Tech Mahindra's acquisition of Satyam could change the Indian IT league

Continuation from previous post on Tech Mahindra's bid for Satyam
Currently, the top 10 players in the Indian IT industry (by revenues) are:

		Net Sales	Profit
		Rs. Crore	Rs. Crore
1	TCS	18534	4,509
2	Wipro	17493	3,063
3	Infosys	15648	4,470
4	Satyam*	8137	1,716
5	HCL Tech.	3769	1,102
6	Tech Mahindra	3605	326
7	Oracle Fin. (iFlex)	1793	411
8	Mphasis	1452	265
9	Financial Tech.	1254	961
10	Patni Computers	1172	388

* as per the latest audited data which may be subject to change after the revised audit by new auditors.

The top 3 players were at a much higher level compared to others. The combined revenues of Tech Mahindra and Satyam will reduce the gap and the combined entity could pose a serious threat to the top 3 in the medium to long run. However, in the short run there are strong challenges for Tech Mahindra. Retaining customers of Satyam is a crucial factor and Tech Mahindra will be doing every bit to save each customer. Besides other M&A related issues, managing diverse domain businesses will be tough task for senior management.
If managed well the synergies between the two companies can pose serious threat to TCS, Infosys and Wipro. Tech Mahindra's promoter British Telecom (BT) has businesses with all the top 3 companies and its business with Infosys is 6% of Infosys' total revenues. With Satyam in Tech Mahindra's kitty it could as well provided those services to BT which Infosys, TCS and WIpro are providing currently. Moreover its automotive IT business can be positively impacted because of Mahindra group's automobile business.

A look at Tech Mahindra’s winning bid for Satyam Computers

Recently Tech Mahindra won the bidding auction for a majority stake in Satyam Computer Services Ltd. which has been seeking some rescue since it was hit by the country’s biggest accounting fraud. Tech Mahindra outbid the other two bidders: engineering giant Larsen & Toubro (L&T) and International distressed fund investor WL Ross and Co. While Tech Mahindra bid at Rs 58/share L&T and Ross were distantly behind at Rs 45.90 and Rs 20 /share respectively. The reason for such low bid by WL Ross & Co. is cited by many that it lost interest as its partner for the bidding Cognizant Technology Solutions withdrew from the bid. As the next bidder was at less than 90% of the highest bid value Tech Mahindra was easily declared the winner.

Tech Mahindra has to pay Rs 1756 crore ($351 million) for 31 % preferential allotment of new shares. Later it has to make open offer for further 20 % at Rs. 58 /shares. If the open offer does not get fully subscribed, Tech Mahindra will have the option of going for a second preferential issue and raise its stake to 51 % to become the majority shareholder. Overall it will be investing Rs 2880 crores to get the 51% stake. This deal values the fraud-hit Satyam Computers at about Rs 5,665 crore ($1.1 billion).

Tech Mahindra will require Rs 2880 crore to sail through this deal smoothly. Moreover it may have to immediately invest for operating expenses of Satyam which according to some analysts could go up to Rs 1000 crore. In its balance sheet Tech Mahindra has about Rs 700 crore in cash. It will be looking for debt financing for the rest of the acquisition value. This is likely to put stress on its balance sheet which as on Mar 2008 had total asset value of Rs 1323 crore.

About Tech Mahindra
“Tech Mahindra is a leading provider of solutions and services to the telecommunications industry, majority stake owned by Mahindra & Mahindra Limited, in partnership with British Telecommunications plc. With total revenues of Rs 37,66 crore in the year ended March 31, 2008, Tech Mahindra is India’s 6th largest software exporter, and serves telecom service providers, equipment manufacturers, software vendors and systems integrators. Tech Mahindra solutions enable clients to maximize returns on IT investment by achieving fast time to market reduced total cost of ownership and high customer satisfaction. Tech Mahindra achieves this through its domain and process expertise, distinctive IT skills, research and development, proven innovative delivery models and approach to off shoring.”

About Satyam
“Satyam (NYSE: SAY) is a leading global business and information technology services company, delivering consulting, systems integration, and outsourcing solutions to clients in 20* industries and more than 65* countries.”
* Figures as of September 30, 2008


Before Satyam's scandal was disclosed in January, Satyam was ranked India's fourth-largest outsourcing firm and Tech Mahindra was sixth-largest.

Microsoft set to leave its debt-free status for acquiring Yahoo!

Microsoft surprised many analysts by announcing acquisition offer for Yahoo! last week. The offer amount is $44.6 billion based on per share offer price of $31. This is at 62% premium to the closing price of Yahoo! stock on January 31, 2008. The offer is funded by 50% equity & 50% debt. The equity is equal to 0.9509 times the Microsoft's stock closing price on January 31, 2008. Chris Liddell, Chief Financial Officer of Microsoft, said that the offer has more than 100% premium over the operating assets of Yahoo!.

If the acquisition is completed, this will be the first time Microsoft will be borrowing money. At present Microsoft is a debt free company. Yes! Microsoft has no long term debt. Surprising, isn't it? Even Yahoo! has very insignificant amount of debt. Its debt to equity ratio in the latest quarter was 0.079.

Microsoft is a cash rich firm with 21 billion USD in cash and short term investments according to their latest balance sheet (December 31, 2007). The total current assets are more than 37 billion USD. This is huge considering the total assets size of about 67 billion USD. Microsoft funds its operations with short term loans. It has 22 billion USD current liabilities. MS is planning to use its available cash and stock to pay the equity part of the acquisition value.

Yahoo! stock price has climbed more than 50% since the offer was announced last week. Google's investors have been shocked by this and the stock fell heavily after the announcement. Currently, Google is the dominant leader of the online advertising market with more than half of total market share. The market is set to grow from 40 billion USD to 80 billion USD by 2010.