Satyam to mull on buyout offers, decision soon

According to a company source, the two-day board meeting, beginning on Wednesday, will consider six-seven buyout offers made to it and discuss the company's short-term funding requirements.

Ever since Satyam's founder and former chairman Ramalinga Raju admitted to having cooked the account books of the company to the tune of at least $1.5 billion, the company has been under severe liquidity crunch and, in its search of raising working capital, the newly-appointed six member board said the company is not averse to a takeover provided it finds a good suitor.

Though Satyam has received proposals from both domestic and foreign players, the board may give preference to a local entity.

In this regard, Satyam has appointed Goldman Sachs and Avendus, an Indian investment bank, to identify strategic investors and obtain expressions of interest.

Leading the buyout race are India's largest engineering and construction firm Larsen & Toubro (L&T), B.K. Modi's diversified Spice Group, IT services provider iGate Corporation, the UK-based Hinduja Group and Tech Mahindra, a leading IT services and solutions provider to the telecom industry and a unit of $6.7 billion Mahindra Group. Of the four, frontrunners are L&T, which is Satyam's biggest shareholder with 12 percent stake, and the Spice Group, which has made an offer of $408 million to buy controlling interest in the company.

Others in the fray are several IT services providers like HCL Technologies and Patni Computer Systems; BPOs like Aegis BPO (the back office unit of Essar Group), Genpact, IBM Daksh and Quatrro Solutions; and private equity funds such as Texas Pacific Group (TPG), General Atlantic Partners, 3i, The Blackstone Group and Kohlberg Kravis Roberts (KKR).

According to market analysts, it was not surprising to find so many suitors line up outside Satyam's door as Satyam is a good acquisition target, especially at its prevailing stock price, despite reputation risks.

"Anybody and everybody would have some or the other plan for Satyam because it is in big-time trouble and available at dirt-cheap valuations," said Harshad Deshpande, analyst at Mumbai-based Ambit Capital Pvt. "What is important is they need to provide right leadership, they need to have genuine interest."

"At this level, Satyam is an interesting candidate for takeover because fundamentally it's a strong company," said Harit Shah, sector analyst with Angel Broking.

"Valuations are cheap," Shah said, adding that any takeover move would give instant access to a company with a good set of clients such as General Electric and Qantas Airways, and a well trained workforce.

"It's easy for any acquirer with deep pockets to mount a takeover of the IT company. Given its weak reputation, I don't think other shareholders will object," said independent broker Pawan Dharnidharka.

Agrees James Friedman, a senior analyst with Susquehanna Financial Group. "You don't have the opportunity to acquire a tier-one vendor in any industry very often. These circumstances are results of unusual developments," Friedman said.

According to Avinash Vashistha, CEO of advisory firm Tholons, despite recent developments, Satyam is a good buy as the India outsourcing story is intact. "There is enough record of Satyam being out there with a good client list. Both Indian and non-Indian services companies could look at it," he said.

According to Jefferies & Co equity research analyst Sachin Jain, technology firms with little or no direct presence in India would be the front-runners to pick up a stake in Satyam to boost their ability to deliver projects from cheaper locations.

"Clearly, in a slowing economy clients would be looking for more cost effective solutions. So for that reason, they would be interested," he said.

According to Daljeet Kohli, research head at Emkay Global, "The business prospects of the company remain good" and hence Satyam is a good buy.

However, most analysts say that any merger or takeover move is unlikely to happen in the next 1-2 months, as most suitors would like to wait until the extent of the fraud is detected and measures to streamline operations are taken. Satyam has appointed audit firms KPMG and Deloitte to restate the accounts and report on its true financial health. The exercise is expected to take at least 5-7 weeks.

According to Sudin Apte, country head of Forrester Research, Satyam as a whole was attractive as it has a strong clientele and a highly rated workforce. But he admitted that any acquisition would be risky.

"Anyone who buys Satyam, or parts of it, will have to be aware that the real risk isn't the health of the company but the two class action suits filed in the US and several litigation cases in India," Apte said.

Agrees Kevin Trindade, an analyst with KR Choksey Shares and Securities. "A buyer will have to take the responsibility for the company, and I don't think any one will take a shot in the dark before the accounts are restated and the legal issues are resolved," Trindade said.

According to Sanjeev Patkar, research head at Mumbai-based Dolat Capital, "a buyer for the company will come in, after due diligence, but the price may only be at Rs.50-60 a share."

Agrees First Global's Shankar Sharma. Sharma feels Satyam is a suitable takeover candidate but it will face difficulty in finding a suitor. "Satyam on paper would be a takeover candidate but in this kind of environment I don't think any suitor will turn up very quickly because ultimately you need to get an audit done," he said.

Meanwhile, India's capital market regulator, the Securities and Exchange Board of India (SEBI) said will amend the takeover regulations at the "earliest" so as to help arrive at a fair open offer price in special cases, such as the one faced by Satyam.

"The (SEBI) board recognized the special circumstances that have arisen in the affairs of the company and concluded that the issue needs to be dealt with in the general context rather than for a specific case. We need to have provisions in our regulations to deal with such cases," said C.B. Bhave, chairman, SEBI, indicating that it could introduce amendments for open offers made in special cases like Satyam.

Under India's takeover rules, an acquisition of 15 percent stake in a company would trigger an open offer for a further 20 percent at a price not less than the previous six months' average.

However, the six-month average price in Satyam's case works out to be in excess of Rs.200 and is deterring potential buyers from making a bid for the company as the current stock price of the company is around Rs.50.

"Prices prior to and including January 7 (the date when the fraud became public) were those based on certain company information put out in public which now seem to be no longer valid; those accounting statements have been withdrawn by the auditors themselves. So under such circumstances, whether that price should be used or not is to be considered," Bhave said.

Bhave said SEBI has not considered any time frame on making the amendments but whatever decision SEBI takes would be with the focus of ascertaining that that Satyam's offer price is "decided in a transparent manner."

A SEBI official said, on condition of anonymity, that the market watchdog is keen on introducing a new rule that in special cases, such as Satyam, a two-week average price would be considered for any takeover move instead of six-month average price.

If this new rule is introduced, Satyam would have no difficulty in finding suitors as the acquisition cost would come down substantially, considering that Satyam stock is quoting around Rs.50.

Moreover, in an open bidding process, SEBI could also mandate the bidders to offer a price which is higher than the two-week average price formula, which would benefit shareholders as it resembles a price discovery process which works to shareholders' advantage.