Analysts optimistic on absorption of new clients, growth possibilities under Tech Mahindra.
Tech Mahindra, India’s sixth-largest software exporter, will figure among the top five players in information technology services in revenue, market capitalisation and the number of employees after it brings Satyam Computer Services under its fold.
The Company Law Board (CLB) is expected to approve the Satyam board recommendation for selling the the company to Tech Mahindra by the end of this week.
As of December 31, Tech Mahindra’s consolidated headcount had stood at 25,429 and revenues for the third quarter ended December 31 were Rs 11,32.2 crore, with a net profit of Rs 222.8 crore. Add the 48,000-odd employees of Satyam and the employees become around 73,500, next to India’s third-largest IT services provider, Wipro Ltd, which has around 97,000 employees.
For Tech Mahindra, the biggest positive is that the two companies have synergies in service offerings and client portfolio, says Sabyasachi Satpathy, director and co-founder, Mindplex Consulting. Satyam will bring capabilities in enterprise resource planning (ERP), systems integration, as well as vertical expertise in the embedded, manufacturing and insurance space that Tech Mahindra does not have right now, he explains.
“It’s a good growth strategy for Tech Mahindra, as it will get new clients and capabilities. By paying around $600 million, it is getting Satyam, which is worth $800 million-$1 billion,” said Sudin Apte, head of Forrester India. On the negative side, Apte said, “Clients will be concerned about the auto, aero and enterprise applications space. More than half the company’s business is from one client, British Telecom, which owns a minority stake in Tech Mahindra.”
Alok Shende, principal analyst, Ascendia Consulting, concurs that Tech Mahindra faces the twin risks of high dependence on BT and excessive concentration on telecom. But on the positive side, both BT and non-BT revenues have increased, he adds. “This means the company also has experience in non-telecom business,” he said.
Tech Mahindra has a strong management line-up, says Shende. The company has people like Sanjay Kalra, currently the president, Strategic Initiatives, who spearheads the BT relationship. He is responsible for mergers & acquisitions and was earlier the chief executive officer of DSL Software (a joint venture between HCL and Deutsche Bank), which is focused on IT and BPO solutions to capital markets. “It will take time but Tech Mahindra has the leadership to excel in non-telecom business,” said Shende.
Its focus on Europe and telecom gives it enormous capabilities. Therefore, the merger is complementary and the integration will be smooth, according to Som Mittal, president, Nasscom.
Satyam’s stock was up 3.61 per cent, to close at Rs 48.85 on the Bombay Stock Exchange (BSE). Tech Mahindra was up 12.31 per cent at Rs 359.45, while Larsen and Toubro was down 0.59 per cent, at Rs 824.
What made Tech Mahindra buy Satyam? “The deal was driven by business fundamentals,” said a source familiar with the deal. He explained that the basic value of Satyam came from contracts (revenue) and skill sets (employees). Satyam has a strong revenue base, but one which is “reasonably sticky”. The revenue run rate was pegged at $1.3-1.4 billion, which accounted for client losses, said the source.
Tech Mahindra, the source noted, had a strong presence in telecom, largely in Europe. Satyam, on the other hand, is strong in the US, and has around 48,000 employees. Besides, Satyam has a very good skill set in ERP solutions. “Tech Mahindra pays around $580 million and gets a company with a revenue of $1.2-1.4 billion. That’s not a bad deal,” the source reasoned.
But what about the liabilities? “One does not have an exact idea of the liabilities that will arise from the 13 US class-action suits. However, a gut feeling pegs it at $125-150 million,” the source said.
The Company Law Board (CLB), which gave its nod to nominating the government directors on the board of Satyam, would be able to approve the winning bidder within a day of the Hyderabad-based company filing the petition.
“The approval will be given in one to two days after Satyam files an affidavit regarding Tech Mahindra’s 51 per cent stake ownership,” said CLB Chairman S Balasubramanian.
Meanwhile, a city magistrate on Monday posted the Enforcement Directorate (ED)’s petition to record the statements of five prime accused in the Satyam scam — Founder Ramalinga Raju, his brother and former managing director Rama Raju, former chief financial officer Srinivas Vadlamani, and the two Price Waterhouse auditors, Gopalakrishan and Srinivas Talluri — to April 20.
