It’s not altogether surprising if you’ve never heard of Tech Mahindra outside of the UK and India.
By Samad Masood
17 Apr 2009
The four-month saga surrounding beleaguered Indian IT services firm Satyam is coming to an end. The company has announced that rival offshore services firm Tech Mahindra is the winning bidder in a hastily organised sale overseen by the Indian government and managed by a board of directors that had been drafted in specially.
Tech Mahindra is paying $351 million for a 31 per cent share of Satyam, and will follow this up with an open offer for a further 20 per cent of the shares at the same price. This values Satyam at US$1.1 billion, just over half of its total reported revenues for the year ended March 2008. In any other circumstances this would be a bargain-basement price. However, clear details about Satyam’s true financial position have yet to emerge four months on from the admission of fraud by its former chairman B. Ramalinga Raju. Therefore we don’t expect Tech Mahindra, or any of its competing bidders, would have had a clear view of the profitability and operating metrics of Satyam before placing a bid.
While Satyam maintains that the fraud is not as widely spread as first thought, audited accounts have yet to emerge, making the value attributed to this acquisition a real ‘shot in the dark’. Tech Mahindra beat private equity firm W.L. Ross & Co, and Larsen & Toubro, an Indian engineering and construction conglomerate, in the final round of bidding for Satyam, with news reports putting these companies’ bids at Rs20 and Rs45.90 per share respectively. This is considerably lower than Tech Mahindra’s winning Rs58 per share bid, raising further concerns that Tech Mahindra may have overpaid.
Tech Mah-who?
It’s not altogether surprising if you’ve never heard of Tech Mahindra outside of the UK and India. The company is a joint venture between British Telecom and Indian conglomerate Mahindra & Mahindra, and it still generates around 60 per cent of its revenues from services to BT. Given its heritage as a supplier to BT, most of its expertise is in the telecoms sector, where it focuses on application management, maintenance and support services. The company generated around $750 million in revenues last year and, depending on the amount that Satyam will add (Tech Mahindra currently anticipates that could be around $1.3 billion in FY09/10), it could pass the $2 billion mark in 2009/10.
This historical focus on maintenance and management contrasts with Satyam, which focuses primarily on application development, and enterprise software consulting and integration in the financial services and manufacturing sectors. As such, the two businesses seem pretty suited, with a low potential for overlapping client-service contracts.
Plenty of challenges ahead
Speculation abounds as to the state of Satyam and what Tech Mahindra will have to do to get the business back on track. But this is just speculation! While some preliminary audited financial metrics were shown to the Satyam bidders, concrete financials are yet to emerge.
It is simply far too early to estimate the corporate actions that Tech Mahindra may have to take. And while they may include redundancies, reorganisations, and disposals, it’s just as likely that these actions will not be necessary. After all, the low level of overlap between the two companies would suggest that Tech Mahindra would not need to cut back Satyam’s operations unless they were found to be unsustainable due to poor management and fraud previously.
That’s not mentioning the potential liabilities associated with Satyam, which could face class-action suits from both shareholders and former clients. Again, one can only speculate about the size of these liabilities and how long they will take to be settled. None of these challenges can be tackled properly until Tech Mahindra is able to get a trustworthy account of Satyam’s total business. We only hope for its sake that preparing these numbers doesn’t take any longer.
On the positive side, Tech Mahindra can use this as an opportunity to rebrand and reposition itself as a broader tier-1 Indian services player. Indeed, this acquisition can be seen as a new start for both companies – and if successful, the turnaround and integration story could help position Tech Mahindra as a prominent and trustworthy player.
