By Erika Morphy E-Commerce Times
04/13/09 11:00 AM PT
Call it a scratch and dent sale: Indian IT services provider Tech Mahindra has outbid rivals and will acquire a 31 percent stake in Satyam for about $350 million. It will make an open-market offer on another 20 percent. Satyam, which outsources IT operations for major global corporations, was sent into a tailspin earlier this year when its chairman admitted to massive fraudulent activities.
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The four-month-long process to find a strategic investor for Satyam --
the India-based outsourcer that rattled the global business
community with its ex-chairman's confession in January of longstanding accounting
fraud -- is apparently over.
Venturbay Consultants, a unit of Tech Mahindra, is acquiring
31 percent of Satyam for US$351 million, or 302.76 million Satyam
shares. Tech Mahindra is a joint venture between British Telecom and
Mahindra & Mahindra in India.
Other bidders -- which didn't come close to matching Venturbay's offer
-- included engineering firm Larsen & Toubro and
billionaire investor Wilbur Ross, according to comments Satyam
Chairman Kiran Karnik made at a press conference.
Venturbay will eventually own a majority stake of Satyam; it must make
an offer in the open market for another 20 percent of the company's
stock, thus giving it a total 51 percent of Satyam.
New Face
The move could introduce a new face in the global outsourcing
community. Tech Mahindra, which develops software for telecom service
providers and equipment makers, is a niche player in the software
service outsourcing space. Its major client is its part owner, British
Telecom.
A partnership deal was a necessity for Satyam to survive, Scott Testa, a professor of marketing
at St. Joseph's University, told the E-Commerce Times. "A new partner
was essential -- Satyam needed to bring in new blood to clear the deck
and move forward so Satyam could salvage what is left."
The deal will also propel Tech Mahindra into the outsourcing
community's upper ranks, Shaalu Mehra, a partner at Perkins Coie and
head of both its outsourcing and India practices, told the E-Commerce
Times.
Satyam has a broad -- and well-regarded -- line of business practices
that will be of great benefit to any firm, he said.
Scarred by Scandal
More questionable is whether the scandal has caused irreparable damage
to Satyam's reputation.
The accounting scandal and Satyam's subsequent actions have rippled across the
Fortune 500 community. Given the secrecy that usually shrouds most
outsourcing contracts, it is difficult to determine with much certainty
all of the companies that were using Satyam for critical IT tasks.
Satyam has said that one-third of its clients are Fortune 500 firms -- a
constituency whose shareholders tend to focus on suppliers' reputation
and honesty.
Mehra maintains that the scandal has not hurt Satyam's long-term
prospects. "Satyam has withstood the scandal very well -- it has
retained most of its clients." That is because the accounting fraud
did not impact the core business operations. "There wasn't anything
fundamentally wrong with the business," he said.
However, the company's future direction had been unclear as it
sought a partner. Recently, cash-constrained Satyam had reportedly been forced to
ask some customers to make early payments.
Confession and Arrests
The cause of the company's troubles, of course, stem from the revelation
in January that Satyam Computer Services ex-chairman Ramalinga Raju
had falsified corporate earnings and assets.
Raju inflated the cash on the company's balance sheet by nearly US$1
billion, overstated September, 2008, quarterly revenues by 76 percent
and profits by 97 percent, according to a letter Raju sent to Satyam's
board of directors. Raju, it turned out, had been falsifying profits
for several years.
The scandal tainted the company's auditor, PriceWaterhouse, which reportedly had
to admit that its audit reports for the last eight years relied on
potentially false data provided by the company and should be
disregarded.
Eventually, three former top executives from Satyam -- Raju; his brother B. Rama Raju, who was Satyam's former CEO; and Srinivas Vadlamani, the company's former
CFO -- were arrested on charges of conspiracy and forgery in India.
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