India-based Tech Mahindra wins bidding process to buy controlling stake in outsourcer
Scandal-wracked Satyam Computer Services Ltd. has chosen an India-based company named Tech Mahindra Ltd. to acquire a majority stake in the offshore outsourcing vendor, following a bidding process that began early last month.
What isn’t clear, though, is just how much of Satyam is left to take control of in the wake of now-former Chairman B. Ramalinga Raju’s Enron-like revelation in January that the company’s profits had been overstated for several years.
In agreeing to buy at least 51% of Satyam’s stock, Tech Mahindra, a telecommunications-oriented systems integrator and services provider with just under US$1 billion in annual revenue, is looking to vault itself into the big leagues of offshore IT services. The deal would adding about 48,000 Satyam employees to Tech Mahindra’s current workforce of 25,000 people.
But analysts say that Satyam has lost customers and revenue since the disclosure of the fraudulent accounting scheme. Moreover, they say, it’s losing good employees to rival vendors. That’s a lot for Tech Mahindra to fix, especially since it also will have to integrate two very different organizations: its own telecom-focused operations and Satyam’s more diversified IT business, which is especially oriented toward ERP-related services.
Tech Mahindra was formed more than 20 years ago as a joint venture between U.K.-based telecom operator BT Group PLC and Mahindra & Mahindra Ltd., which is part of a conglomerate in India that manufactures automotive and farm equipment. Under the terms of the deal with Satyam, Tech Mahindra will pay about $354 million for a 31% ownership stake in the outsourcer and launch a public tender offer to acquire at least another 20% of its shares.
Satyam once was a $2 billion company in terms of annual revenue. But Gartner Inc. analyst Frances Karamouzis said that based on interactions with clients, the consulting firm estimates that Satyam’s revenue run-rate now may be less than $1 billion. She added that Satyam also faces potential legal liabilities from ongoing lawsuits, including two class-action suits filed in the U.S. on behalf of investors here.
Nonetheless, Karamouzis thinks that Tech Mahindra needs to expand in new areas, especially since contracts from BT itself constitute a large part of the company’s portfolio. Buying control of Satyam would be a way for Tech Mahindra to catapult itself into more mainstream competition for IT services business, she said.
Peter Bendor-Samuel, CEO of Everest Group, an outsourcing consultancy in Dallas, said the deal between Satyam and Tech Mahindra is a good one for India’s IT services industry as a whole. “It creates some stability that [the industry] desperately needed,” he said.
Bendor-Samuel estimated that Satyam’s current revenue run-rate may be closer to $1.5 billion. But he said that no one, including Satyam itself, is certain about what the company’s business level will be this year.
On the plus side, Bendor-Samuel said that the parent companies of Tech Mahindra have strong reputations and “are in a position to take care of any issues that are coming out of the Satyam situation.” But he added that Tech Mahindra faces substantial issues related to integrating the two firms and retaining customers as well as employees.
What may help Tech Mahindra keep some of Satyam’s customers is the typical “stickiness” of IT services, as well as the early termination costs that companies might have to pay to get out of their services contracts. That could give Tech Mahindra a chance to stabilize Satyam’s business while also providing customers with an opportunity to digest the upcoming changes, Bendor-Samuel said.
Ramalinga Raju resigned from Satyam in January after admitting that the company’s accounts had been falsified; his brother, B. Rama Raju, also stepped down as the company’s managing director. Last week, Indian authorities filed criminal charges against the Raju brothers and four other former Satyam executives in connection with the accounting scheme. Three people who didn’t work for Satyam also were charged.
Satyam’s reconstituted board, which was appointed by the Indian government after the financial scandal came to light, said today that the selection of Tech Mahindra as the high bidder “signals a new stage for [Satyam] in its progress towards stabilization and growth.”
