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Tech Mahindra Swings In to Snap Up Stake in Scandal-Wracked Satyam

By Erika Morphy
Apr 13, 2009 11:00 AM PT

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.

Tech Mahindra Swings In to Snap Up Stake in Scandal-Wracked Satyam

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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