Wednesday, April 15, 2009

Satyam Acquisition: Implications on Stakeholders of Satyam, Tech Mahindra and Larsen & Toubro

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.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.


Shalu said...

Hi Viral,
I want to start accumulating the following stocks:Bartronics, Time Technoplast, Moser Baer. Can you pls tell me the price range at which i can start this.....also, what is your view on the current levels of sensex? Will we be able to buy largecaps at the price range you suggested earlier or as many people say: have we missed the bus :-)?

Viral Rajnikant Dholakia said...

Dear Shalu,

You can accumulate your desirable Mid-cap stocks in the below mentioned Accumulation ranges:

Time Technoplast: Rs.20-24
Bartronics: Rs.60-80
Moser Baer: Rs.50-70

VIEWS ON NIFTY/SENSEX:Crucial 200 DMA on Nifty lies at around 3450 levels. A confirmation of its cross-over is received at a weekly close above Nifty 3500, to which we're very near to.

Cross-over of Nifty 3500, could break-open big flood gates to Nifty 3850-4250 with a surprising rally.

If Nifty 3500 is unable to be crossed over convincingly, we may remain range bound in the range of 3120-3485. Than markets may again make a dart towards re-testing 3500 resistence. This, in case, we fail to cross over 3500 in immideate future.

TRADERS EYE:Traders should have a close eye on Nifty levels 2940 (coresponding Sensex 9500), below which the current intermediate uptrend will be absolutely nullified. So, intermediate SL to be 2940 & short-term SL to be 3120 for trading fraternity.

When i published that posting on individual stocks, the markets were trading in an approximate range of Sensex 9000.

MISSED THE BUS?Dont get the feeling of missing the bus journey sink into your mind. This will indulge you to plunging into markets at higher levels, especially, since we have rallied significantly in last 1 month.

Wait for a substantial dip & enter during such times with piecemeal approach. Markets dont tend to go up in a linear fashion for too long. We've already had a fair bit of rally after witnessing a trough of Nifty 2600 & Sensex 8050. Some consolidation may be on the cards, even if we're to rally more from here.

Such rallies tend to give a feeling of commencement of a fresh bull phase. But these temporary exuburances or 'Bear Market Rallies' tend to fizzle out with time.

Anonymous said...

Hello... I am holding the ADS's listed on the NYSE, and one niggling concern that I have is that as we move forward, I don't see what would be preventing Mahindra to begin slowly shifting business from Satyam to its Tech Mahindra business division, and before you know it, Satyam is (as one analyst put it), just a collection of liabilities, and some land which can just be written off. What guarantees do minority shareholders have?

Shalu said...

Thanks Viral......for all your help.Shalu

Viral Rajnikant Dholakia said...

Dear Anonymous,

As far as i understand, when there are 2 seperate companies listed on the bourses under heading of different subsidiaries; usually their accounting & business operations are carried out seperately.

Their Accounting assets, liabilities, profit & loss, income & expenditures & cash flow positions are also maintained seperately. The assets or liabilities of one company do not get reflected in other company's accounts.

Though, at the end of the period, the parent company may show 'Consoldiated Results' where the integrated results of the combined entity are depicted.

So, there is little chance of Tech Mahindra poaching clients of Satyam, as at the end of the year the 'Consolidated Balance Sheet' are going to be same even if the Satyam clients are poached by Tech Mahindra.

Tech Mahindra would always benefit from the 51% stake that it would own in Satyam & shall not need to carry out such unsrcupulous acts.

Shabu's said...

Dear Viral,

Its again a Prompt and an appreciable post from you. I agree with most of your views regarding Satyam, But shall interested to know, what do u think on the foreign investors/US Judiciary responses towards the Satyam, now a subsidiary of Tech Mahindra. Whats all the impacts you expected on the Tech Mahindra people. Its got to know that, to expect some unexpected move from Anand Mahindra. What will be that. Can the huge value properties of Mr. Ramalinga Raju will give some relief to Satyam investors... Is it possible...'


Viral Rajnikant Dholakia said...

Dear Mr Shabu,

As per deal/regulator guidelines, the winning company (Tech Mahindra) can not sell its stake in Satyam for some 3 years lock-in period. Similarly, Tech Mahindra can also not liquidate any properties of Satyam for around 2 years without informing the regulator. (Pls confirm the above matter from your appropriate sources).

So, there are lock-in clauses that the winning company (Tech Mahindra) is bound with, after acquiring majority stake in fraud-hit Satyam Computers.

Shabu's said...

Thank u Viral....

Faisal said...

Hi Viral,

Satyam has been going down since the acquisition was announced...Whats your take on the stock for near term...Do you think one can make money if he/she buys at current levels?

Viral Rajnikant Dholakia said...

Hello Mr Faisal,

I do feel Satyam is a good buy for TRADERS at this point in the range of Rs.40-45. Time range for holding capacity should be 2 months. As more clarity emerges, the stock can shoot towards Rs.60-70. At the same time, the downside looks capped on the back of new face as its owner, even if there is disappoitment.

In fact, i would say, even if there is any form of disappointment in the 'Re-stated' Accounts or more than expected liabilities accruing from various lawsuits filed abroad, it would more so affect its likely Acquirer rather than Satyam itself.

In short, the Risk-Reward ratio is tilted in favour of Satyam for Traders in the game. The downside risk may be Rs.10 from here, whereas upside may be Rs.20-30.

Note: Traders should observe strict Stop lLss for their trades.

Antriksh Patel said...

Hi Viral,

Are there any chances of value unlocking by L&T. How are the shareholders of L&T benefited if the subsidaries are listed? Do the shareholders get any right's issued for the subsidaries? Which are the other propects where value unlocking can be seen?



Viral Rajnikant Dholakia said...

Dear Mr Antriksh,

Definitely value unlocking prospects can not be ruled out in the case of L&T.

The company has significant presence in various different spaces of infrastructure & other business lines as follows:

Engineering & Construction (E&C), Information Technology, Ship Building, Power Plants, Railway, Finance, Defense.However, all the subsidiaries involved in above operations may not have assumed a big size & scale. But, at least 3-4 lines of the company's businesses have scale big enough to be hived-off in the future, preferably, during bullish environment.

This process of unlocking could be done in the form of 'DEMERGER' which would simply mean offering shares of the demerging entity to prevailing shareholders.

More unlocking of value would mean better valuation of the sum-of-the-total parts of the company's seperate businesses to the shareholders.

Anyways, one more option could be, the parent company comes out with an 'IPO' (or stake sale to private institutions) for its subsidiaries which may unlock funds for the company itself.

In either of the options mentioned above, the shareholders stand to benefit directly or indirectly.

Shalu said...

Hi Viral, what is your view on Camson Bio Tech.....strictly for long term? Thanks

Viral Rajnikant Dholakia said...

Dear Shalu,

I don't track Camson Bio tech. So can not comment on it specifically.

Anonymous said...

Hello Viral,

I am in real need of a good suggestion. I have around 6000 Satyam shares, which I bought at an average price of Rs.200. I got them when i was working in satyam. Now I dont know what I should do with my satyam shares, i am holding them for now just not to commit loss by myself.

What is your suggestion for me. thanks.

Viral Rajnikant Dholakia said...

Dear Anonymous,

Your Cost for Satyam is Rs.200/-

It is very unlikely that such high cost would be recovered by you in short term or even medium term.

There is still lot of unclarity on the current standing of the company in terms of its liabilities from lawsuits abroad & at the same time even its Re-stated Financial statements.

May be, some flair up for the stock may come once there is more clarity on such fronts. Till than the stock may not move up sharply.

Though, at the same time the downside is capped around Rs.40 levels or so, especially, now that there is a new owner for the company in the form of Tech Mahindra. So, dont exit now at panic bottom prices prevailing now.

Wait for at least 2 more months to determine the stock price at that time with Re-stated statements expected to be announced till then.

Even if u're in dire need of money, & want to exit the company, make sure that you dont sell all shares in bulk quantity at current low levels. Do only part exit & remain invested to get at least some sort of appreciation in the next 2-3 monthsperspective.

Anonymous said...

Hello Viral,

Its me again, 6000 sataym shares @ Rs.200/-

Last 3 days generated a hope in me. I would appreciate if you could suggest more.

Thanks for your help.