Tech Mahindra snaps up Satyam

Trumps L&T's bid at Rs 45.90 a share and Wilbur Ross at Rs 20.

'The family is very happy that Satyam has stabilised'
- Nandini Raju, wife of jailed Satyam Computers Founder B Ramalinga Raju

The exercise proved much shorter than what the board members, bidders and investment bankers had expected. Just three hours after the three suitors for Satyam Computer Services submitted their bids this morning, it was all over — Tech Mahindra, a joint venture between Mahindra & Mahindra (M&M) and British Telecom — emerged the clear winner.

The Satyam board approved Tech Mahindra’s offer of Rs 58 a share, trumping Rs 45.90 a share offered by Larsen & Toubro (L&T). Wilbur Ross was the third bidder, but its bid of Rs 20 a share was just a third of the winning bid. The deal values Satyam at around Rs 5,500 crore.

Though some analysts termed the deal expensive, others said the price represented an enterprise value to sales of about one time, a reasonable valuation for the technology sector.
 

THE NEW STAKES Top 5 IT cos by market cap
Company	Market cap (Rs cr)	Employees
Infosys Technologies	80,716	1,05,000
TCS	57,904	1,30,343
Wipro	39,382	96,965
Tech Mahindra*	10,039	73,429*
HCL Technologies	8,569	52,957
* including Satyam Computer market cap + 48,000 Satyam employees. Note: Once the deal fructifies, Tech Mahindra, with a combined market cap of Rs 10,039 crore, is expected to rank fourth among IT companies from its current Nasscom ranking of six. The company has agreed to acquire 302.76 million shares of Satyam Computer — representing 31 per cent of the company's share capital. This means Satyam's equity capital will increase to 976.64 million shares from the current 673.88 million shares. Tech Mahindra will acquire these shares at a price of Rs 58 per share, which means Satyam's market capitalisation will be Rs 5,664 crore. The current market cap of Tech Mahindra is at Rs 4,375 crore so the total market cap, including that of Satyam Computer will be Rs 10,039 crore.

The winning bid was less than one-tenth Satyam’s share price of Rs 542 when the scam broke in January, after its founder Ramalinga Raju admitted to inflating profits for several years.

“Satyam will now be reborn with a new owner,” the company’s government-appointed chairman Kiran Karnik said. The board has drawn all-round praise for completing the sale within three months of Raju’s confession. The acquisition will be made through Venturbay Consultants, a subsidiary of Tech Mahindra.

Tech Mahindra will pay around Rs 1,750 crore for a preferential allotment of 302.8 million shares, amounting to 31 per cent of Satyam's equity. This will be followed by an open offer to acquire an additional 20 per cent within 55 days. The acquisition is expected to cost the company around Rs 2,900 crore.

The deal will have to be approved by the Company Law Board (CLB), but observers said that’s a formality. Tech Mahindra, India’s seventh-largest IT firm by market capitalisation, will rise to the fourth slot – a position once occupied by Satyam.

The deal also got a thumbs-up from the market. The Tech Mahindra stock went up 12 per cent on the Bombay Stock Exchange to Rs 359.45 after soaring nearly 25 per cent intra-day. Satyam shares closed up 3.6 per cent, at Rs 48.85 a share.

An ecstatic M&M Vice-Chairman and MD Anand Mahindra told reporters, “This will be a game-changer for Tech Mahindra. We have taken on the challenge and will make it work,” he said.

The challenges Mahindra talked about are many and said the company would get cracking immediately after it gets CLB’s approval. He said he would “reach out personally” to Satyam’s 500-plus clients, which includes General Electric, Cisco and Citibank.

Expressing his gratitude to Satyam’s clients, Mahindra said, “We bring the Mahindra commitment of customer-centricity.” He also sought the support of Satyam’s 48,000 employees who “have kept the ship afloat” during times of crisis.

The other challenge is to raise the funds required. The company, which has to pay the money within four days of getting CLB’s approval, however, is confident.

CFO Bharat Doshi said the company generated Rs 700 crore cash internally a year and had the potential to raise debt, for which it already had an underwriting tie-up with Kotak Bank. The company does not see the need for a tie-up with any private equity player, at least in the short term.

Satyam, which is listed on the New York Stock Exchange, also faces a spate of class action suits. Besides, it has lost contracts from 46 customers to rival firms, though many firms have also joined.

But a good reason Satyam is  a good fit for the company is what Vineet Nayyar, vice-chairman and CEO of Tech Mahindra calls “complete complementarity”. Nayyar said not a single customer is common to the two companies.

Besides, close to 75 per cent of Tech Mahindra’s revenues are in pounds or Euros, whereas 75 per cent of Satyam’s revenues are in dollars. 

Tech Mahindra, which provides information technology services to the telecom industry, has less than half the workforce of Satyam. More than half of the company’s business is serving one client, British Telecom, which owns a minority stake in Tech Mahindra. The deal would bring Tech Mahindra business in new industries from manufacturing to financial services.

Satyam has a land bank of 450 acres, of which 50 per cent is leasehold property. The two properties owned by the company – Satyam Infocity campus and Satyam Technology Centre campus in Hyderabad — have been valued at Rs 1,700 crore. The company has also been sanctioned Rs 600 crore bank loans against  security of these two properties.

Satyam director Deepak Parekh who stayed out of the evaluation of technical bids because he sits on the board of Mahindra Group flagship Mahindra & Mahindra, confirmed that Tech Mahindra was at liberty to bring in another investor but would not be allowed to strip Satyam’s assets.

Tech Mahindra was advised by Kotak Mahindra Bank and UBS AG and BMR Advisors.