Wednesday, April 15, 2009
Although Tech Mahindra was supposed to be an underdog in the race to acquire fraud-hit Satyam as against the heavy weight L&T, the company went away with the trophy with highest bid of Rs.58 per share from the three bidders. The list of other two edged out bidders include L&T and Wilbur Ross with their respective bid at Rs.45.90 and Rs.20 per share. With this deal Tech Mahindra catapults into 4th largest IT Company in India after TCS, Infosys and Wipro.
Below I am discussing the implication of Satyam acquisition by Tech Mahindra and its effects on various stakeholders of Satyam, Tech Mahindra and Larsen & Toubro.
Implications for Satyam Stakeholders:
1) Cost of Satyam shareholders who bought the stock during the initial phase of bull phase is estimated to be around Rs.300-350 per share.
2) Likely Open Offer from Tech Mahindra would come at paltry Rs.58/- per share. Though, the bid turned out to be the highest bid among the 3 bids received, the amount is too small to compensate long-term investors who have invested in the outsourcing giant Satyam even before the time of euphoria of bull run 5 years back around Rs.300-350 per share. However, the fundamentals are no more the same as then, after the being fruad-hit.
3) In the final analysis, the genuine long-term shareholders would continue to remain the ultimate losers even after finding a new owner for their company. Though, over a period of next 2-3 months as more certainty prevails over the stock's fortune related with its actual re-stated accounts, the stock may witness revival from the current depressing levels.
4) Uncertain prospects for 45000 odd Satyam employees what with the deal not binding Tech Mahindra to retain majority of the employees.
5) Positive for Satyam clients as now there would be more clarity and certainty. Clients would be in more comforting position with a new owner on the anvil.
Implications for Tech Mahindra Stakeholders:
1) Tech Mahindra cannot strip the company nor can it sell Satyam through a piecemeal approach.
2) Tech Mahindra to acquire Satyam at approximately Rs.2900 crore for a 51% stake. On the other hand, the company hardly has Rs.500-700 on its books.
3) The remaining amount to be raised through raising debt. This could be from NBFCs or even an equity offering at a later stage.
4) Almost 60% of the Tech Mahindra’s revenues comes from British Telecom which incidentally also holds 31% stake in Tech Mahindra. The company’s big part of operations is concentrated in Telecom outsourcing.
5) With Satyam acquisition, Tech Mahindra gets hold on diversified services ranging from ERP to Engineering services.
6) Problems of integrating the diverse business of both the companies. Lower expertise of Mahindra’s in areas other than Telecom outsourcing Vertical.
7) Increasing uncertainty regarding re-stated accounts and class action lawsuit liabilities.
8) With a quick process of bailing out Satyam, Tech Mahindra may be able to control flight of clients to other outsourcing majors.
Implication for L&T Stakeholders:
1) L&T lost out to acquiring fraud-hit Satyam Computers in view of strategic importance to Infotech arm.
2) L&T’s current cost of 12% stake in Satyam is pegged at around Rs.80-90 per share.
3) The company is not be allowed to sell its holding in Satyam for next 6 months.
4) I feel that L&T shall not sell its stake in Satyam at any less than Rs.125-175 per share in farther future.
5) L&T shareholders are content as of now on failing to acquire fraud-hit Satyam and likely strains on its Balance sheet, uncertainty on re-stated accounts and implications of lawsuits filed abroad.
6) But, shareholders should understand that, as a preliminary affair, the stock price was initially battered on account that L&T holds stake in Satyam and the company is fraud-hit leading to slump in its stock price. The shareholders gave thumbs down to L&T on account of mark-to-mark losses that L&T may have to suffer for its stake in Satyam. This loss-making stake continues to remain unchanged even with changed ownership till date.
For Tech Mahindra Share holders:
Though Tech Mahindra has managed to acquire Satyam and catapult the combined entity in the top league of Indian IT firms, the company holds only to the extent of Rs.500-700 crore on its books and the remaining amount needed for acquisition of Satyam may need to be funded via raising debt through financial institutions or offering equity at a later stage.
Add to this leveraged buy-out, the high uncertainty of the current standing of Satyam on the back of delay in producing re-stated accounts and a series of lawsuits filed abroad on account of fraud.
Also, Tech Mahindra has gone on to bid for the company without having a detailed view on Satyam’s financial position and carried on basing expectations with this regard, is a matter of concern. Integration of new diversified services that has been acquired by Tech Mahindra form Satyam needs to be balanced out what with the acquiring company having limited exposure and experience in fileds other than Telecom outsourcing vertical.
For long-term shareholders of Tech Mahindra, I would recommend exiting from this company and rather prefer to shift to other Large-cap companies like Infosys or TCS which are more of CASH RICH companies with superior record of performance over years. Also the stock price of Tech Mahindra has rised appreciably from a trough of Rs.200 to Rs.365 in a short span of 1 month. Whereas other large-cap IT companies have not witnessed such a strong rally in the same period under contention.
This decision to prompt me to recommend an exit from Tech Mahindra, is more so after looking at the leverage buy-out that the company may have to make & stifling speculation factor of which the company would be a part of unless existing liabilities & re-stated account positions of Satyam Computers is not clearly known.
For Satyam Computer Share holders:
For Satyam shareholders with high cost of acquisition can keep holding their stock with a medium to longer horizon. They need not supply their stock in the likely Open Offer from Tech Mahindra at Rs.58 per share. As more clarity on Satyam’s accounting standing and liability whereabouts come out, the stock shall eventually rise if such numbers and liabilities tend to be better than market expectations.
Now, the shareholders should not be too concerned about the Satyam shares re-testing those trough levels as now it has a new and a recognized owner to its support. Though, the recommendation to hold Satyam is not long-term call but a medium-term view.
Short to Medium Term Call: Hold Satyam Computers
Medium to Long Term Call: Sell Tech Mahindra
Short to Long Term Call: Hold L&T
Note: The above views on calls related to Tech Mahindra, Satyam and L&T are my personal views views and suggestions for the respective stocks. Investors/Traders should do their own research & due-diligence. They should act as per their suitability, trading strategy & knowledge.
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