Will The Ordeal End?

It finally looks like light at the end of the tunnel for Satyam Computer Services (Satyam). After the ordeal that the company’s employees and clients have been through, the company now has got the olive branch from Tech Mahindra (TML). After being rescued from a verge of a total collapse to getting a new life Satyam has seen it all. The government too has done its bit by not only making a timely intervention to keep afloat the sinking ship, but also by guiding it to be successfully passed on to its new owner through a fair bidding process. All this has sent right signals not only to the investors domestically but also globally, thereby increasing their comfort level for investing in India.

Many thought that it would be Larsen & Toubro (L&T) that would finally lap up Satyam. But it was a surprising result when TML emerged as a winning bidder with the highest bid of Rs 58 per share for a 51 per cent stake in Satyam. The acquisition was done through a combination of a fresh issue of equity and a mandatory open offer. TML first acquired 30.28 crore shares representing 31 per cent of the share capital to infuse Rs 1,756 crore. After that TML made an open offer for 20 per cent of the enhanced capital for acquiring 19.53 crore shares. It’s a dual benefit for Satyam and TML where one is getting rescued while the other is getting a giant leap in the IT/ITES space. [PAGE BREAK]

But despite such a huge development the investors seem to have displayed a mixed bag response to both these scrips. When the announcement came on April 13, 2009, the Satyam scrip not only remained flat on that day, but has also been the same till now. On the other hand, the TML scrip did witness a brisk movement on the bidding results’ day. In fact, SEBI will be probing this unusual movement in the TML scrip on April 13, 2009 when it moved up by 21 per cent between 11.31 am and 11.39 am, just some time before the winning bid at 11.56 am. Barring the movement on that TML scrip, there hasn’t been much movement since then. Now if Satyam is being rescued by TML then why aren’t the Satyam shareholders happy about it? Besides, why did the TML scrip, which showed sharp gains on the bidding results’ day, remained flat since then?

To jig the memory of our readers, we had previously done an analysis on Satyam wherein we had recommended ‘sell’ and to avoid the counter when the fiasco broke out. But today the situation has changed with Tech Mahindra acquiring Satyam. So in the light of this development, should the investors who are still invested with the Satyam scrip make an exit at the current level or wait till the open offer? Does it also make sense to stay invested in Tech Mahindra as well? Through this analysis we have tried to guide the investors about the path that must be taken.

Delay Could Hurt
After the entire Satyam fiasco what the investors were eagerly looking forward to was the actual financial picture of Satyam. However, they would now have to wait even longer as the statements are being checked for the last six to seven years and re-statement of accounts will take its own sweet time. In fact, Kiran Karnik, Chairman, Satyam in one of the media interviews had said, “We hope the re-statement will be completed soon and within the Company Law Board’s limit of December 31. But if the December 31 deadline is not met, we will ask CLB and the regulators for more time.”

Thus it will take some time before TML and other investors would get to know Satyam’s actual financials. With lack of authenticated data it would not only be difficult for TML to chalk out a proper restructuring plan, but also lead to unnecessary delay in drawing any future growth estimates for Satyam. This could be the first time in Indian corporate history that a company has acquired a target company without knowing its true and fair financial picture. [PAGE BREAK]

What About Domain Expertise?
It is quite clear that Satyam’s acquisition by TML was a desperate attempt to get itself in the big league and the gap between their winning bid of Rs 58 and the second best bid of Rs 45.90 itself shows their will to do so. But has TML really thought this acquisition through? It should be noted that Satyam has many diverse revenue streams, while TML’s revenues come from the telecom space.

Thus considering that TML has been a telecom specialist it raises the question on the ability of this company to handle a much diverse revenue stream company such as Satyam. Will TML be able to generate and also maintain consistent business for Satyam for it to sustain the growth in the coming years? Besides, what worries us the most is about how the clients will react. In a scenario wherein the client is expecting more value for money and hassle-free services from the vendor, what strategy would TML come out with to serve the clients better is what needs to be seen. It should be noted that Satyam has already lost many clients since Raju admitted to the fraud. That apart we also believe that with the restructuring that would take place at Satyam there would be some fear of job loss among the Satyam staff. Currently there is no clarity about the employees who would be asked to leave. This would affect the productivity of the employees at Satyam, which would in turn affect business. [PAGE BREAK]

Log In, Log Out
Though TML has been successful in bidding for Satyam and would now get access to business beyond the telecom sector, there are rumours floating around that British Telecom (BT) might sell its stake in TML. According to one of the recent media reports, top BT executives don’t view TML as strategic investment for the long-term as it tries to rationalise it existing core business. In another media report, it was stated that TML wanted to diversify its business but BT stamped out the proposals and wanted TML to focus on the telecom domain. In fact, though BT has given its nod to the Satyam acquisition, it wasn’t before BT did raised its concerns regarding issues such as liabilities and the class action suits that have dogged the company.

This isn’t the first time that there have been rumours about BT exiting TML. BT has been looking to sell its stake in TML for the last one year, but the global meltdown could have been the reason that they have refrained till now. The reason we feel this is important is because BT contributes more than 60 per cent to TML’s total revenues (BT has equity stake of 31 per cent) and if BT exits TML, there could be a probability that it might lose the business as well. This could affect TML’s growth in the coming years. Besides, Satyam’s acquisition process has just started and it would take time before it could really get any benefit out of the same.

Exit Formula
There was excitement previously in the Satyam counter regarding who could come at the helm of affairs at Satyam. But with that suspense already over and we don’t feel there are any major triggers in the Satyam stock. Hence the upside in the scrip looks capped. Similar is the situation of TML as well where apart from the first flush of excitement that the scrip witnessed when it won the bid. In fact, we believe that most of the positives in the scrip have already surfaced and hence there are hardly any triggers for the scrip to move up any more.

But what we see is that with re-statement of accounts of Satyam yet to be declared, investors would always be concerned about the price Tech Mahindra paid for Satyam. In fact, L&T CFO Y M Deosthale was quoted as saying in one of the media interviews that “a lot of uncertainties still exist in Satyam and the bid involved a lot of judgements and assumptions about the company”. Besides, BT’s exit rumours would too keep the scrip under pressure. Hence we feel that the TML scrip will remain an under-performer on the bourses and hence it would be better to exit the scrip.

As far as the Satyam scrip is concerned, investors are lucky enough as they have the option to opt for an open offer unlike L&T which is stuck with a 12 per cent stake, which it now calls as strategic investment. L&T has a six-month standstill agreement with the Satyam board as part of the bid process. Thus it will not be able to offload its stake in Satyam in the open offer and also for the next six months. Despite the fact that the Satyam open offer is at Rs 58 per share we would still advise investors to exit the scrip at its CMP of Rs 48 as we expect the probability of shares getting accepted in the open offer is just 34 per cent. Thus for every 100 shares only 34 shares would get accepted in the open offer. Besides, applying in the open offer would also increase the investors’ tax liability and hence it would advisable to exit now.