FOR Anand Mahindra and his team at Tech Mahindra, the hard work has
just begun. The elation of clinching Satyam Computer Systems â€”the
combine will be hot on the heels of Wipro, Indiaâ€™s thirdlargest
software exporterâ€”was understandably tempered with the realisation that
an uphill struggle lies ahead.
â€œThere is a sense of euphoria and joy right now, but it will be different when we wake up the next morning.... It will not be easy, it is a challenge, but we will make it work,â€ said Tech Mahindra chairman Anand Mahindra, who is also Mahindra & Mahindra (M&M) VC and MD.
Tech Mahindraâ€™s highest bid of Rs 58 a share means it will have to fork out Rs 1,756 crore to subscribe to a preferential issue totalling 31% of Satyamâ€™s equity capital and a 20% mandatory open offer. And priced at Rs 58, a 23% premium over last weekâ€™s closing price, the two transactions will cost Tech Mahindra Rs 2,889 crore. The bid values Satyam, once ranked Indiaâ€™s fourthlargest IT exporter, a little over $ 1 billion.
In a validation of its strategy to buy Satyam, the Tech Mahindra scrip shot up 12% to close at Rs 359.45 on the BSE. This despite TM paling closest rival L&Tâ€™s bid. Shares of Satyam too closed 3.6% higher at Rs 48.85. But the Satyam ADR was down 16.23% at $2.22 at the time of going to press.
â€œYou donâ€™t look behind yourself while running a race. You need to look at the deal strategically. This was a reasonable bid and accretive for our shareholders,â€ said Mr Mahindra on whether he was overpaying.
But Mr Mahindra was also careful to make the distinction between being the highest bidder and the new owner of Satyam. Tech Mahindra will become the winner only after its bid is approved by the Company Law Board. â€œAfter the CLB approves the offer, it usually takes four working days to start the open offer. The four days are necessary for the highest bidder to provide the funds. So by next week, we have asked Tech Mahindra to provide the funds in the escrow account and the bank account of Satyam,â€ said Satyam board member and HDFC chairman Deepak Parekh.
A person close to M&M said the new Satyam board will include some existing membersâ€” former Nasscom president Kiran Karnik, Mr Parekh and CII chief mentor Tarun Das while M&M group CFO Bharat Doshi will join the board. He also said Tech Mahindra had no plans to merge Satyam with itself because of the latterâ€™s liabilities.
To compete with the Big Three:
FROM being primarily a single-client company, the Tech Mahindra-Satyam combine will now compete for projects with the Big Three of Indian ITâ€”Tata Consultancy Services, Infosys Technologies and Wiproâ€”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 Satyamâ€™s own campuses in Hyderabad is around Rs 1,500-2,000 crore. The other major asset is its 48,000-strong workforce.
On the flip side, it will have to battle shareholder lawsuits, loss of customer confidence and the need to restore the employee morale. Satyam is facing half-a-dozen class action suits filed by shareholders in the US after its disgraced founder B Ramalinga Raju admitted to fudging the firmâ€™s books. It is also fighting a legal battle with UK-based mobile payments services provider Upaid. The board has, however, not quantified the legal liabilities in the information pack given to bidders.
According to Mr Doshi, Tech Mahindra had Rs 700 crore on its books and the ability to take on debt to finance the acquisition. â€œToday we donâ€™t have a need for private equity to fund the acquisition,â€ Mr Doshi said, although he did not rule out a partnership later.
An investment banker said Tech Mahindra, in which British Telecom holds a 31% stake, has received funding commitments from NBFCs such as Rabo India Finance, GE, Mahindra Financial Services and Tata Capital. However, this could not be independently verified with the NBFCs. Kotak Mahindra Capital has arranged the entire funds. The possibility of Tech Mahindra launching an equity offer later this year to repay the debt looks bright, said the same banker.
â€œThey (Tech Mahindra) are at liberty to bring in any kind of investor after the deal is done. 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,â€ Mr Parekh said while announcing the highest bidder for Satyam.
Incidentally, the Satyam boardâ€™s announcement was the culmination of over two-and-a-half months of suspense and speculation over who will eventually bag the scam-hit IT exporter ever since its founder B Ramalinga Raju confessed to fraud and siphoning off funds. The whole process was over in a few hours as Tech Mahindra pipped L&T, which bid Rs 45.90, and Wilbur Ross, which bid at Rs 20.
â€œInvestors like this deal because it addresses the inherent risks Tech Mahindra hadâ€”it was dependent on its foreign partner BT and its revenues were only from telecom outsourcing. A new star is born and it is worth giving them a chance to see what happens,â€ said Alok Shende, principal consultant, Acsendia Consulting about what the deal meant for Tech Mahindra and Satyam shareholders.
Was Tech Mahindraâ€™s â€˜concernsâ€™ on the Satyam deal just a smart strategy or was there enough in the virtual deal room to cause worry? According to a person close to the development, it was a combination of both. â€œTill late last evening there were worries about liabilities. But if by playing the underdog, Tech Mahindra managed to catch its rivals in the deal off-guard, good for it,â€ he said.
Added an outsourcing expert with a top consultancy firm: â€œGoing by what Tech Mahindra has valued Satyam, I would say it is more of an entrepreneurial decision. There have been more aggressive. L&T, on the other hand, has been cautious.â€
The biggest challenge Tech Mahindra immediately faces besides the lawsuits and other liabilities of Satyam is to restore customer and employee confidence. Mr Mahindra told reporters he would address the issue. â€œI will reach out personally to Satyamâ€™s largest clients,â€ he said, adding that he along with the teams at Tech Mahindra and Satyam would reach out to all the 500 clients of scam-hit firm.
â€œIt is a marriage made in heaven with its own share of turbulences,â€ said Vineet Nayyar, vice-chairman, managing director and CEO of Tech Mahindra. Mr Nayyar, along with Sanjay Kalra and CP Gurnani, have taken Tech Mahindra to its current position as the countryâ€™s sixth-largest software exporter. Although Tech Mahindra is only present in telecom outsourcing, all three executives have experience in leadership positions in other industry segments as well.
Before joining Tech Mahindra, Mr Nayyar was vice-chairman of HCL Technologies while Mr Kalra was CEO of a joint venture between HCL and Deutsche Bank and Mr Gurnanai was the COO of Perot Systems (India), initially set up as joint venture, HCL Perot Systems.
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