The IT arm of conglomerate Mahindra & Mahindra faced little competition for a 51% stake in the troubled outsourcer. But can it win back Satyam clients?
Tech Mahindra, the information technology arm of auto and farm equipment conglomerate Mahindra & Mahindra (M&M), has emerged as the top bidder for beleaguered Hyderabad-based outsourcing company Satyam Computer Services (SAY). Tech Mahindra, which was advised by local investment banks Kotak Mahindra and BMR Advisors, will pay $600 million for a 51% stake in Satyam, India's fourth-largest IT company, valued at $1.5 billion.
Perhaps indicating the challenges Tech Mahindra now faces, the company faced little competition for Satyam—its $1.16-per-share offer was much higher than any others. Engineering company Larsen & Toubro, which already has a 12% holding in Satyam, only offered 92¢ a share. Wilbur L. Ross Jr., the American private equity investor and rehabilitator of global damaged assets, offered a mere 40¢.
With elections scheduled to begin next week, leaders are presenting the news as good for India. The government has been in a hurry to find a new home for Satyam before the company's home state of Andhra Pradesh in southern India goes to the polls on Apr. 15-16. Prime Minister Manmohan Singh said in a televised message on Apr. 13 that he was "confident that India's regulatory system had the resilience to ensure that no case like Satyam ever takes place, and the perpetrators of any fraud will be punished." Kiran Karnik, chairman of the government-appointed Satyam board, told reporters at an Apr. 13 news conference in Mumbai that "we hope the deal will infuse greater confidence and comfort amongst customers."
The acquisition finally puts to rest three months of uncertainty for many of Satyam's clients, which include Nestlé, Citibank (C), and General Motors (GM), after the Jan. 7 confession of then-Chairman B. Ramalinga Raju to a $1 billion fraud.
Tech Mahindra wanted Satyam badly, as reflected in its bid price. Satyam is the biggest acquisition for parent M&M, catapulting the $900 million Tech Mahindra to No. 4 from seventh in the Indian IT sweepstakes. "This is a historic and game-changing day for Tech Mahindra," said M&M Chairman Anand Mahindra.
It sure is, but the challenges are also stacking up for Tech Mahindra, 30% owned by British Telecom (BT), which also accounts for 73% of the business. With its expertise Europe-focused and limited to telecom, Tech Mahindra has been trying to diversify, and believes that Satyam is the right fit. Satyam, in contrast, is larger than Mahindra and operates globally across a plethora of sectors like auto, avionics, manufacturing, insurance, and health care.
"No-Holds-Barred Fight" for Business
Tech Mahindra's limited experience could be a problem as it tries to digest Satyam. "How are they going to explain to Satyam clients about integration, and instill confidence in their business when they are new to many sectors?" says Sudin Apte, senior analyst at Forrester Research (FORR) in India. "There are so many uncertainties in the short term." He says Satyam has been losing around $200 million of business every month since Raju's confession.
Already, many Satyam clients such as Telstra, U.S. insurer State Farm, and Abu Dhabi Bank have moved to competitors. "Now it's going to be a no-holds-barred fight to grab business," says an outsourcing rival. He had earlier refrained from poaching Satyam's employees or clients "unless they approached us" after the fraud.
According to Tech Mahindra officials, the first task is to restore Satyam's reputation. They also need to tackle Satyam's liabilities, cope with class actions in U.S. courts, and absorb the company's 43,000 employees. Anand Mahindra knows what's in store. "We have taken on a challenge," the chairman said, "and we are going to make it work."