Prospective Satyam Bidders May Include IBM – L&T, Tech Mahindra Confirmed

Posted by Jeffrey Scott -TypeHost Web Development | Thursday, April 2nd, 2009
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So many analysts, reporters, and bloggers are trying to link IBM to the bidding for Indian IT giant Satyam, whose disgraced CEO Ramalinga Raju (currently in jail) admitted to cooking the books and defrauding the company of over $1 Billion USD. This last week, Reuters released an article quoting the Economic Times in India, stating that IBM was in the bidding for the company and conducting due diligence in the second round of the sale process being overseen by a former Chief Justice of the Indian Supreme Court. Within 24 hours, Reuters released a second article denying IBM was in the bidding for Satyam, while the ET has stood by their story and repeated it in other articles. Some reports have stated that a law firm is representing IBM in the deal, a degree of separation that may lead to the attribution calls in both reports.

Yet, some are saying IBM doesn’t need Satyam with its 50,000 employees and IT staff that form the outsourcing backbone of the majority of the world’s Fortune 500 companies. IBM already has around the same number of employees in India currently, making it with Infosys, Wipro, TCS, Cognizant, and Satyam one of the top IT outsourcing service providers in the country. Analysts say Satyam’s potential liabilities, from a class action shareholder suit against Raju for destroying stock value and a lawsuit by Upaid for fraud / copyright issues could be problematic, to the tune of over $100 Million in liabilities. Bidders for the company have been unable to review the full accounts of Satyam, as the investigation into the accounting fraud is still ongoing. Clients have canceled accounts with Satyam, and the company has taken a bridge loan to cover operational costs until a new buyer is found. What advantage to IBM, then, in purchasing the company with so many problems?

Return then to the bidding process. Currently, 51% of Satyam is being sold by the government. A list of bidders who have confirmed requirements includes 8 companies, some of which have been mentioned at various times during the process as:

  1. Larson & Toubro – Indian Engineering Firm
  2. Tech Mahindra – IT Branch of Indian Conglomerate
  3. Spice Group – Now Withdrawn from Bidding
  4. Wilbur Ross – Distressed Assets, Venture Capitalist
  5. IBM – or their proxy
  6. HP – very little on this possibility published
  7. Cognizant – Reportedly withdrawn
  8. KKR – PE firm, May be in or outsourced

Again, there may be another private equity firm or multinational IT company involved but not publicly confirmed, some of the names listed above may not be included. The front-runner is considered L&T, whose founder has already acquired around 12% of the company. IBM is reportedly purchasing Sun Microsystems at what may be considered an incredible price – a former $200 Billion USD company at a fraction of its value. Even so, the purchase price was double Sun’s market value at the time of the announcement. Would a 100,000 strong outsourcing team in India, combining IBM Global and Satyam be a powerful backend for a fused IBM-Sun conglomerate? The fact is Satyam has one of the best client portfolios in the world, and the company has IT service contracts with Fortune 500 companies that could add $1 – $2 Billion USD in yearly income to the company that acquires it at current value. Companies generally sell between 10 and 20 times average yearly receipts, but since Satyam’s books are scrambled, nobody knows for sure what that value is.

Satyam needs a strong buyer with unparalleled corporate governance, openness, and transparency. They need a company that instills confidence in their client base and brings in new accounts. The Satyam staff or employee base are recognized as being some of the most talented in the world – before the Ramaling Raju revelation, there were really few companies with the international reputation of Satyam, in a very good way. Satyam essentially invented IT outsourcing or BPO, industries that have created a development revolution around the world, and trillions of dollars in business. This is the main point – more than being an Enron or Ponzi scheme, Satyam was one of the best and most innovative companies in the world over the last 25 years, and their employees are among the most talented and respected in the field. In 2006, IBM considered a takeover of the company at its heights – and at a market cap over 10 times current values.

So there is a bond and a perfect synergy between Satyam and IBM, the main issues being former management (already removed). But L&T has to be seen as the front runner and favorite in the bidding. Unless one of the PE firms makes a surprisingly high offer and outbids them, or IBM seriously pursues Satyam (something most market analysts are suggesting they are not doing), or another wildcard emerges, L&T will probably win the bidding. A bid by HP aimed at fusing their work with Mphasis and Satyam into a large outsourcing service provider based in India would be an exciting development, but nothing suggests anything like this is brewing.

Taking a Wilbur Ross model, imagine a PE firm buying Satyam – required by law to hold the company for three years, selectively acquiring other international outsourcing and BPO companies, merging the companies together, building up a massive IT service providing company, selling it off when the market recovers – similar to what he has done in steel and coal. The fact is that no one can really compete with Indian BPO at this point and it is going to grow continually based on cost / quality factors over the next 10 years, and no one really does that better than Satyam traditionally. There is massive potential here and the base is strong.

Whatever the motivations, potential benefits and unknowns, the process looks to be resolved quickly – reports suggest the sale will be announced within 2 weeks. We can hope the best for Satyam and its employees, and hopefully the company’s recovery will be symbolic of the overall greater recovery of the economic situation globally.

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