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 A to Z of Satyam-Tech Mahindra deal

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8/3/2019 Satyam Techmahindra

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 A to Z of Satyam-Tech Mahindra deal

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Satyam Computer Services Chairman Kiran Karnik (2nd L) and board members

Deepak Parekh (2nd R), Tarun Das (L) and T. N. Manoharan attend a newsconference held by Satyam board members in Mumbai April 13, 2009.

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Tech Mahindra to be Satyam's

new owner Tech Mahindra has bought a 31 percent stake in the

fraud-hit Satyam Computers. Tech Mahindra outbid

Larsen and Toubro and other companies.

In a race that saw only a handful of bidders, Tech

Mahindra beat rivals such as engineering

conglomerate Larsen & Toubro and U.S.-listed

Cognizant Technologies. Tech Mahindra agreed to

 buy a 31 percent stake in Satyam at 58 rupees, a 23

 percent premium to Satyam¶s last closing price.

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Tech Mahindra, established more than 20 years ago as a

 joint venture between Mahindra & Mahindra and BritishTelecom, faces the daunting task of reshaping Satyam, acompany at the heart of India¶s biggest corporate scandal.

Ever since Satyam¶s founder Ramalinga Raju shocked

markets by disclosing the $1 billion-plus fraud, there havebeen numerous reports of Satyam¶s employees jumpingship and some clients cutting back on orders toSatyam. The company¶s accounts are also still beingrestated and its U.S. liabilities are unclear.

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Satyam becomes Mahindra Satyam now

Satyam is no longer Satyam, but has become Mahindra Satyam asper the demands of the business. In fact, it's an irony that `WhatBusiness

Mahindra Satyam logo.Demands', which was the tagline belowSatyam's original logo, is now missing. Perhaps, the newmanagement saw the futility of stating the obvious.

The company unveiled its new brand identity, Mahindra Satyam. According to the company, this strategic move paves the way for the

emergence of a robust brand, which draws from the core values of the Mahindra Group and the inherent strength of the Satyam brand.

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How is Tech Mahindra funding the

deal?

It's already in the market to raise Rs 600 crore through 4-5 year bonds. Close to Rs

700 crore will come from internal resources. Kotak Mahindra, which advised Tech

Mahindra, is in touch with mutual funds, insurance companies, institutions likeIDFC, HSBC and some NBFCs and PE funds to raise money since banks can't

directly fund acquisitions.

The company may also get a bridge loan to complete the initial payment. Market

does not rule out an equity offering at a later stage.

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Is Tech Mahindra overpaying?

The company doesn't think so. In the worst-case scenario, it does not expect Satyam'sannual revenues to drop below $1.3 billion.The figure is arrived at after assuming 15 per cent of the revenues were overstated and

factoring in client attrition, which wouldshrink the figure from $2.2 billion to $1.5billion.

If private equity investors step in later, itwould indicate how much financial investors

are willing to fork out for the stock. Anoutsourcing expert with a consultancy firmsaid, "Going by what Tech Mahindra hasvalued Satyam, I would say it is more of anentrepreneurial decision. They have beenmore aggressive. L&T on the other hand has

been cautious."

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Is this a merger?

Tech Mahindra has no plans to merge Satyam with itself because of latter's liabilities.

The Pune-based firm will be handed reins of Satyam onlyafter the bidding process is vetted by the Company LawBoard, which appointed the board of directors that devised

and managed the auction.

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What would be Tech Mahindra's

priorities?

To retain clients and attempt renewing over $300 million worth of outsourcing contracts through competitive pricing, reassesslegal liabilities, negotiate out-of-court settlements with litigants

such as the UK-based mobile services provider Upaid. Also,accelerate restatement of accounts (expected to be completedby May).

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What Tech Mahindra cannot do?

Tech Mahindra is at liberty to bring in any kind of investor after the deal is done. However, theagreement says that they cannot strip the companyand cannot sell the company piecemeal.

³They can take another partner if they want to, in theSPV,´ Deepak Parekh, Satyam board member saidwhile announcing the highest bidder for Satyam

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Will there be layoffs?

While most of the employees evoked a sense of relief after the winner was announced, many remainedconcerned about tough days ahead.

This was true especially for those who are currently not

part of any active customer project. Satyam professionalsworking in subsidiaries such as Nipuna, the BPO arm of the company, continued to be sceptical about the newowner fear that Tech Mahindra could look at rightsizingthe company.

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Tech Mahindra has an agreement with Satyamto retain 100 key employees (which interestinglydoes not include Ram Mynampati). The fate of the remaining employees of Saytam would

depend on the extent to which Tech Mahindradecides to downsize. The first set of casualtiescould be employees on the bench. Satyam has43,500 direct employees.

As customers seek to lower their IT spend, andeven shift projects to other rivals, many Satyamemployees

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Tech Mahindra has a challenging task on its hands post its acquisition of Satyam, said industry observers. The factors that could make thisintegration a complex task are Tech Mahindra¶s lack of experience in mostof Satyam¶s business verticals and issues relating to its own core

business.

³Tech Mahindra certainly gets breadth in skills post merger (with Satyam).But what it lacks is depth in terms of a client base and leadership in thenew verticals that it would get access to after the merger,´ said EdelweissSecurities IT analyst Viju George.

Analysts also said that integrating a large pool of Satyam employeesacross verticals would be anything but easy. ³The business profiles of both the companies are totally different. While Tech Mahindra earnsmajority of its revenue from European market by providing telecomsolutions, Satyam is far more diverse in verticals as well as geographies,´said India Infoline IT analyst Rajiv Mehta.

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How will both companies benefit

Far from being primarily a single-client company, the Tech Mahindra-Satyam combine will now complete for projects with the Big Three of Indian IT - Tata Consultancy Services, Infosys Technologies and Wipro -and multinationals like IBM and Accenture.

Satyam has land assets of around 425 acres in India, half of which isowned by the firm. The other half (125 acres) is land taken on lease. Theestimated value of two of Satyam's own campuses in Hyderabad is aroundRs 1,500-2,000 crore. The other major asset is its strong workforce

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What will L&T do with the stock?

L&T still prefers to categorize the investment as strategic,thereby escaping the mark-to-market provision required for securities in the trading book. As per bidding rules, L&T can'tsell the shares for six months. But it plans to hold on to thestock for longer than that. L&T holds 12 per cent in Satyam,which will go below 10 per cent after Tech Mahindra's fundinfusion.

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Thank you