We take a look at the possible synergies some of those who are seriously considering whether or not to bid for Satyam Computer Services have with the troubled IT firm
Larsen & Toubro
The $7 billion engineering and construction giant, Larsen & Toubro (L&T), having earlier acquired 12 per cent in Satyam Computer Services, had been touted as the leading bidder. L&T, in fact, has clearly expressed to the government its interest in acquiring the management control of Satyam.
It has invested around Rs 670 crore in the company so far. However, CMD AM Naik later told media persons in Mumbai that many things had changed in Satyam over the past few weeks, with some key clients and employees quitting.
L&T sees synergy between the core strengths of the beleaguered software giant and L&T Infotech, its unlisted information technology subsidiary. "Satyam has a huge focus on enterprise application space and the engineering segment. These two complement L&T Infotech, as a large chunk of their work also comes from ERP practice," said a banker. Satyam's ERP business is 45 per cent of revenue, while engineering solutions contribute about 6.5 per cent.
"The other thing is that Satyam will bring in horizontal solutions capability, like business intelligence. If L&T takes over Satyam, we feel the transition will be smoother and faster," said an analyst. "For L&T, Satyam is a strategic fit. The company will get access to new verticals and service offerings like semiconductors and discreet manufacturing, as well as entry into new geographies," said Sabhyasachi Satpathy, director, Mindplex Consulting.
"If L&T becomes Satyam's suitor, then it will not only add about a billion dollars to its revenues but also have to absorb Satyam's 50,000 employees. This is difficult, but if this happens, cultural integration will not be a problem," said Vinu B. Kartha, partner at advisory firm Tholons.
The Spice group had expressed interest in investing around Rs 2,000 crore in Satyam and wants a clear 51 per cent stake. BK Modi, chairman of the Spice Group, said he believed that Satyam had only 43,000 employees, adding that if he won the bid, he "will change the brand name of Satyam." Modi estimates the liability from the 13 class actions suits at $440-840 million (around Rs 2,200-4,200 crore) but adds that "I will contest these suits."
Another strong contender is the Mahindra and Mahindra group's IT business, Tech Mahindra. While the company has kept its options open, it has noted that there is no clarity on Satyam's customers, employees and liabilities.
"For Tech Mahindra, this will be a good diversification strategy. It is way too dependent on one sector, telecom, and one client," said an analyst. However, the biggest concern for Tech Mahindra are the liabilities. "From our understanding, the board is yet to decide, as the liabilities part has not been elaborated," said a source close to the development. Besides, there is growing concern over news reports about top clients of Satyam leaving.
"Satyam has a focus on manufacturing and the automation sectors. Both these are under stress. On what basis do you think one can reach any valuation?" asked a senior official of Tech Mahindra. "The other concern for M&M will be raising capital for the acquisition. There are chances that it could tie up with a PE (private equity) player," said an informed source. The company declined to comment on the way ahead. As of December 31, Tech Mahindra had cash and equivalent of $110 million.
However, Deepak Parekh, a member of the Satyam board, has been on the board of Mahindra and Mahindra since 1990. If Tech Mahindra decides to bid, it could raise concerns over transparency and corporate governance, unless he steps down from the Mahindra boards, opines Haresh Ganatra, Supreme Court advocate, Ganatra & Co.
Tech Mahindra stock was up 2 per cent at the start of the trading day and touched an intra-day high of 5 per cent. The stock closed at the same price as the previous day, at Rs 263.50. L&T was up 2.53 per cent and closed at Rs 576 on Thursday.
Analysts tracking Satyam are not happy. "The process should have been much more transparent. Since there is no clear information on the number of clients who have left or the liabilities, reaching a valuation is getting difficult. It seems Satyam is being sold as a black-box and will get sold at a discounted rate," said an analyst.
Among the analysts tracking the L&T group and Mahindra, there seems to be growing concern. A recent report by Kotak Institutional Equities states that while L&T has the resources, it will be better if the group uses the money to address the challenges that its core business is facing.
The company, stated the report, had outstanding liquid mutual fund (MF) investments of Rs 4,000 crore at the end of FY200,8 in addition to cash of Rs 1,000 crore and a gross debt-equity of 0.4. "But we believe such resources are better utilised towards the core business, which may see increase in working capital requirements with slowdown in the broad economy, and could consume almost half the liquid resources visible at the end of FY08," said the report.
However, experts tracking the group feel it's not about the resources but whether L&T should focus on its core business or diversify into a new business without shareholder approval.
On who is the best suitor for Satyam, experts are divided between Tech Mahindra and L&T. "Both firms do not have the management bandwidth for Satyam. Perhaps, L&T can do a better job, as it has an experienced person in charge.
If you look at Tech Mahindra, this will be one of the best chances for the company to diversify. In terms of revenue, perhaps Satyam and Tech Mahindra could be comparable (since clients contributing $200-$300 million have left) but in terms of the employee numbers, it will be huge," said another analyst.