Where angels fear to tread

In the first week of March, two months after Satyam’s fate was put in the balance by Founder B. Ramalinga Raju’s stunning admission of an accounting fraud, the Securities and Exchange Board of India cleared a plan by Satyam’s new government-appointed board to sell a 51 per cent stake in the company.

The first response? Much shuffling of feet and a few ahems— but nobody rushing to bid for the one-time icon of India’s IT/ITeS sector which services some of the biggest corporations in the world. As this edition of BT went to bed, (a day after the process of registration of bidders was concluded) the names floating around were the usual list of suitors like L&T, Tech Mahindra, iGate and Spice. The biggest surprise, though, is that none of the sector’s top names—the Big Four—Tata Consultancy Services, Infosys, Wipro and HCL Technologies— has shown any interest in their former rival so far. However, the company said it had received adequate response from Indian and international bidders, including private equity (PE) firms. There are also unconfirmed reports of IBM and HP and a couple of PE firms evincing interest.

 

Value and the Beholders How much will Satyam’s suitors be willing to fork out? Total value at the upper level $1 billion* Share price at which deal could be clinched: Rs 70-75 Value of fixed assets: Rs 4,000-5,000 crore US liabilities, courtesy of classaction suits: $440-840 million Figures are estimates of analysts, except the US liabilities, which is a reported estimate put out by the legal advisors to the Spice Group *Enterprise value

The new dimension is only that of PE firms also showing interest. Analysts feel that entry of PE firms in the fray could be a welcome development for Satyam only if there are big names that have the necessary management bandwidth to turnaround companies. There is speculation that it could be firms like Fidelity but there is no confirmation on this. Fidelity has, apparently, already increased its stake in the company from a single digit to over 10 per cent through open market deals.

While every potential buyer had a ready rationale for a possible acquisition, none of them had an idea of the only thing that matters now: a clear picture of Satyam’s liabilities, right now on the ground, or in the future. An L&T official pointed out that the expression of interest does not have any financial dimension. The way forward would depend on the nature of information that Satyam is ready to disclose. Officials at Tech Mahindra confined themselves to saying: “Once we have received the RFP (Request for Proposals) and other information we will evaluate and conclude on next steps.” Only the Spice Group has so far made some early calculations of the legal liabilities in the US. Apparently, Spice has a report from its legal advisors, Gibson, Dunn & Crutcher LLP, which places the liabilities in the range of $440-840 million from the dozen-odd classaction lawsuits in the US.

At the moment, analysts are inclined to see L&T as the bestplaced, going by the overlap of services: Both have manufacturing and SAP practices as also an auto and engineering practice. L&T also has deep pockets. For Tech Mahindra, the feeling is that it could just be diversification for the sake of diversification.

Whatever be the valuation of Satyam, evidently, one cannot overlook its fixed assets—land and buildings. And these are significant in value. The company’s two major facilities at its Hyderabad headquarters— the120-acre Satyam Technology Centre at Bahadurpally and the 30-acre campus near Hitec City—alone are valued at Rs 1,800 crore “on a conservative basis”. Satyam cited its silent period to decline comment on these numbers. But it owns properties in at least 10 locations—Pune, Bangalore, Bhubaneswar, Chennai, Vizag and Hyderabad, among others. According to some estimates, the total value of all property could be worth Rs 4,000-5,000 crore.

What about the company’s liabilities? Some Satyam insiders say the existing liabilities are mostly in the form of loans taken from banks (around Rs 600 crore), a large part of which is still lying as cash in the banks as the company has been able to meet most of its operational expenses from its receivables. Analysts at Edelweiss Research say the upper limit for Satyam’s value would be just under $1 billion, based on indicators from its profitability, margins and assumptions of a productive employee force and assuming a realistic share price of Rs 70-75 per share (against around Rs 50 today). If the liabilities were to be deducted, then the enterprise value to the shareholder could be anybody’s guess! What about the value of its fixed assets? “These really come into picture when you want to liquidate,” says Viju George, Senior IT Analyst and VP, Edelweiss Research. No wonder, the biggest worry for potential suitors is on the liabilities front. But there could be worries on the business front as well.

Whatever the valuation of Satyam, one cannot overlook its fixed assets. The company’s two major facilities at its Hyderabad headquarters alone are conservatively valued at Rs 1,800 crore

According to Forrester Research Senior Analyst Sudin Apte, mission critical work that Satyam did for top multinationals represents the largest opportunity but is difficult to transition. One of the top service lines for Satyam is enterprise application services, with the company maintaining and supporting corporation-wide implementations of enterprise software such as Oracle and SAP. Before the scandal, Satyam reported that it had 50 clients representing more than $10 million in revenue per year, and these clients most likely use Satyam for mission-critical work. Given the sensitivity of these services, these clients will be compelled to look for other options, but any transition will be difficult given the complicated nature of the projects.

On the other hand, Satyam’s very small clients can change suppliers easily. A few such clients— typically in the revenue range of $1-2 million—have told Forrester that they can swiftly look at alternatives. While the work Satyam does for these companies is not of very high impact, the corporate supplier policies at most companies do not support working with vendors charged with malpractice. To protect the integrity of their vendor selection criteria, these firms— Apte estimates approximately 120 companies—may blacklist Satyam and shift their work to other firms.