Tech mahindra buys satyam

Last monday (13-04-2009), there was a bid for buying satyam computer services and there was competition between 3 giants, L&T,Cognizant and Tech mahindra.

At noon after the bidding is over, Tech mahindra won the bid.
If it goes through, the deal will give Tech Mahindra a seat at the high table of the Indian IT services business. It will also mark the end of the uncertainty surrounding Satyam, though the firm’s legal and financial troubles are far from over.
Tech Mahindra, which provides telecom software services, made the bid through subsidiary Venturbay Consultants Pvt. Ltd and will likely spend a total of Rs2,889 crore to acquire a 51% stake in the fraud-hit Satyam. Analysts say that the company may have to immediately invest Rs1,000 crore in Satyam for operating expenses. The deal needs to be approved by the Company Law Board (CLB), the government arm that oversees the functioning of companies.
A Mahindra Group executive said money wouldn’t be a problem. “Tech Mahindra has Rs700 crore of cash available and then we have hard under-writing for the remaining amount. So, we can arrange it,” said Bharat Doshi, the group’s chief financial officer


What’s next
Satyam is expected to apply to CLB for permission to go ahead with the deal, the board’s chairman S. Balasubramanian said. The board “will take 24 hours to approve it”, he added.
Tech Mahindra, a publicly traded firm that is a joint venture between automobile firm Mahindra and Mahindra Ltd and BT Group Plc. (it owns 31% of the company), will then be given management control of Satyam after it deposits Rs1,756 crore with the company. Tech Mahindra will then have to make an open offer to acquire shares adding up to a further 20% stake in Satyam from the company’s public shareholders. If it isn’t successful in this, Satyam will issue it fresh shares to make sure it ends up with a stake of 51%.
People familiar with the matter say that Tech Mahindra has received a commitment of Rs1,500 crore from a clutch of non-banking financial companies, mutual funds and insurance companies. The remaining Rs700 crore will be raised through a short-term loan by Indian banks, they added, asking not to be identified. This loan will be repaid from the money that will be raised from PE investors, a banker familiar with the matter said, asking not to be identified.
Reuters reported that Tech Mahindra plans to raise Rs600 crore through sale of bonds to finance its Satyam buy, citing three unidentified people with knowledge of the deal.
Potential liabilities
Tech Mahindra’s chief executive Vineet Nayyar said legal liabilities of Satyam, including a case by Upaid Systems Ltd (a former Satyam client, it is locked in a dispute involving intellectual property rights and business losses with Satyam) and class action suits in connection with the accounting scandal, were considered and factored into the valuation of Satyam while arriving at the bid price of Rs58 per share. He declined to disclose his company’s estimate of the extent of Satyam’s financial liabilities from legal issues in the US.
“The legal liabilities against Satyam are estimated at $200 million. In the event of these liabilities materializing, Tech Mahindra may require further debt financing, putting more pressure on an already leveraged balance sheet,” Religare Hichens Harrison, the London-based broking arm of brokerage Religare Enterprises Ltd, said in a research note on Monday.
“We took a lot of scenarios into account and we’ve taken a very calculated risk in making this bid,” Mahindra said.
Making it work
Analysts see synergies between Satyam and Tech Mahindra. While Tech Mahindra largely works with telecom firms and gets 60% of its revenue from BT and 75% of its revenue from Europe, Satyam serves customers across businesses, including automotive. It also helps companies implement their business software and serves companies across North America and Asia.
Still, analysts say that the ongoing loss of business at Satyam could present a problem. Tech Mahindra has estimated Satyam’s revenue to fall to $1.3 billion (Rs6,500 crore), the company said on Monday.
“First priority should be ensure that there is no further attrition, either on the clients side or on the employees side,” saidAnil Advani, head of research at SBICAP Securities Ltd.
It wasn’t immediately clear whether Tech Mahindra would retain Satyam’s new board and the brand name.
“I don’t think Satyam as a brand will exist in the long run. But re-branding and marketing the new brand can be a challenging task, especially in the current tough market condition,” said Diptarup Chakraborti, principal research analyst with consulting firm Gartner.
Satyam’s chairman Kiran Karnik said it was up to the new investor to decide whether to retain the brand.
The deal would pose financial and operational challenges for Tech Mahindra, said C.S. Chandramouli, director (advisory services) at outsourcing advisory firm Zinnov Management Consulting Pvt. Ltd.