Mahindra Satyam is now getting back on track. But the biggest issue facing them is the upcoming June declaration of true results. Can they handle that? by Amir Moin
In the last six months, the BSE IT index gained 5%. However, Mahindra Satyam’s stock slipped by 32% (Share price is still languishing at Rs.85 levels, compared to the Rs.500s seen during Raju’s time). This clearly shows that despite the IT sector showing positive signs, investors still don’t have confidence in Mahindra Satyam. That could mean short term valuation issues for Tech Mahindra, which has taken up Rs.8.75 billion to acquire Satyam Computers. “This will continue to happen since Mahindra Satyam is still undergoing restructuring. There are a lot of integration issues and therefore due to lack of transparency, investors don’t have much confidence in Mahindra Satyam. Our analysis says that once the consolidation is over, Tech Mahindra will drop the name of Satyam and merge the latter with the former,” says an industry analyst.
L&T, as was mentioned, recently sold the 4.58% stake that it once used to hold in the past. L&T did this after accusing Mahindra Satyam for not revealing critical business information. That hardly does any good for the company on the shareholders front.
Operationally, Mahindra has brought Satyam’s operations under its ‘Two-in-a-box’ framework, wherein sales and delivery functions will be combined and work on new and existing customers respectively. It is also implementing a new strategy that is aimed at aligning Satyam’s older core areas with Tech Mahindra’s focus on telecom. “Mahindra Satyam has its own set of core competencies and aligning it with Tech Mahindra’s focus on telecom will only confuse clients. So I think that is a bad idea,” says Sahni.
So where does Satyam go from here? Given the new executive leadership at the top of Satyam, can one expect that the June results would finally prove to the world that Satyam is back with a snook cocked at the critic world? Our take is clearly in the negative. The fact is that while Raju ran the company with his group of family and top management members – amply helped by PwC – the extent of fraudulent book keeping declared by him can be confirmed only after Satyam’s new auditors are able to collate and resolve the innumerable non-existent book entries shown in Satyam’s various financial sheets.
Given the past forecasts, there can be no doubt that when results are declared in June, there would be a huge stock taking session by Tech Mahindra on whether they really would wish to continue with Satyam or to simply sell it off. Imagine the phenomenal capital profit Tech Mahindra is set to gain in one year. They purchased Satyam’s stock at Rs.58 per share. At current Rs.85 prices, they’ll be set to gain an immediate 50% plus premium – great enough by any Buffett standards.
But in case Tech Mahindra goes ahead and merges with Satyam, such a valuation could get devastated. One has to realise that Tech Mahindra, by itself, has not followed a traditional IT company path. It was created to primarily service British Telecom (Tech Mahindra’s second largest shareholder holding 31% shares compared to 44% owned by Mahindras), and BT still continues to be Tech Mahindra’s largest client. So what exactly might happen in the coming months? Well, our call still remains, let’s wait for the results!
In the last six months, the BSE IT index gained 5%. However, Mahindra Satyam’s stock slipped by 32% (Share price is still languishing at Rs.85 levels, compared to the Rs.500s seen during Raju’s time). This clearly shows that despite the IT sector showing positive signs, investors still don’t have confidence in Mahindra Satyam. That could mean short term valuation issues for Tech Mahindra, which has taken up Rs.8.75 billion to acquire Satyam Computers. “This will continue to happen since Mahindra Satyam is still undergoing restructuring. There are a lot of integration issues and therefore due to lack of transparency, investors don’t have much confidence in Mahindra Satyam. Our analysis says that once the consolidation is over, Tech Mahindra will drop the name of Satyam and merge the latter with the former,” says an industry analyst.
L&T, as was mentioned, recently sold the 4.58% stake that it once used to hold in the past. L&T did this after accusing Mahindra Satyam for not revealing critical business information. That hardly does any good for the company on the shareholders front.
Operationally, Mahindra has brought Satyam’s operations under its ‘Two-in-a-box’ framework, wherein sales and delivery functions will be combined and work on new and existing customers respectively. It is also implementing a new strategy that is aimed at aligning Satyam’s older core areas with Tech Mahindra’s focus on telecom. “Mahindra Satyam has its own set of core competencies and aligning it with Tech Mahindra’s focus on telecom will only confuse clients. So I think that is a bad idea,” says Sahni.
So where does Satyam go from here? Given the new executive leadership at the top of Satyam, can one expect that the June results would finally prove to the world that Satyam is back with a snook cocked at the critic world? Our take is clearly in the negative. The fact is that while Raju ran the company with his group of family and top management members – amply helped by PwC – the extent of fraudulent book keeping declared by him can be confirmed only after Satyam’s new auditors are able to collate and resolve the innumerable non-existent book entries shown in Satyam’s various financial sheets.
Given the past forecasts, there can be no doubt that when results are declared in June, there would be a huge stock taking session by Tech Mahindra on whether they really would wish to continue with Satyam or to simply sell it off. Imagine the phenomenal capital profit Tech Mahindra is set to gain in one year. They purchased Satyam’s stock at Rs.58 per share. At current Rs.85 prices, they’ll be set to gain an immediate 50% plus premium – great enough by any Buffett standards.
But in case Tech Mahindra goes ahead and merges with Satyam, such a valuation could get devastated. One has to realise that Tech Mahindra, by itself, has not followed a traditional IT company path. It was created to primarily service British Telecom (Tech Mahindra’s second largest shareholder holding 31% shares compared to 44% owned by Mahindras), and BT still continues to be Tech Mahindra’s largest client. So what exactly might happen in the coming months? Well, our call still remains, let’s wait for the results!
Amir Moin
For more articles, Click on IIPM Article.Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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