Tech Mahindra's takeover | Analysis

1. Research Question

Will The takeover of Satyam Computers by Tech Mahindra be profitable to Mahindra and Tech Mahindra?

The primary objective of this essay is to answer the above research question through primary and secondary data along with the use of various analytical tools in order to come up with an effective answer to the above question. The first company in the research question, Satyam Computers is an IT company which is prominent all over the world. My essay will investigate the aftermaths of one of the biggest scams in the world, the Rs 7000 crore scam committed by the chairman of Satyam Computers on the company. My essay also follows the second company mentioned in the research question, Tech Mahindra which decided to take over Satyam Computers as it was beneficial to them. On the whole, my essay will evaluate this takeover and predict whether this would be profitable to Tech Mahindra and its parent company Mahindra & Mahindra.

2. Theoretical Framework

To analyze my research question effectively, I will be applying various business theories to extract a considerable answer to my research question. I will be using the following theories and analytical tools in my essay:-

1. SWOT Analysis
2. Lewin’s force field Analysis
3. PEST Analysis on the eve of takeover.
4. The Wheel of Fortune- Post Merger and Pre Merger Analysis
5. Graphs showing the rise and fall in share price before and after the takeover

3.Areas of study

IB Business and Management HL Module 1:

1. Mergers and acquisitions.
2. Ethics and CSR.

4. Method of Research and Plan of Action

I will undertake extensive research of the scam by investigating it in leading Business Magazines such as Business World and also include the various interviews that the chairman Mr. Ramalinga Raju has given since the scam. Secondary research will also include examining official documents like the letter of confession of Ramalinga Raju when he quoted the exact amount of the scam and also stated the reasons for it. Further research will also include visiting the Satyam Computers head office in Hyderabad and scheduling interviews with a leading manager from Tech Mahindra who was appointed at Satyam to smoothen conditions over there.

Abstract

Will The takeover of Satyam Computers by Tech Mahindra be profitable to Mahindra and Tech Mahindra?

In this case, Tech Mahindra acquired a scam-hit Satyam Computers as they felt that it would be beneficial for them to strengthen their hold in the IT industry as it has done for itself in the Automobile industry. As The Mahindra Group does not have a strong presence in the IT sector, they have taken the decision to acquire Satyam Computers in order to have a stalwart hold in the IT sector. The main aspect which drew attention towards this project was why The Mahindra Group decided to acquire Satyam Computers.

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The motive behind this project is to analyze as to what were the reasons on behalf of Tech Mahindra to acquire Satyam Computers. Through research it has been found that there were many benefits for Tech Mahindra behind this acquisition. Through this acquisition, they would become the 4th largest IT firm in India and would also bring them a great deal of popularity in the IT sector. Tech Mahindra would be introduced to many new industries from manufacturing to financial services and also into the Aerospace industry as Satyam has a strong presence in the aerospace sector too. Hence, this acquisition would make them pioneers in the IT sector.

After analyzing using the analytical tools, and rise in share price of Satyam as well as Tech Mahindra before and after its acquisition. It was concluded that Tech Mahindra’s acquisition of Satyam was in fact beneficial for Tech Mahindra. Hence, the final conclusion would be that Tech Mahindra, through this acquisition would improve not only the condition of Satyam but also the stand of The Mahindra Group in the IT sector.

Introduction:-

Background information of both the companies

Tech Mahindra-

The Mahindra Group, with a net worth of US $6.3 billion is one of the top 10 industrial houses in India. It is a market leader in multi-utility vehicles in the Indian market and world’s second largest producer of tractors. The Mahindra Group has a leading presence in the major sectors of the Indian economy including the financial services, trade, retail and logistics, automotive components, IT and Infrastructure. It is also the proud recipient of the Japan Quality Medal, the only tractor company worldwide to be bestowed this honor. It also holds the distinction of being the only tractor company worldwide to win the Deming Prize. The US based Reputation Institute recently ranked Mahindra among the top 10 Indian companies in its Global 200: The World’s Best Corporate Reputations list.

The Mahindra Group has many verticals of its business ranging from Automobiles to IT. Automobiles, Farm Equipment, Infrastructure and Real Estate, Engineering Services and IT are its main verticals. The IT vertical of Mahindra’s business is called Tech Mahindra.

With more than 25000 employees, Tech Mahindra Ltd formerly known as Mahindra British Telecom (MBT) is an Indian Information Technology service provider headquartered in Pune, India. It is the 6th largest software exporter in India (Nasscoms, 2007) and 2nd largest Telecom Software Provider in India (Voice & Data, 2007) and JV between Mahindra & Mahindra Limited (M&M) and British Telecommunications plc (BT). Tech Mahindra is a leading provider of solutions and services to the telecommunications industry, with a majority stake owned by Mahindra & Mahindra Limited, in partnership with British Telecommunications plc. With total revenues of Rs 44,647 million in the year ended March 31, 2009, Tech Mahindra serves telecom service providers, equipment manufacturers, software vendors and systems integrators.

Satyam Computers:-

Satyam, India’s No. 4 software services exporter, was founded in 1987 by its chairman B Ramalinga Raju, who was born into a family of farmers. He started Satyam Computers with 20 employees and bagged multitude of IT projects from US companies.

Satyam debuted on the Indian markets in 1991, followed by a listing in New York in 2001. In 2008, it launched a secondary listing on Euronext Amsterdam under NYSE Euronext’s new “fast path” process for cross listings in New York and Europe. Satyam, based in the southern Indian city of Hyderabad, now has 52,865 employees.

Satyam Computers is a leading global business and information technology Services Company, which delivers consulting, systems integration, and outsourcing solutions to clients in numerous industries across the globe. Satyam leverages deep industry and functional expertise, leading technology practices, and an advanced, global delivery model to help clients transform their highest-value business processes and improve their business performance. The company’s professionals excel in engineering and product development, supply chain management, client relationship management, business process quality, business intelligence, enterprise integration, and infrastructure management, among other key capabilities. Satyam also caters other services such as Enterprise Integration and Infrastructure Management. It specializes in Sheet Metal Parts and Fabrication in the fields of Automobiles and Electrical Industries. Satyam Computers also has a strong presence in the Aerospace Industry. Satyam, whose clients include General Electric, Nestle, Qantas Airways, and Fujitsu, also specializes in business software, and offers back-office outsourcing and consulting services. It competes with local players such as Tata Consultancy Services, Wipro and Infosys Technologies as also global majors such as IBM and Accenture, for outsourcing deals.

PART iii- RESEARCH FINDINGS

3.1: Background information of the scam:-

Though Mahindra Group has a strong hold in the Automobile sector, they felt the need to advance in the IT sector as Mahindra was a small player in the IT sector. They realized that the fastest way to grow in the IT sector was through Mergers and Acquisitions. In the year 2007, Mahindra started scouting for companies to acquire in the IT sector. In 2008, as a part of their plan, Mahindra sent feelers to Satyam Computers and offered Satyam an opportunity to merge with them.

This proposal was at the time when B. Ramalinga Raju was still the Chairman and more importantly it was before the fraud was admitted. Though Raju wanted to merge with Tech Mahindra, he chose not to answer this proposal. Soon after this, Ramalinga Raju admitted to the fraud and Satyam was almost driven to bankruptcy. Mahindra felt that this was the breakthrough they required in the IT sector and lunged at it. A graduate in B.Com, Raju did MBA from Ohio University. Before Satyam, Raju ventured into other businesses such as construction and textiles.

3.2: The conditions leading to the scam, the reasons, and its aftermaths:-

It started with Satyam’s plans to buy Maytas properties and Maytas Infrastructure Company for a proposed $1.6 billion. Satyam had planned to acquire about a 51 per cent stake in Maytas Infrastructure costing $300 million and a 100 per cent share in Maytas Properties which would cost them $1.3 billion. Satyam would buy 31 per cent stakein Maytas Infra from promoters at Rs 475 per share with an open offer to public for 20 per cent stake at Rs 525 per share.

It seemed that this deal would empty Satyam’s treasury and would bring in debt along with adding almost $1.48 billion to the promoters’ kitty. The news of this acquisition sent shockwaves across the country questioning the hidden lines behind the deal. Soon after Ramalinga Raju announced that Satyam was going to acquire Maytas Infrastructure and Maytas Properties, he invited the wrath of the investors in a conference call. Faced with shareholder’s revolt and heavy criticism over corporate governance issues, Satyam withdrew the offer within hours of making the proposal. But by that time, the damage was done. What had shocked investors is that this will be funded out of cash reserves and debt in 75:25 ratios. The big question was why a share swap option couldn’t have been considered instead of draining Satyam Computer’s cashreserves.

3.3: Research findings of incidents which added to Satyam’s ethical miseries:-

A severe blow to the Hyderabad-based IT provider facing criticism from investors on its decision to acquire Maytas’ was of World Bank banning it for 8 years.The World Bank has banned Satyam from providing it services for eight years for alleged malpractices, including bribery. The ban would severely impact the business prospects of the Hyderabad-based company, already battling to retain and attract fresh business in a recession-hit global market. The World Bank debarment had been meted out for “improper benefits to bank staff” and “lack of documentation on invoices.”

Satyam started providing IT services to the World Bank in 2003. Two years later, allegations of bribery surfaced. In 2007, an internal World Bank investigation found that former VP Mohamed Muhsin had secured contracts and purchase orders worth $100 million for the Indian firm in return for Satyam’s stock options (ADRs) at preferential prices. After which he was banned permanently from the bank. However, Satyam was allowed to work for the bank till 2008.

There have also been allegations against Satyam of causing security breaches at the bank. World Bank’s records, which contain sensitive financial information, have reportedly been illegally accessed over the last year. This raised greater questions over the ethical behavior of Satyam.

Due to this, an investigation was carried out into the accounting statements of Satyam and there were found to be large gaps in the balance sheet along with inflated profit margins and others in _ _ _ _ (Date).

Ramalinga Raju then admitted to committing a fraud of Rs.7000 crore and held himself accountable for the gaps in the balance sheet and other accounts. On January 7, 2009, Ramalinga Raju wrote a confession letter to the board of directors as well as to the Chairman of SEBI regarding the fraud that was committed by him. In the letter, he stated how he had tampered with the accounts and the balance sheet by inflating the profits and the bank and cash balances, by accruing non-existent interests and by overstating debtors’ position.

The following is an extract from his letter of confession:-

Dear Board Members,

It is with deep regret and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:-

1. Inflated (non-existent) cash and bank balances of Rs.5040 crore (as against Rs.5361 crore as reflected in the books)
2. An accrued interest of Rs.376 crore which is non-existent.
3. An understated liability of Rs.1230 crore on account of funds arranged by me.
4. An overstated debtors position of Rs.490 crore (as against Rs.2651 reflected in the books)

3.4: Graphs Showing the Share Price of Satyam Computers and Tech Mahindra before and after the scam and the Takeover.

3.5: Tech-Mahindra Satyam deal:-

After the scam, the condition of Satyam went from bad to worse. Hence, the Government seceded to appoint four directors for Satyam till someone took over Satyam and made conditions better for Satyam. Later, the Government held a bid for the takeover of Satyam Computers. According to IT analysts, the chances of a strategic takeover have brightened after the company announced the possible dilution of stake by founder and promoter B Ramalinga Raju.

Despite the recent developments, IT analysts reckon that the fourth-biggest software exporter is a good buy, as the India outsourcing story is intact. IBM, it is reckoned, has strong expertise across verticals. So, it was well positioned to leverage on its strengths. An acquisition of a company like Satyam would further strengthen the Big Blues global services delivery capability. Another expected buyer was the US headquartered Cognizant. A Satyam buy will help to build significant scale and bring it into the big league of IT players, according to market trackers.

However, the unexpected winner turned out to be Tech Mahindra, coming out from the blue and taking the bidding by storm. Tech Mahindra had won the bid for Satyam Computer after bidding at Rs 58 per share. Tech Mahindra would pay Rs 1, 757 crore for a 31 per cent stake in Satyam. Satyam would operate as a special purpose vehicle until Tech Mahindra raises its stake to 51%.No other bid was within at least 90 per cent of Tech Mahindra’s bid. While L&T’s bid was at Rs 46/share, WL Ross’ bid for Satyam stood at Rs 20/share. Spice Corp, IBM and iGATE were among those confirmed names that dropped out of the race after showing an interest in the company. On April 13, 2009, Kiran Karnik, the MD at Satyam announced that IT services provider Tech Mahindra had offered the highest bid at Rs 58 per share and become the new owner of the company. Tech Mahindra, however, would run Satyam as an independent company with separate liabilities.

Part IV: ANALYSIS

4.1: Benefits behind the takeover of Satyam by Tech Mahindra:-

The Mahindra Group is one of the top 10 industrial houses in India. It has proven to be a pioneer in the automobile industry and also has a leading presence in the major sectors of the Indian economy including the financial services, trade, retail and logistics, automotive components, IT and Infrastructure. Tech Mahindra (IT) is a provider of solutions and services to the telecommunications industry, with a majority stake owned by Mahindra & Mahindra Limited, in partnership with British Telecommunications plc.

The Mahindra group, although strong in the automobile industry, is not well-balanced in the IT sector. Hence, it needed to diversify itself into the IT sector and create a name for itself there just like it has done in the automobiles and farm equipment sectors. Having a strong hold in the IT sector would prove beneficial for Mahindra as it would enhance its versatility. The downfall of the IT service giant Satyam Computers provided a breakthrough for Tech Mahindra. Tech Mahindra won the bid for Satyam at the price of Rs 58/ share in the presence of giants like IBM, iGATE, L&T and WL Ross.

After Tech Mahindra won the bid for Satyam Computers, Anand Mahindra, the owner of The Mahindra Group revealed the motive behind the takeover saying, “We want to be the leader in the IT field and that is our vision for Mahindra Satyam. But right now, the immediate task is to bring the company back on track.” Tech Mahindra prior to the acquisition specialized in Telecom services, Equipment manufacturing, Software vendoring and in System Integration. Whereas after the acquisition, they would specialize in other fields where they have a lack of experience like Consulting services, Outsourcing solutions, Engineering and Product Development, Supply Chain management, Business Intelligence, Enterprise Integration, Infrastructure management, etc.

Satyam also provides engineering services to many of the component manufacturers in the world today especially in Sheet Metal Parts and Fabrication which are used in Automobile and Electrical Industries.This deal with Satyam would also bring Tech Mahindra into new industries from manufacturing to financial services. It would also introduce Satyam into the Aerospace Industry as Satyam has a strong presence in it. With skill strength of about 6,000 engineers, the work in this vertical would be dealt with effectively.

Through this takeover, Tech Mahindra has become the 4th largest IT service firm in India only behind Tata Consultancy Services, Wipro Technologies and Infosys Technologies. Prior to this takeover, Tech Mahindra drew almost 50% of its revenues from a single client- British Telecom plc. But with the takeover of Satyam, they would be servicing the customers of Satyam like Ford, Opel, etc. who require designs, drawings, etc. from the engineers of Satyam. Mr. C.P. Gurnani, the to-be CEO of Mahindra Satyam said that it would be beneficial for Satyam to be associated with the 65- year old Tech Mahindra. This is because of the fact that the company would get 110 of Tech Mahindra’s customers for the Enterprises Services business. Getting Satyam back on track would be no easy task as there would be many challenges that have to be faced after the takeover. These challenges will be quoted below.

4.2: Challenges for Tech Mahindra:-

The biggest challenge that Tech Mahindra will have to face is that they have to reduce the workforce to an optimum level which will be a difficult task as Satyam Computers has about 50,000 employees most of whom are in ineffective positions whom Tech Mahindra can layoff.

1. Another big challenge for Tech Mahindra will be to regain customer confidence.
2. Tech Mahindra does not have the adequate experience in all of Satyam’s business verticals and it will be a challenge to deal with the issues relating to these verticals.
3. Tech Mahindra has to complete all the legal liabilities of Satyam Computers.
4. Tech Mahindra has to face challenge of merging the work cultures of both the companies as the work cultures of both the companies are not similar. It also has to face the challenge of winning over the trust of the employees of Satyam and other human resource management issues.
5. It will also be a challenge for Tech Mahindra to repair the balance sheet of the scam-tainted company as it will be difficult to know as to where the lost money has gone. Another challenge will be to show the real profits and losses of Satyam Computers.
6. The steps taken by Tech Mahindra have to be chosen very carefully as they are now managing one of the biggest IT giants in India. Any wrong move may result in very dire circumstances for Tech Mahindra.