Facing the threat of a hostile takeover by a domestic or overseas company, including private equity firms, Satyam Computer Services' [Get Quote] management and some of its institutional investors are exploring a merger with another software company.

The company is reportedly in talks with Delhi-based HCL Technologies [Get Quote] and Bangalore-based MindTree [Get Quote]. HCL, with whom discussions are on for a cash-less merger, seems to be the front-runner, investment banking sources said.

India's third-largest software services company has been under pressure after institutional shareholders, especially overseas ones, forced it to reverse a decision to invest almost Rs 8,000 crore in two promoter-owned companies mid-December.

Four independent directors resigned thereafter, after facing criticism for agreeing to a decision that was widely perceived as damaging to the company's interests.

The company's share price has fallen 21.3 per cent since December 15, the day before the crisis broke.

Satyam promoters' stake has come down to little over 5 per cent, after some institutional investors sold promoters' shares pledged with them to make good margin calls when the stock price started falling.

As a result, several investors think the company is vulnerable because it has cash reserves of over Rs 5,500 crore or Rs 55 billion.

The promoters' holding in HCL Technologies, which has completed the acquisition of UK-based Axon for $658 million, is around 67 per cent.

Investment banking sources said the merger strategy has been approved by DSP Merrill Lynch, which is advising the Satyam management on a potential takeover threat.

The pressure to merge with another IT firm is building because investors fear that a takeover by a non-IT firm like a private equity firm is unlikely to bring the benefits of synergy.

"The acquisition of Flextronics Software, now Aricent, by private equity firm Kohlberg Kravis Roberts & Co in 2006 for $900 million was not a successful experiment," said the representative of a leading overseas fund with investments in Satyam.

An HCL Technologies spokesperson declined to comment on the issue, saying: "As company policy, we don't comment on market speculation."

A Satyam official likewise said, "There is no clarity at this point of time and a lot of speculation in the market."

A board meeting scheduled for January 10 is expected to address issues arising out of the dilution of the promoters' stake and increasing the number of independent directors.

The Satyam board currently constitutes five directors, two independent directors -- former Cabinet Secretary T R Prasad and V S Raju -- and three promoter-directors -- founder and chairman B Ramalinga Raju; co-founder and managing director B Rama Raju; and president Ram Mynampati.

The merger is likely to be discussed at the board meeting but a decision cannot be taken in the absence of a full board.