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Investors urge caution on Satyam merger

The company is likely to be merged with parent company Tech Mahindra

Small investors have asked Indian outsourcer Satyam Computer Services not to rush its proposed merger with its parent company Tech Mahindra.

Satyam should be stable and allowed to grow first, the small investors said at the company's annual general meeting (AGM) in Hyderabad on Tuesday.

A key concern of the investors is that a merger of the company with Tech Mahindra at this point will result in low valuations for them. Satyam investors took a hit after company founder B. Ramalinga Raju said in January last year that the revenue and profit figures for the company had been over-stated for several years.

In the wake of that scandal, a government-nominated board decided to bring in a strategic investor in the company. Tech Mahindra, an Indian outsourcer that has BT as a key investor, acquired a 43 percent stake in the company.

Satyam reported last month that it had returned to profit in the quarters ended June 30 and Sept. 30. Profit for the quarter ended Sept 30 was however lower than in the quarter to June 30, because of salary increases. The company's revenue was also marginally down in the quarter ended Sept. 30, compared to the previous quarter.

The company's drop in revenue and low margins indicated a performance that was far lower than that of other Indian outsourcers, which are benefiting from a recovery in offshore outsourcing, according to analysts. The billing rates that the company can get from customers are lower than those of its competitors, said Sudin Apte, principal analyst and CEO of Offshore Insights, a research and advisory firm in Pune, India.

A comparison with the company's revenue and profit figures last year is not available as the company was exempted by India's Company Law Board from publication of financial results for the quarters ending from Dec. 31, 2008 to March 31, 2010.

A merger between Satyam and Tech Mahindra will create a company which by current revenue levels will have combined revenue of over US$2 billion. That would make the combined entity far smaller than some of India's top outsourcers. Satyam officials have said that after the merger, the intention is not to compete head on with the big players, but to instead focus on a few vertical markets.

Tech Mahindra, which is focused on the telecommunications sector, hopes to benefit from synergies between the two companies, particularly from Satyam's expertise in providing services in the area of enterprise applications like enterprise resource planning (ERP) and business intelligence.

Tech Mahindra had so far not been able to tap the demand from its telecommunications customers for enterprise applications like ERP and business intelligence, Vivek Kalra vice president for the Americas at Tech Mahindra, said in an interview earlier this month.

Satyam will also use Tech Mahindra's expertise in telecommunications to offer mobility technology to its enterprise customers, Kalra said.

A merger will not bring significant benefits to customers as Satyam's strengths are mainly in ERP implementations, Apte said recently. Customers will look for application development and maintenance services and business process outsourcing (BPO), which are small businesses currently for both Satyam and Tech Mahindra, he added.

Tech Mahindra has not indicated a final date for the merger of the two companies. A company official said on condition of anonymity that it would take some time, as the company has to still settle some outstanding issues including finalizing its results according to U.S. accounting practices, and continuing investigations into the alleged misdeeds of the former management of company, including Ramalinga Raju.

The company, after restating accounts, has so far announced its results only according to Indian GAAP (generally accepted accounting principles).

The company official said that a merger was inevitable, and even the small investors had not objected to the merger, but only asked that it should not happen too soon.

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More about: AAP, BT, Satyam Computer Services

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