Getting Satyam back on track will be Anand Mahindra’s next big challenge.
The acquisition of Satyam Computer Services could be a real game-changer for Tech Mahindra. For one, it has acquired a much bigger company. While Tech Mahindra is expected to clock revenues of over Rs 3,500 crore in 2008-09, Satyam is expected to declare a turnover of around Rs 6,500 crore. Together, the two will have a formidable telecom practice of over Rs 5,000 crore ($1 billion). And Tech Mahindra is all set to join the league of such hallowed names in the business as Tata Consultancy Services, Infosys and Wipro.
On the flip side, getting Satyam back on track will not be easy, though Tech Mahindra has the backing of the Rs 30,000-crore Mahindra Group. For one, the cost of the acquisition (close to Rs 3,000 crore) will strain its finances in these days of tight liquidity. On this concern, Fitch had downgraded Tech Mahindra’s rating in the run up to the Satyam sale.
More important, does Tech Mahindra have the experience to run an operation that’s so big and diverse, and completely different from its own? At the end of the day, Tech Mahindra is pretty much a one big client, one domain firm, catering exclusively to the telecom vertical. Its biggest client, British Telecom, will bring in nearly 60 per cent of the expected revenues of Rs 4,450 crore in the current year.
That’s not to take away from what it’s achieved or to say that it doesn’t know how to build a business, but it should be remembered that British Telecom is as much a partner as a client since it has a stake of 30 per cent in the company.
Tech Mahindra Vice-chairman & CEO Vineet Nayyar says the two companies don’t have a single customer in common. While this means the two customer lists complement each other, it also means Tech Mahindra will have to learn how to service Satyam’s marquee customers like General Electric, Cisco, Citibank, Qantas and many others. All told, Satyam has over 500 clients.
Too big to handle?
“Tech Mahindra is acquiring a business that is far more sophisticated than its own; it operates only in the telecom space, whereas Satyam caters to many more verticals such as automobile, avionics, healthcare and insurance. Also, as a vendor, it doesn’t have the experience of dealing with big customers and many of Satyam’s customers are Fortune 500 companies,” says an industry veteran. “I’m not sure how the management is going to cope. Ultimately, the front-end of the offshoring business is as crucial as the back-end.”
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Industry experts agree that it may be a challenge but it’s not insurmountable. According to Zensar Technologies Vice-chairman & Managing Director Ganesh Natarajan, Tech Mahindra needs to expand its ability to manage multiple accounts. “Maybe you also need to put in place a new CEO,” he says. Akhil Gupta, who heads private equity firm Blackstone in India, however, says Tech Mahindra can overcome the handicap in quick time by hiring new talent. “I’m sure they’re aware of this and they have the resources to acquire management expertise,” he says. “Even if they don’t have the expertise they can always go out and buy it,” adds Sid Pai, partner and managing director, TPI, an information technology consulting firm.
On top of Tech Mahindra’s action plan is how to connect with Satyam’s customers. After Ramalinga Raju’s infamous January 7 confession deflated the numbers, Satyam’s operating margins are down to 3 per cent. Several clients have moved out. “They can’t let go of any more customers. After all, the Satyam team has been delivering top quality work,” says Ashish Basil, who tracks technology within the Transaction Advisory Services practice at Ernst & Young.
It’s not that Tech Mahindra doesn’t realise how important it is to get on with business and convince clients that they have a safe home and that the quality of service will not suffer. At the press conference held to announce that Tech Mahindra had been adjudged the highest bidder for Satyam, Tech Mahindra Chairman Anand Mahindra said he would be calling on everyone from Vikram Pandit at Citibank and John Chambers at Cisco to reassure them. “We will give our highest priority to restoring confidence in the company. My travel schedule is now in Nayar’s hands,” he had said. “Satyam has over 500 clients. I do believe we will have to address each one of them,” said Nayyar.
For sure, it’s a good idea for Mahindra to do some damage control; his calling card will open doors but over the longer term without a strong sales and marketing team, Satyam might see more client attrition.
Excess employees
Even as it builds a stronger team, Satyam also needs to shed some flab. “It’s clear that Satyam has far too many people,” says James Abraham, senior partner and director, The Boston Consulting Group. He believes that if the firm’s operating profit margins are at 3 per cent compared with around 23 per cent for the industry, it’s because the wage bill is bloated. In any case, salaries typically account for 45-50 per cent of the sales of any technology firm and Abraham suspects there are too many highly paid people at the top or middle end.
It is now an open secret that Satyam always had high bench strength to match the inflated revenue numbers. This flab now needs to be trimmed. That may be easier said than done. Top government officials say the sale agreement bars the new owner of Satyam from laying people off in large numbers. The government had swung into action in double quick time to ensure the company doesn’t implode after the fraud came to light. At a time when new jobs are not being created in the corporate sector, it does not want to be seen in a negative light.
Still, Tech Mahindra has an agreement with Satyam to retain 100 key employees (excluding Ram Mynampati, the former interim CEO) of the total strength of 48,000. Mahindra isn’t prepared to disclose too much about how excess employees will be dealt with and whether jobs would be protected, though he does say that he would make sure there would be as little pain as possible.
That’s a good thought because Mahindra’s top priority is to make sure employee morale doesn’t sink any further. That their new parent is a reasonably big technology player which intends to stay invested in the information technology space and not a foreign financier would of course have done a lot to make the 48,000 employees feel better. “We felt as though we had won a cricket match,” one Satyam employee is believed to have said when he heard the news. At the same time, the mood on the campus is circumspect as employees remain anxious about their future. E&Y’s Basil believes that there can’t be any large-scale firing immediately. “The costs may be high but the morale right now is far more important. And talent must be retained.”
Come together! How?
Blackstone’s Gupta points out another challenge: Integrating the two teams, given the big difference in their cultures. “Satyam’s employees need to be treated with respect and not like acquirees. They need to be empowered which I’m sure the Mahindra group, given its good human resources practices, understands,” he observes. A JP Morgan report has also expressed concern at the integration challenges ahead, saying it was looking to the company for more details on the integration plan and a road map.
Numerous studies have shown that most mergers fail at the integration level. Most experts now recommend running an acquisition as a subsidiary for a while, till the employees lose their anxiety. Subsequently, they say, it should be pulled in under the parent’s umbrella. Of course, acquisitions aren’t new to the Mahindra Group. In July 2007, it acquired Punjab Tractors which was merged with Mahindra and Mahindra in July last year. The Mahindra chief is confident that the standard integration plan, which is already in place, will work.
Some observers have pointed out the legal liabilities on Satyam. There are 13 class action suits running in the US. Upaid, the UK-based mobile payment services company, claims it lost out on a $1-billion opportunity because one of the Satyam engineers sold the inventor rights for a particular technology to another firm.
Tech Mahindra seems fairly confident it can take these in its stride — it’s possible that the number could crystallise anywhere between $150 million and $200 million. There are chances of an out-of-court settlement with Upaid. “We have done our due diligence and the liabilities aren’t as high as Upaid claims,” says Nayyar. Meanwhile, US Federal Court proceedings are scheduled for June this year. “Obviously, Tech Mahindra has taken a calculated risk and hopefully the damage won’t be too severe. But it needs a grip on what the liabilities could be as quickly as possible,” cautions an industry insider.
There could be another liability. Ramalinga Raju had said in his confession that he had brought Rs 1,230 crore into Satyam by pledging his shares to bridge the financial gap his shenanigans had caused in the balance sheet. In fact, the day after he confessed, companies controlled by the Raju family wrote to Satyam seeking the money back. So far, the government-appointed directors on the Satyam board as well as the Central Bureau of Investigation have maintained there is no trace to be found of this money. Still, it is unlikely the Rajus will let go of the claim so easily.
...and the gains
On the positive side, the acquisition will help Tech Mahindra spread its risks. Its margins haven’t been among the industry’s best — in 2007-08, for instance, it was just 17 per cent compared with around 30 per cent for Infosys. Observers and sector experts say this is because of its large dependence on British Telecom for business: It accounts for 60 per cent of its total revenues. Post the acquisition, it will come down to 25 per cent. (Since Tech Mahindra is acquiring 51 per cent, it will consolidate Satyam’s accounts with its own.)
While margins should improve post consolidation, the bottom line might be under pressure for a couple of years because of the debt of close to Rs 2,200 crore that it will be taking on to fund the initial stake as also the open offer. Clearly, a lot has to happen before the bubbly can be uncorked.