2011

Corporate Strategy: Acquisition

of Satyam by Tech Mahindra

Anshul Bahre
Roll Number - eMEP -10-041
1/27/2011
Table of Contents

Jan 7th 2009: The day of confession ................................................. 3

The history of Indian IT Industry ...................................................... 4
History of Satyam............................................................................. 5
Indian companies confirm bids for Satyam...................................... 6
Acquisition by Tech Mahindra ......................................................... 7
A friendly merger: Mahindra Satyam & Tech Mahindra .................. 8
Reference....................................................................................... 10

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Jan 7th 2009: The day of confession
In any software project, according to an industry adage, programmers think they are 90%
done for about 50% of the time. That paradox will be familiar to the owners of Satyam Computer
Services, which was once India’s fourth-biggest software and services firm. The scam
perpetrated by its founder, B. Ramalinga Raju, and his brother is equally hard to fathom. On
January 7th Mr Raju confessed to cooking Satyam’s books for years, and admitted that a $1
billion cash pile did not in fact exist.

But were there hands in the till? But when a liar confesses, can you believe him? Many suspect
that even now only 50% of the truth is out. Cash, after all, is hard to fake. Satyam’s books were
audited by PricewaterhouseCoopers. According to the Economic Times, an Indian newspaper,
the auditor says it verified Satyam’s fixed deposits with the banks that held them. So perhaps the
money did exist, but has since been spirited out of the company.

Such tricks are not unusual in India, even if the scale of the Satyam fraud is extraordinary. Indian
“promoters” (who include business families and other corporate insiders) still hold almost half of
the shares on the National Stock Exchange (NSE). But many family firms are evolving into
widely held corporations. The danger is that as the stake held by insiders falls, they have an
incentive to rip off other shareholders by siphoning off money.

Who will stand up for the minority shareholders? In America managers cower before pension
funds and other powerful institutional investors. But India lacks a local equivalent. Its
occupational pension funds hold assets worth 2.5 trillion rupees, only about 5% of GDP. They
are permitted to invest only 15% of their holdings in shares, and actually invest even less.

Some hope that foreign investors might fill the gap. They hold about 10% of the shares on the
NSE, more than Indian banks, insurance companies and mutual funds combined. They ought to
be wary of inscrutable companies, giving the firms an incentive to change their ways. But
foreign investors can only take big positions in the firms they buy. And since half of India’s
shares are held by promoters, a foreign fund cannot take a worthwhile position without
managers’ acquiescence. So funds are reluctant “to cheese off management too much” by
complaining about corporate governance.

That complacency has been shattered. Indeed, in the wake of the Satyam scandal, investors have
been swift to punish even small infractions. The shares of Wipro, another computing giant, fell
by 9% on January 12th after the World Bank revealed it had barred the firm from doing business
with it until 2011. Wipro’s transgression was to invite bank officials to take part in an
oversubscribed share offering in 2000. Many who did so lost money. “It is a real debate whether
it was a benefit at all,” says Suresh Senapaty, Wipro’s finance chief.

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Meanwhile Mr Raju, his brother, and Satyam’s chief financial officer are in custody, charged
with criminal conspiracy, cheating and forgery. Satyam is in the hands of three directors
appointed by the government. If they do not act swiftly, Satyam’s rivals may pick up its most
lucrative customers and its best employees. But right now all that its Indian competitors want
from Satyam is distance.

The history of Indian IT Industry

Though it was all started way back in the history the major growth of IT industry in India started
from 1991 post-liberalization. India did not see a development in IT industry during mid 70’s
and this period was not so effective due to restricting imports of computer peripherals, high
import tax, strict Foreign Exchange and Regulation Act limiting its allocation.

A notable turning point in the Indian software and IT industries policy environment was when
Shri Rajiv Gandhi became PM in 1984. The major policy reforms were to recognize software as
an industry to invest and make it eligible for incentives as other domestic industries, reducing
import tariffs and announcement of CSDT policy which liberalizes exposure to the latest
technologies to compete globally and to capture a share of global software exports.

In 1986 when all state-owned banks were standardizing banking process, there came a need of
using UNIX over MS-DOS and which created a puzzle for local vendors to shift towards UNIX
based platforms and made India become “Unix country”.

Another important event in mid 80’s was when GE’s chairman Jack Welch visited India in 1989
which led to GE’s technology partnership with India. Till this period policies were able to
remove the barriers in IT industry but not completely.

In 1990, Department of Electronics (DoE) introduced the concept

of Software Technology Park (STP’s) in India. STP’s were allowed with basic infrastructure,
dependable power supply, tax exemptions and also given 100% ownership for the foreign firms.
1990’s development was mainly because of STP’s. MRTP Act was replaced de-facto in 1991
which allowed unbiased trade practices there after.

During this period India saw dramatic changes in heavy investments on higher education and
booming privately funding engineering colleges which made India ready with technical
manpower resources.

South Indian states saw drastic changes in higher education after 1983, where
liberalization made a major impact on privately funded colleges. This created IT clusters to form
in and around Bangalore, Hyderabad, Chennai, New Delhi, Mumbai and Calcutta.

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A significant break through factor in IT industry development was by Y2K. Indians were already
gained expertise in converting mainframes and DOS PC’s into UNIX platform. Y2K created a
battle ground for Indian software professionals and which prepared them to compete and show
their talent globally.

High investments in higher education and formation of prestigious engineering colleges,

policy reforms to allow foreign investments in 1991 enabled for significant growth in
development. From just programming and documentation work India emerged to
implementation, R&D, out sourcing and diversified itself to hidden depths of IT industry to
become a global hub for software and IT enabled services.

History of Satyam
Satyam Computers was founded in June 1977 as a private limited company by Ramalinga Raju
along with one of his brothers-in-law, DVS Raju. In June 1991, Satyam Computers got its first
Fortune 500 Client. In the same year in August, Satyam Computers was recognized as a Public
Limited Company.

Satyam went public in May 1992 and its issue was oversubscribed 17 times. In July 1993,
Satyam entered into a joint venture with Dun & Bradstreet. Satyam was awarded ISO 9001
Certification in March 1995. In December 1995, Satyam Infoway was incorporated. In May
1997, Satyam became the first Indian IT Company to get ITAA Certification for Y2K Solutions.
In November 1998, Satyam became one of the first companies to enter Indian Internet service
market with the launch of Satyam Infoway's ISP Service. In the same year Satyam entered into a
joint venture with GE. In 1999, Satyam Infoway became the first Indian Internet company to be
listed on NASDAQ.

In February 2000 Satyam was declared one of '100 Most Pioneering Technology Companies' by
World Economic Forum, Davos. In May 2000 Satyam became the first organization in the world
to launch Customer-Oriented Global Organization training. In March 2001 Satyam became first
ISO 9001:2000 Company in the world as certified by BVQI. In May 2001 Satyam was listed on
New York Stock Exchange. In 2003, Satyam announced business continuity center in Singapore,
the first of its kind outside India. In 2004, Satyam opened new development center in
Mississauga, Canada. In 2005 Satyam acquired 100% stake in Singapore based Knowledge
Dynamics, a leading Data Warehousing and Business Intelligence solutions provider.

Achievements of Satyam Computers:

 First Indian IT Company to get ITAA Certification for Y2K Solutions.

 Satyam Infoway is the first Indian Internet company to be listed on NASDAQ.

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  Declared one of '100 Most Pioneering Technology Companies' by World Economic
Forum, Davos in the year 2000.
 First organization in the world to launch Customer-Oriented Global Organization
training.
 First ISO 9001:2000 Company in the world as certified by BVQI.
 Ranked by the Brown-Wilson Group as the number two outsourcing vendor globally in
the year 2006

Indian companies confirm bids for Satyam

Larsen & Toubro (L&T), an Indian engineering and construction company with a small IT
services business, and Tech Mahindra, a mid-size Indian outsourcer, said Thursday that they had
registered their interest in acquiring a majority stake in ailing Satyam Computer Services.
Tech Mahindra, which has British Telecommunications as a key client and investor, said in a
filing to the Bombay Stock Exchange on Thursday that it will decide on other steps after it
receives a RFP (request for proposal) and other information in connection with its bid.
The company had earlier told a local TV channel that it may not bid if the full financial
information on Satyam is not made available.
After they register their interest online, they will receive a RFP from the company, and asked to
submit a detailed expression of interest by Friday, Satyam said.
A Satyam spokeswoman said that “information on the number and names of investors
registering interest would not be available immediately. Satyam's board is meeting Friday and
some announcement on investor interest can be expected.”
Satyam was plunged into a crisis after the company's founder, B. Ramalinga Raju, said in
January that the business inflated profits for years. The company accounts are being revised, and
information on the company's financial and business will be provided to short-listed bidders only
in the later stages of the bidding process, Satyam said. That move is likely to have deterred some
potential investors, analysts said.
A stake in Satyam is likely to be interesting to small and medium-size Indian outsourcers looking
to have access to Satyam's customers, analysts said. For large Indian outsourcers and
multinational companies like IBM and Capgemini that already run large Indian operations, and
have a large number of clients, a stake in Satyam is not likely to be of interest, they added.
Hewlett-Packard and IBM have not registered interest in a stake in Satyam, according to sources
close to the situation. Market and media reports had said that the two companies may consider
bidding. Executives at both companies said they would not comment on market speculation.

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Acquisition by Tech Mahindra
Now that mid-sized outsourcer Tech Mahinda has acquired controlling interest in fraud-beset
Satyam Computer Services, the new owner must take stock of what exactly it got for its money.

On April 17, Tech Mahinda got approval from India's Company Law Board (CLB) to acquire
31% of Satyam for $351 million. It will also make an offer on the open market to buy an
additional 20% of Satyam at an unspecified future date.

In other words, for an estimated $570 million, Tech Mahinda has leapfrogged into the top five
rankings of India's multi-billion-dollar outsourcing industry and in theory at least, upgraded its
clients list with Satyam's customers.

Problem is Satyam, whose multinational clients include Citigroup, GM, Ford, Nestle and Cisco,
is facing enormous problems, including class action lawsuits, defecting employees and a major
exodus of clients.

Moreover, Tech Mahinda is acquiring a company whose revenues and accounts are at best
uncertain. Since Satyam has to restate accounts for nearly six years, CLB chairman S.
Balasubramanian said it would be allowed to file all required documents, including quarterly
earnings reports, by December 31. Until then—assuming Satyam makes that deadline—Tech
Mahinda may be flying blind when it comes to determining the fiscal status of its new
acquisition.

Satyam was plunged into turmoil Jan. 7 when founder B. Ramalinga Raju confessed to vastly
inflating Satyam's earnings as part of a $1 billion fraud. Raju and eight others, including two
auditors from Price Waterhouse, are currently facing charges of criminal conspiracy, cheating
and forgery for allegedly stealing millions of dollars from the company.

In the meantime, Satyam, The Economic Times reported, has lost 46 clients to tech rivals such as
Wipro, Accenture, IBM and Tata. Those clients leaving Satyam include Emerson, State Farm
Insurance and Australian telco Telstra. Among the rivals benefiting from Satyam's client
defections: 3i Infotech, which grabbed Abu Dhabi Bank; Capgemini, which signed on one of
Satyam's prized customers, Coca-Cola, to a $100 million seven-year deal; and Cognizant which
bagged GlaxoSmithKline.

At this point Satyam is not yet prepared to discuss how it intends to deal with client losses and
the other issues it's confronting. "We won't be in a position to discuss integration matters before
the deal is consummated, the first phase of which is expected to occur early next week. Even
then, it will take some time for the two companies to develop detailed plans," Bob Olivier,
Satyam's VP, Global Marketing & Communications told CIOZone.

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The good news is that Tech Mahinda is owned by India's Mahindra & Mahindra Ltd and British
Telecommunications, both of which have deep pockets. They may well need them to ensure
Tech Mahinda's Satyam purchase proves successful.

A friendly merger: Mahindra Satyam & Tech

Mahindra
Even after the acquisition has been done formally but the companies are still working as different
entities from almost 2 years. Since the mid of 2010 every now and then we have been hearing
about the merger of the two companies. Presently, the combined valuation of 2 companies is at
steep discount, due to short term concerns, can be good bet for Long Term investors.
Bellow figures are from: http://www.parasramindia.com/reports_pdf/TechM-M%20Satyam.pdf

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The merged entity will be India’s 4th largest IT services provider. Presently, appears at steep
discount on the basis of

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The points to be noted:

 Market Cap/Sales Ratio, lower than even smaller companies.

 Presently, Tech M has limited expertise, mainly of Telecom domain and Mahindra
Satyam is coming out of its tough phase.
 The merged entity will have expertise in diverse areas of IT services and much wider
global reach.
 Presently, the margins are low; however with the synergy derived from the merger,
margins can see explosive expansion and its margins can be in the same league as the top
3.
 Growth in business and margin expansion are likely to result in EPS growing many folds.
 Probability of Jackpot: We assume that Merger will in ratio of 1 Tech M for Every 10
held in Mahindra Satyam and Promoters stake to remain as treasury shares. If Tech M
decides to extinguish its stake on merger, then post merger Equity will be about Rs. 195
Crore (against assumption of Rs.243.3 Crore), which itself raises the value per Share by
about 20-25% based on current fundamentals.
Risks:

 If Satyam is unable to turnaround to stronger performance, the scrip may slide down
sharply.
 Merger requires clearances from various institutions in India and US, which may be
lengthy procedure.
 Mergers often create issues with employees not adjusting well and attrition may be very
high.
 Both the scrip may under perform in short to mid term, till the dust settles. Presently,
Tech Mahindra is facing margins pressures, as it is expanding to various Geographies &
Satyam is coming out of its tough phase.

The questions are still the same, when will these company merge? Is it going to be a friendly
merger? What will be the brand positioning strategy for them, will they fade out Satyam or
Mahindra or they will keep both. As Satyam has a good hold in US and other regions like,
Mexico, Canada and now in South after the FIFA 2010 and Tech Mahindra have a firm hold in
Europe. Both the markets are fruitful but the companies individually but is it going to be fruitful
after the merger.

The results would be out soon, let it be financial, branding or organizational structure issues, we
will have to wait and watch how the two big firms get together and how does it impact the
market potential for them and for others.

Reference
http://www.ciozone.com/index.php/Outsourcing/The-Satyam-Acquisition-What-Tech-Mahinda-
Got.html

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http://sadhiqali.blogspot.com/2008/03/history-of-indian-it-industry.html

http://www.allvoices.com/contributed-news/2290138-special-report-the-satyam-scandal-offshore-
inmates

http://www.itworld.com/business/64148/indian-companies-confirm-bids-satyam

http://www.parasramindia.com/reports_pdf/TechM-M%20Satyam.pdf

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