Tech Mahindra Wins Bids for Majority Stake in Satyam 

Venturbay Consultants Pvt. Ltd., a special purpose vehicle set up by Tech Mahindra for the stake buy, will pay 17.56 billion rupees (US$351 million) for 302.76 million Satyam shares, or a 31% stake, Dow Jones reports. The deal needs to be approved by the Company Law Board (CLB)—a semi-judicial authority. CLB chairman S. Balasubramanian said the agency is likely to receive formal notification on Thursday (16 April) and will rule on the deal within 24 hours. If the deal is cleared, Venturbay Consultants will have to make an open offer for another 20% of Satyam at a minimum 58 rupees per share within four days of the CLB approval. This would give it a total 51% stake in Satyam.

Tech Mahindra develops software for telecom service providers and equipment makers. The Pune-based company is a joint venture between Mahindra & Mahindra Ltd., India's biggest utility vehicle and tractor maker—with an over 52% stake—and U.K.-based telecoms firm BT Group, with about 31%. Backed by BT, Tech Mahindra outbid W.L. Ross & Co., the U.S. private-equity firm headed by billionaire investor Wilbur Ross, and Larsen & Toubro, an Indian engineering and construction conglomerate. The successful bid emerged after a four-month long process to find a strategic investor for Satyam that would help restore confidence in the scandal-hit company—once India's fourth-largest software exporter by revenue.

Founded in 1987 and in the next decade grew to be one of India's handful of large technology companies, Satyam serves some of the world's biggest companies, with its clients including General Electric, General Motors, Nissan Motor, and Applied Materials and Citigroup. Satyam however, has been in turmoil since founder B. Ramalinga Raju revealed in January this year that he had overstated the company's profits over several years and created a fictitious cash balance of more than US$1 billion. Ramalinga Raju, his brother and co-founder, B. Rama Raju—also the company's then managing director—and then chief financial officer Srinivas Vadlamani, as well as three other officials at the company's finance department, have been arrested and charged with cheating and forgery. Three months later, Satyam is about to change hands as a viable business as a result of the swift intervention of the Indian government, who is keen to restore investor confidence in the Indian corporate sector.

Outlook and Implications

• Financial Risks: Tech Mahindra offered a 23% premium over Satyam's previous closing price to gain access to its strong customer base, despite uncertainty over the Hyderabad-based company's financial situation as its accounts for the last six years are in the process of being restated. Satyam has not reported its results for the quarter ended 31 December 2008 and has sought an extension from the stock exchanges to post the results by 30 June. Tech Mahindra's CEO Vineet Nayyar has acknowledged that the company would face "reasonable risk" from investing in Satyam. He said that it had conducted a fair assessment of possible legal liabilities as Satyam is faced with class action suits in the U.S, without elaborating on the quantum of legal liabilities that Tech Mahindra could face. Tech Mahindra has over 7 billion rupees in cash and plans to raise the balance 21.90 billion rupees—needed for a 51% stake—via debt on Tech Mahindra's books as well as on the books of Venturbay Consultants.
• Potential Synergies: Despite the financial risks, the deal could potentially transform Tech Mahindra, currently the sixth-largest software exporter in India, into a new global force in the technology outsourcing industry. "Satyam has immense experience and diversified geographical presence across different verticals. Satyam's and Tech Mahindra's profiles complement each other," Vineet Nayyar, vice chairman and CEO of Tech Mahindra said in a statement. According to Satyam Chairman Kiran Karnik, Satyam had a total of 48,000 employees and over 600 clients spread across the globe at the end of March. Tech Mahindra had 25,429 staff and 110 clients at the end of 2008. Unlike its larger rivals—Infosys Technologies Ltd., Tata Consultancy Services Ltd. (TCS) and Wipro Ltd.—which provide software services to all business sectors, Tech Mahindra currently focuses on services to the telecom sector. For the year ended 31 March 2008, Tech Mahindra had posted revenue of US$934.7 million, compared to TCS's US$5.7 billion and Infosys's US$4.18 billion. Taking control of Satyam could also give Tech Mahindra wider access to the U.S. market, the biggest market for Indian software exporters. As for the year ending 31 December 2008, Tech Mahindra generated 26% of its revenues from the U.S. and about 65% of its revenues from the United Kingdom, with BT being its biggest client. In contrast, its bigger rivals had over half their revenue from the U.S. market. For Satyam, the U.S. market accounted for over 62% of its revenue, as was reported at the end of the July-September quarter. The acquisition of Satyam Tech Mahindra could help diversify its businesses by reducing the concentration of revenue on one geographical market and on one company.
• Impact on BT: BT Group, which holds 31% of Tech Mahindra, has said it is supportive of its affiliate's investment. The deal, however, looks unlikely to have significant direct impact on the company at this stage. Nevertheless, the U.K. group is increasingly looking to its overseas interests, as the U.K. domestic market stagnates and competition increases, and the company has repeatedly blamed the disappointing performance of its Global Services unit for falling profits. BT announced that it was cutting 10,000 jobs in November 2008, as it reported an 11% drop in third-quarter pre-tax profits, and has recently frozen pay for its U.K. staff, and may cut its 2008 share dividend, to be announced next month, by up to 50%. Recent reports also suggest BT is planning a fresh write-down of its ailing Global Services unit, which offers IT services to multinationals, of at least £300 million (US$429.5 million), following a £340-million charge in January relating to the value of the unit (see United Kingdom: 31 March 2009: BT to Write Down Global Services Unit by US$430 mil.—Report).