A to Z of Satyam-Tech Mahindra deal
Satyam Computer Services Chairman Kiran Karnik (2nd L) and board members
Deepak Parekh (2nd R), Tarun Das (L) and T. N. Manoharan attend a news
conference held by Satyam board members in Mumbai April 13, 2009.
Tech Mahindra to be Satyam's
Tech Mahindra has bought a 31 percent stake in the
fraud-hit Satyam Computers. Tech Mahindra outbid
Larsen and Toubro and other companies.
In a race that saw only a handful of bidders, Tech
Mahindra beat rivals such as engineering
conglomerate Larsen & Toubro and U.S.-listed
Cognizant Technologies. Tech Mahindra agreed to
buy a 31 percent stake in Satyam at 58 rupees, a 23
percent premium to Satyam’s last closing price.
• Tech Mahindra, established more than 20 years ago as a
joint venture between Mahindra & Mahindra and British
Telecom, faces the daunting task of reshaping Satyam, a
company at the heart of India’s biggest corporate scandal.
• Ever since Satyam’s founder Ramalinga Raju shocked
markets by disclosing the $1 billion-plus fraud, there have
been numerous reports of Satyam’s employees jumping
ship and some clients cutting back on orders to
Satyam. The company’s accounts are also still being
restated and its U.S. liabilities are unclear.
Satyam becomes Mahindra Satyam now
• Satyam is no longer Satyam, but has become Mahindra Satyam as
per the demands of the business. In fact, it's an irony that `What
• Mahindra Satyam logo.Demands', which was the tagline below
Satyam's original logo, is now missing. Perhaps, the new
management saw the futility of stating the obvious.
The company unveiled its new brand identity, Mahindra Satyam.
According to the company, this strategic move paves the way for the
emergence of a robust brand, which draws from the core values of
the Mahindra Group and the inherent strength of the Satyam brand.
How is Tech Mahindra funding the
It's already in the market to raise Rs 600 crore through 4-5 year bonds. Close to Rs
700 crore will come from internal resources. Kotak Mahindra, which advised Tech
Mahindra, is in touch with mutual funds, insurance companies, institutions like
IDFC, HSBC and some NBFCs and PE funds to raise money since banks can't
directly fund acquisitions.
The company may also get a bridge loan to complete the initial payment. Market
does not rule out an equity offering at a later stage.
Is Tech Mahindra overpaying?
The company doesn't think so. In the worst-
case scenario, it does not expect Satyam's
annual revenues to drop below $1.3 billion.
The figure is arrived at after assuming 15 per
cent of the revenues were overstated and
factoring in client attrition, which would
shrink the figure from $2.2 billion to $1.5
If private equity investors step in later, it
would indicate how much financial investors
are willing to fork out for the stock. An
outsourcing expert with a consultancy firm
said, "Going by what Tech Mahindra has
valued Satyam, I would say it is more of an
entrepreneurial decision. They have been
more aggressive. L&T on the other hand has
Is this a merger?
Tech Mahindra has no plans to merge Satyam with itself
because of latter's liabilities.
The Pune-based firm will be handed reins of Satyam only
after the bidding process is vetted by the Company Law
Board, which appointed the board of directors that devised
and managed the auction.
What would be Tech Mahindra's
To retain clients and attempt renewing over $300 million worth of
outsourcing contracts through competitive pricing, reassess
legal liabilities, negotiate out-of-court settlements with litigants
such as the UK-based mobile services provider Upaid. Also,
accelerate restatement of accounts (expected to be completed
What Tech Mahindra cannot do?
Tech Mahindra is at liberty to bring in any kind of
investor after the deal is done. However, the
agreement says that they cannot strip the company
and cannot sell the company piecemeal.
“They can take another partner if they want to, in the
SPV,” Deepak Parekh, Satyam board member said
while announcing the highest bidder for Satyam
Will there be layoffs?
• While most of the employees evoked a sense of relief
after the winner was announced, many remained
concerned about tough days ahead.
This was true especially for those who are currently not
part of any active customer project. Satyam professionals
working in subsidiaries such as Nipuna, the BPO arm of
the company, continued to be sceptical about the new
owner fear that Tech Mahindra could look at rightsizing
• Tech Mahindra has an agreement with Satyam
to retain 100 key employees (which interestingly
does not include Ram Mynampati). The fate of
the remaining employees of Saytam would
depend on the extent to which Tech Mahindra
decides to downsize. The first set of casualties
could be employees on the bench. Satyam has
43,500 direct employees.
• As customers seek to lower their IT spend, and
even shift projects to other rivals, many Satyam
Tech Mahindra has a challenging task on its hands post its acquisition of
Satyam, said industry observers. The factors that could make this
integration a complex task are Tech Mahindra’s lack of experience in most
of Satyam’s business verticals and issues relating to its own core
“Tech Mahindra certainly gets breadth in skills post merger (with Satyam).
But what it lacks is depth in terms of a client base and leadership in the
new verticals that it would get access to after the merger,” said Edelweiss
Securities IT analyst Viju George.
Analysts also said that integrating a large pool of Satyam employees
across verticals would be anything but easy. “The business profiles of
both the companies are totally different. While Tech Mahindra earns
majority of its revenue from European market by providing telecom
solutions, Satyam is far more diverse in verticals as well as geographies,”
said India Infoline IT analyst Rajiv Mehta.
How will both companies benefit
Far from being primarily a single-client company, the Tech Mahindra-
Satyam combine will now complete for projects with the Big Three of
Indian IT - Tata Consultancy Services, Infosys Technologies and Wipro -
and multinationals like IBM and Accenture.
Satyam has land assets of around 425 acres in India, half of which is
owned by the firm. The other half (125 acres) is land taken on lease. The
estimated value of two of Satyam's own campuses in Hyderabad is around
Rs 1,500-2,000 crore. The other major asset is its strong workforce
What will L&T do with the stock?
L&T still prefers to categorize the investment as strategic,
thereby escaping the mark-to-market provision required for
securities in the trading book. As per bidding rules, L&T can't
sell the shares for six months. But it plans to hold on to the
stock for longer than that. L&T holds 12 per cent in Satyam,
which will go below 10 per cent after Tech Mahindra's fund