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Can Tech Mahindra digest Satyam? - Views on News from Equitymaster

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Can Tech Mahindra digest Satyam?

Apr 17, 2009

Are you an investor in Tech Mahindra? If yes, you might be wondering about the future of the company given that it has just made it to the big league by winning over the fraud-hit Satyam. Or so it seems. While the facts that this win will help Tech Mahindra (TML) in diversifying its software services business to a much wider canvas as also reduce its revenue concentration (BT current forms around 60% of the company’s revenues) might make you cheerful, what might worry you is whether TML will be able to absorb and manage a company more than double its size? And whether it will be able to manage the cockroaches that are yet to come out of Satyam’s cupboards?

These questions indeed are intriguing and might give you sleepless nights. And rightly so! The first reactions of TML gobbling up Satyam now being passé, it is time you understand the risks the former has taken up in its pursuit of becoming a blue-chip IT company.

The biggest risk TML has taken by acquiring Satyam is that it has done so without knowing the actual financial position of the latter, given that the newly appointed auditors are yet to submit restated numbers. What is the price that you quote for something when you have no clue about its value?

Then there are issues with respect to the kind of confidence Satyam’s clients have with respect to the firm’s future in the hands of a much smaller company and one which does not have experience in the domains that Satyam has been working on all these years. As you know, TML’s business is largely limited to the telecom vertical. Satyam’s acquisition will bring in diverse clients across domains like banking, financial services, manufacturing, infrastructure, media, semi-conductor, healthcare, retail, and logistics. This will definitely pose a serious challenge for TML in terms of management bandwidth and execution.

And then there is the baggage of liabilities that Satyam carries, like the case filed by Upaid and class-action suits filed in the US.

As far as TML’s own capacity is concerned, the fact that the company has just around Rs 5.5 bn of cash on its books but needs to pay up around Rs 28 bn for picking up a 51% stake in Satyam, raises funding issues. However, this is still not a major issue given that the company is planning to tie up for funds from banks and through selling debentures and bonds.

In short, while Satyam does not bring along any synergistic benefits to TML, the risks and challenges are immense. Only time will tell whether the latter is strong enough to digest the same. As for Satyam’s investors, the good thing to know is that the company survives – only its avatar will change under the new parent.

We shall anyways await details about TML’s funding and integration plans for Satyam before taking any concrete view on the stock.

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