Going out on a limb
Sailing is one of Anand Mahindra’s passions, which perhaps culminated in the Mahindra & Mahindra (M&M) group recently venturing into the manufacture of leisure boats. That may explain the usage of nautical metaphors by the Vice Chairman & Managing Director of the auto and tractor maker to illustrate the status of his group’s newest acquisition. “I don’t believe this is a sinking ship. No longer. This may not be a racing craft yet but it is our task to make it one,” said Mahindra, 53, at the Satyam headquarters a few days after making the winning bid.
That’s the brightest part of the picture. The dark clouds hovering above it, however, are many, right from declining volume growth to pricing pressure. And there are the current market conditions: “The timing is surely not good. A large part of Satyam’s revenues—close to a third—are from auto and manufacturing; the auto industry in particular is doing quite badly. Then, the billing pressures are very high and people are expecting an 8-10 per cent discount on existing rates,” says Sudin Apte, Senior Analyst, Forrester Research.
Although Tech Mahindra gets to go beyond telecom services into enterprise solutions, the nature and focus of Satyam’s business opens up few options for synergies, point out analysts. “Tech Mahindra will only widen its positioning but not deepen it,” says Viju George, Senior IT Analyst & Vice President, Edelweiss Research. As far as scale goes, however, Tech Mahindra now gets a chance to move from 7th position into the 4th slot (Cognizant being seen as US-based)—ahead of HCL Technologies and Patni.
But then again, as George points out: “There are more cost synergies than revenue synergies.” Analysts like Pralay Kumar Das of BRICS Securities believe that the synergy factor may be overplayed. “The company is talking about synergy because there are no overlaps between their domains but this is not correct. While Tech Mahindra gets 100 per cent of its revenues from telecom, the biggest pie at Satyam is also telecom at 23.6 per cent,” points out Das.
There are many reasons for that mix of trepidation and resolve. One big concern is over manpower. Consider this: According to Forrester, since Raju’s confession, Satyam has lost close to a billion dollars in revenues. Although some 5,000 employees— or around 10 per cent of the workforce—have left since the scam surfaced, the desertion hasn’t been in the same proportion as revenue loss. The upshot? Satyam is saddled with excess manpower standing at close to 20,000, in the face of a declining run rate.
Satyam has some 48,000 employees on its rolls currently. Tech Mahindra refused to comment on such an eventuality. Analysts point out that such large-scale layoffs are unheard of in India. On the other hand, Tech Mahindra shareholders will feel short-changed if such a large number of employees continue to be paid for doing nothing.
The challenge for the company clearly is to utilise as many Satyamites as it can in as short a period as possible. There are more dark clouds on the not-too-distant horizon, too, in the guise of impending lawsuits and restatement of accounts. The latter exercise will take at least 8 months, given that accounts of 5-6 years have to be redone. Till then, Tech Mahindra can pat itself for bagging an IT services major at a bargain basement price—at least if you go by traditional valuation metrics: The total of close to Rs 2,900 crore Tech Mahindra will pay for Satyam is estimated at around 60 per cent of Satyam’s revenues.
Add Rs 480 crore of civil liabilities estimated by BRICS, to the cost of acquisition and you’re staring at a final price tag of Rs 3,370 crore. With the debt component estimated at Rs 2,600 crore, Tech Mahindra would see an annual outflow of Rs 270-280 crore in interest payments. “Infotech stocks fetch a premium because they usually have a very low gearing. However, after this deal Tech Mahindra’s debt equity ratio will become 1:1,” says BRICS’ Das. Paritosh Kashyap, Executive Vice President & Head-Debt Capital Markets, Kotak Mahindra Bank, however, says the funding was arranged with a view to keep the leverage at under 1. “On an average, funds were raised at less than 10 per cent rate,” he says.
Says Falguni Nayar, Managing Director, Kotak Mahindra Capital Co, which arranged funding for the acquisition: “We didn’t really go about valuing the business based on what happened in the past. We looked at the present scenario—the billing rates, revenue status, actual receivables positions shown to us and the future prospects, and then assessed the underlying long-term value of the business. We felt this is a great platform for Tech Mahindra.” Tech Mahindra’s Nayyar salvos another reason: “The fact that they have been able to retain a major proportion of their business despite the tsunami that hit them is an indication of their capability and how much their customers value them. We will talk to all the customers,” he says. Nayyar’s time starts now.
Plan B After losing out in the race for Satyam, L&T Infotech is on the look out for the next M&A opportunity. Every failed bid has a silver lining. Or at least that’s the way the top brass at L&T Infotech, the IT services arm of engineering & construction giant Larsen & Toubro, prefers to view its failed attempt to acquire Satyam Computer. “We got our money’s worth. The bid has triggered many possibilities. Clients of Satyam and other possible customers have got to know about us and are in touch with us. We are getting continuous publicity and have been featured in the international press many times in the last few days,” quips Sudip Banerjee, CEO of L&T’s 100 per cent-owned subsidiary. Is Banerjee putting up a brave face or is this positive thinking at its best? After all, prior to the bidding, L&T had picked up a 12 per cent stake in Satyam, with Managing Director & CEO A.M. Naik leading the charge. At the end of the day, L&T’s bid of Rs 45.90 was a long way behind Tech Mahindra’s Rs 58. L&T is in no hurry to offload its holding, which was acquired at an average price of Rs 55. Y.M. Deosthalee, Director & CFO, L&T, has clarified that the company will retain it as an investment—for at least the next six months— and there would not be any intent of playing a strategic role in Satyam. So, what is L&T Infotech’s Plan B? Banerjee, who moved in from Wipro last year, insists that this is the Plan A and Satyam “just happened. Now we just move on and find the next merger & acquisition opportunity”. Banerjee will be the first to admit that Satyam would have given it much-needed scale, allowing it to move up five places up the rankings, from eighth currently (seventh, if you don’t consider Cognizant an Indian company). But there will be opportunities in the future. “We are looking at specific areas. One, finding something within our domain competencies. Another is introducing a new service line like testing or infrastructure,” says the CEO. While that is the inorganic growth plan, the company has its organic play in place, too. It has just opened offices in South Africa and the Middle East. The company has also started new services like infrastructure services, testing and consulting. Despite such initiatives, the gap between L&T Infotech and the top tier just keeps widening. The top five—TCS, Infosys, Wipro, now Tech Mahindra-Satyam, and HCL Technologies are in the $2 billion (Rs 10,000 crore)-plus league, in revenue terms. L&T Infotech is miles behind with revenues of under half a billion dollars (Rs 2,000 crore as of 2008-09). “There will be consolidation,” Banerjee says. Call it Plan A, Target B. |
Additional reporting by Suman Layak and Rachna M. Koppikar
