Tech Mahindra has emerged the winner of an auction for control of Satyam Computer Services with a bid of $351 million for a 31% stake in the company. Tech Mahindra's total outlay, including an offer to minority shareholders that is capped at 20%, will be around $580 million.
Tech Mahindra will effect the acquisition through a wholly-owned subsidiary Venturbay Consultants. This structure was designed to ensure that the buyer's liability was limited to its equity contribution. Satyam is currently facing litigation from customers and investors, especially in the US, where the financial fallout is unclear. Some analysts have, however, estimated it will be within $200 million.
The bidding process for Satyam was formally launched in March. The deal has been completed in a very short span of time, confirming that India's oft-criticised lumbering bureaucracy can function efficiently when it sets its mind to it. Satyam's board was reconstituted on January 9 and investment banks were called in to discuss strategic options shortly thereafter. The winning bidder was announced within three months of the new board's first meeting.
"The only significant condition precedent which remains is Company Law Board [CLB] approval," says a source close to the situation. Under Indian regulations, change of control of a company through the route of preferential allotment is allowed only if shareholders approve the deal. Given the peculiarities of this case, the CLB will approve the deal and the need for shareholder approval has been dispensed with.
Goldman Sachs and Avendus Capital are financial advisers to Satyam, while Amarchand & Mangaldas & Suresh A. Shroff and Latham & Watkins provided legal advice. Tech Mahindra said it was advised in a lead role by Kotak Investment Banking, supported by UBS, with P&A and Jones Day acting as legal counsel.
"[The Tech Mahindra takeover] ought to dispel the anxiety of all stakeholders as it re-positions the company's commitment to revival and good governance." Satyam's chairman of the board, Kiran Karnik, says in a written statement.
The winning bidder was selected based on both financial and technical criteria. The technical criteria included: the corporate governance and management track record of the bidder; its corporate behaviour record, including corporate social responsibility policies and information pertaining to past conduct in companies that it has managed; its track record in managing distressed companies; and other criteria unique to this M&A situation.
Tech Mahindra will buy 303 million new shares of Satyam, representing a 31% ownership stake in the firm, at a price of Rs58 ($1.16) per share, which will result in a $351 million capital injection into the firm.
Indian takeover law makes it mandatory for Tech Mahindra to offer minority shareholders of the company an opportunity to exit at the same, or higher, price. Accordingly, Tech Mahindra will make a general offer to buy another 20% of the enlarged share capital at a minimum price of Rs58 per share, taking its total outlay to around $580 million.
If Tech Mahindra does not succeed in buying 20% of the outstanding shares, it has an option to acquire more new shares to take its shareholding to 51%.
Other bidders included Indian engineering firm Larsen & Toubro and distressed debt specialist investor Wilbur Ross.
Satyam was founded by Ramalinga Raju in 1987, but his shareholding in the firm had been whittled down to less than 10% by the end of last year. Raju was executive chairman of the firm with other family members in key positions. Under Raju's watch Satyam grew to become one of India's leading information technology majors with around 55,000 employees.
But corporate India and the world were shaken in January when it emerged that ongoing accounting fraud at Satyam had left the balance sheet with a hole of more than $1 billion, while revenues and profits had been over-stated for several years. Satyam's auditors PricewaterhouseCoopers resigned and Deloitte and KPMG are currently trying to recast Satyam's past accounts.
"Transaction multiples being bandied about are not really relevant when both revenues and profits are a question mark," comments a source.
The case is the biggest corporate fraud seen in India. Raju, his brother and some Satyam and PWC executives are currently in jail. One of the many conspiracy theories doing the rounds in India is that Raju's forays into real estate lost so much money for so many that jail is the only place for him to be safe from retribution from the rich and powerful whose money he has lost.
Buyer Tech Mahindra was formed as a 50:50 joint venture between Indian business group the Mahindras and British Telecom. BT's stake in the company has been reduced to around 31% following an initial public offering in 2006, but Tech Mahindra still derives around 60% of its revenue from the telecom operator. The acquisition will help Tech Mahindra to diversify its revenue streams across a wider array of customers in terms of both industry and location.
But the question is whether Tech Mahindra will be able to stem the flood of business Satyam has been losing since the fraud was discovered.
The buyer seems fully aware of the challenges it faces, judging by statements made since it emerged the winner on Monday evening. Anand Mahindra, scion of the group and non-executive chairman of Tech Mahindra, said yesterday that reassuring Satyam's roster of clients, which includes multinationals like Nestle and Citi, that the firm was back on track would be a personal priority for him over the immediate future.