Tech Mahindra is paying $351 million for a 31% share of Satyam, and will follow this up with an open offer for a further 20% of the shares at the same price. This values Satyam at $1.1 billion, just over half of its total reported revenues for the year ended March 2008.
In any other circumstances this would be a bargain-basement price, but clear details about Satyam's true financial position have yet to emerge four months after the admission of fraud by its former chairman B. Ramalinga Raju. The Satyam bidders were only shown preliminary audited financial metrics - concrete figures are yet to emerge.
Tech Mahindra beat private equity firm W.L. Ross & Co, and Larsen & Toubro, an Indian engineering and construction conglomerate, in the final round of bidding for Satyam, with news reports putting these companies' bids at Rs20 (â‚¬0.30) and Rs45.90 (â‚¬0.68) per share respectively.
This is considerably lower than Tech Mahindra's winning Rs58 (â‚¬0.88) per share bid, raising further concerns that Tech Mahindra may have overpaid.
It's not altogether surprising if you've never heard of Tech Mahindra outside of the UK and India. The company is a joint venture between BT and Indian conglomerate Mahindra & Mahindra, and it still generates around 60% of its revenues from services to BT.
Given its heritage as a supplier to BT, most of its expertise is in the telecoms sector, where it focuses on application management, maintenance and support services. The company generated around $750 million in revenues last year and, depending on the amount that Satyam will add (Tech Mahindra currently anticipates that could be around $1.3 billion in FY09/10), it could pass the $2 billion mark in 2009/10.
This focus on maintenance and management contrasts with Satyam, whose primary business is application development, and enterprise software consulting and integration in the financial services and manufacturing sectors. The two businesses seem well suited, with minimal chance of overlapping service contracts.
Plenty of challenges ahead
Speculation abounds as to the true state of Satyam and what Tech Mahindra will have to do to get the business back on track. The low level of overlap between the two companies suggests Tech Mahindra would not need to cut back Satyam's operations unless they were found to be unsustainable due to poor management and fraud.
More worryingly, there could be hefty liabilities: Tech Mahindra could face class-action suits from shareholders and former clients as the story unfolds.
On the positive side, Tech Mahindra can use the situation to rebrand and reposition itself as a broader Tier 1 Indian services player.