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.
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.
Securities and Exchange Board of India (SEBI) has made a significant amendment in the takeover norms. The amendment was declared on February 13, 2009 on SEBI's webiste.
The amendment was triggered by the sale of scam-hit Satyam Computer Services Ltd. After the fraud was disclosed by Satyam's founder in January 2009, the stock had fallen more than 90%. However, with the interest of getting a buyer the stock has gone up but is still down by more than 70% when compared to pre-crisis period. The current situation of Satyam demands an urgent restoration of customer's faith which can be brought if a well established player buys Satyam. Many corporates have shown interest in buying Satyam's business as it is currently available at huge discount to its peers. However, the uncertainty over the law-suits which Satyam may face is restricting the buyers. L&T, iGate Global Solutions Ltd., & Spice are the front runners in the race to acquire Satyam. L&T has gone ahead and bought 12% stake from public. To gain management control it has to buy more shares. By the current norms any company acquiring more than 15% stake in any publicly listed company has to give an open offer to the public for buying additional 20% shares. There is some regulatory restrictions on the price of open offer. Simply stated, the price has to be more than the six months average trading price, which in the case of Satyam will be about Rs 250 per share whereas its current market price is about Rs 50 per share. This would be a significant premium to its current market price as the value of Satyam has eroded significantly post the fraud-disclosure. No buyer would be keen on paying such a higher price as indicated by the SEBI's open offer regulations.
To meet this challenge SEBI had two options: make Satyam an exceptional case or amend the regulation to suit such cases. SEBI has gone forward and relaxed the regulations for Satyam like cases. SEBI has added the following sub-regulations:
" (i). No public announcement for a competitive bid shall be made after an acquirer has already made the public announcement pursuant to relaxation granted by the Board in terms of regulation 29A. (ii) Relaxation from the strict compliance of provisions of Chapter III in certain cases. The Board may, on an application made by a target company, relax any or more of the provisions of this Chapter, subject to such conditions as it may deem fit, if it is satisfied that – (a) the Central Government or State Government or any other regulatory authority has removed the board of directors of the target company and has appointed other persons to hold office as directors thereof under any law for the time being in force for orderly conduct of the affairs of the target company; (b) such directors have devised a plan which provides for transparent, open, and competitive process for continued operation of the target company in the interests of all stakeholders in the target company and such plan does not further the interests of any particular acquirer; (c) the conditions and requirements of the competitive process are reasonable and fair; (d) the process provides for details including the time when the public offer would be made, completed and the manner in which the change in control would be effected; (e) the provisions of this Chapter are likely to act as impediment to implementation of the plan of the target company and relaxation from one or more of such provisions is in public interest, the interest of investors and the securities market. ”
Though this will make the way clear for Satyam bidders, this amendment is highly unlikely to be applicable for other cases as the conditions required are very narrow and unlikely to be met by even a similar company in future.
The most dreadful news is out and people all around world are analysing the cause and effect of this on different stakeholders. While Mr. Raju has accepted his responsibility, there seems to be accountability of other CXO’s, Board of Directors, Auditors and regulatory authorities.
The Rise…
The fourth largest provider of Information Technology services in India, Satyam Computers Services Limited (SCSL) was incorporated in the year 1987 as a private limited company at Andra Pradesh. Later at 1991 it was recognized as a public limited company. In the year 1995, company was awarded ISO 9001 certification. The operation was soon expanded to China, Singapore, Malaysia, Canada and Australia.
In the fiscal of 2006 Satyam received the CNBC best performing stock of the year and Excellence in cost management from the Institute of cost and works accountants of India.
Satyam has been ranked the No.1 ITO: Global Process Consulting vendor by the 2007 Black Book of Outsourcing.
It won the Asian Corporate Social Responsibility Award under the poverty alleviation category
As on 2008 Satyam Computer Services Ltd became the first Indian company to list its American Depository Shares (ADS) on Euronext in Amsterdam.
…and the fall
The World Bank awarded the Outsourcing contract to Satyam Computer Services worth of $10 -$15 million in 2003. This lucrative five-year contract to design, write and maintain all of the World Bank's information systems came into news with a ban in Oct, 2008 from doing any off-shore work with the World Bank after forensic experts and bank investigators discovered that spy software was covertly installed on workstations inside the bank's Washington headquarters, allegedly by one or more contractors from Satyam Computer Services. The contract, which began at $10 million, had grown to over $100 million by 2007, but it was not renewed further.
Again in the 3rd week of Dec, 2008 Satyam was in all wrong news for a different reason, Ramalinga Raju the Satyam promoter tried to buy son owned properties firm-Maytas properties, Satyam being a listed company approved the process through its so called independent board, when the takeover news came out the institutional investors cried foul and Satyam backed of from the deal.
And at this stage Satyam got another blow from World Bank making it public that it had banned Satyam from all business at the bank for a period of eight years - and that the ban started in September on the account of bribing some bank officials to get the contract and data-theft.
Reasoning
Was that one Man show?
The $60-billion IT & ITES industry, had maintained is rapid growth with an average of more than 20% for quite a long period on the back of outsourcing demand from Western firms. With 6 consecutive years of boom, top software firms Tata Consultancy Services, Infosys Technologies and Wipro consistently reported annual 50-per cent increases in profits every quarter.
With a very small equity stake of promoters, any drop in share price could have resulted in take-over. That made necessary for the fourth largest domestic IT firm-Satyam to maintain this pace of growth, please investors and shareholders and justify inflated P/E multiples during a six-year bull run. The firm tried every possible way of getting business that even opted for unethical measures of bribing data-theft etc. It started putting minimum possible bid for projects but this did not help the firm much as the margin was as low as 3% in these projects as compared to 20-30% of its’ competitors. The margin was inflated with a marginal gap from the actual profit. The firm had to maintain the growth with higher level of operation and that led to further requirement of additional resources and increase in the gap. Around 94% of the total cash of the firm was fictitious. To cover this increasing gap solely out of inflated non-existent cash, Mr. Raju decided to fill the fictitious asset with the real ones. While the world was wondering about the decision of Satyam going for INR 7680 Crore ( $1.6 billion) investment in Maytas infra and Maytas properties, this was taken as last resort. Maytas payment was planned to be delayed till Satyam conditions improves giving the firm enough time to dress-up its balance-sheet. But large institutional investors found no reason behind use of cash for acquiring Maytas when many undervalued real estate properties were out in market. And soon the whole scandal got exposed. Though Mr. Raju has taken responsibility of the whole fraud, it is impossible for one man alone to carry such big manipulation. CFO, COO and other executive could equally be responsible.
Issue with Corporate Governance
Lack of proper Corporate Governance was blamed right from the day Satyam decided to go for Maytas acquisition without taking view of its major investors. But there are deep routed causes of such ignorance by the board of directors. As an independent board of director, one is expected to work for the increase in share-holders value and at the same time makes sure that management does not take any decision which could impact the image of the firm. Satyam had requisite number of independent directors with excellent credentials, including a Harvard business school professor and a former Federal cabinet secretary.
But, the non-executive directors are generally invited by the management and often due to prior friendship. These directors are preoccupied with their own assignments (Professor M. Rammohan Rao , member of board of directors, Satyam resigned today from the post Dean, ISB as he was not able to spend enough time on Satyam responsibility). They monetary incentive is too less to spend enough time and effort to analyse each and every decision of the management. Last but not the least, the Indian culture of not saying no or question one’s proposal is also matter of concern.
Auditors
The March, 2008 auditors report for Year 2008 states – “In our opinion and to the best of our information and according tothe explanationsgiven to us, the said financial statements together withthe notesthereonandattached thereto give intheprescribedmannerthe information required by the Act and give a true and fair view in conformity with the accounting principles generally accepted in India:” - HyderabadPrice Waterhouse
Though, the Institute of Chartered Accountants of India (ICAI) says it cannot direct the auditors to explain themselves on the basis of the famous five pages letter sent by Mr. Raju, it is evident the the audit overlooked the significant manipulation in the financial statements. Price Waterhouse might not get impacted much as ICAI cannot take action against a firm, but only against individuals. But the firm certainly has gone wrong in its credibility of fair audit.
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