IBM Said To Have Interest In Acquiring Indian Rival Satyam
BY J. BONASIA
INVESTOR'S BUSINESS DAILY
Posted 3/6/2009
Troubled outsourcer Satyam Computer Services (SAY) won approval from the Securities and Exchange Board of India on Friday to sell 51% of its stock, sparking speculation about how that sale might reshuffle the tech services industry.
IBM (IBM) is "the front-runner" to become the buyer, according to the Business Standard, an Indian financial Web site. Its report Thursday cited "sources close to the developments" who said IBM has dispatched investment bankers and lawyers from the U.S. and Europe to perform due diligence.
Contacted Friday, IBM spokesman Doug Shelton said the company doesn't comment on rumors or speculation.
In January, former Satyam CEO Ramalinga Raju admitted to inflating the balance sheet by $1 billion in false assets over several years, putting the company's future in doubt and causing the stock to plunge. Raju was jailed, and a new CEO and board were appointed.
Several Indian firms have expressed an interest in bidding for Satyam, based in Hyderabad, India. They include Larsen & Toubro, which holds a 12% stake in Satyam, and Spice Group.
If IBM were to buy Satyam, it would be getting a rival with operations in 28 cities and 15 countries, and $2.2 billion in revenue last year.
Such a deal would make sense for Big Blue, says Trip Chowdhry, an analyst with Global Equities Research. He says Satyam's U.S.-traded stock is undervalued due to uncertainty around the fraud and potential lawsuits. He has a buy rating on the stock, with a price target of 5. Shares have traded below 2 since Raju's bombshell, down from near 10. The stock traded near 30 as recently as May.
"On a pure fundamental basis, Satyam has lots of marquee customers, a global delivery model and many long-term contracts already on the books," Chowdhry said. "IBM could create instant credibility among Satyam's installed base and it would give IBM a much greater presence in Southeast Asia."
Chowdhry figures Satyam shareholders would accept an offer that values the company at $5 per share, or roughly $1.6 billion. Among companies said to be likely bidders, probably only IBM and Larsen & Toubro could afford that price, says Chowdhry. "I definitely feel the company will be sold," he said.
Satyam's business of writing custom software applications for customers might not be a big benefit for IBM, since IBM already has a massive presence in India in that sector, says David Grossman, an analyst at Thomas Weisel Partners. But Satyam also has deep expertise in maintaining branded software from vendors such as SAP (SAP), Grossman says, where IBM doesn't.
But Grossman is skeptical. "It would all depend on the price, terms and conditions," he said.
In a statement, Satyam said the sale would involve a process by which the buyer would take a subscription worth 31% of the stock, followed by an open offer to purchase another 20% or more of the shares.
Any buyer will need to take "a good look under the covers" at the books to ensure that there are no more accounting problems lurking, says John Madden, an analyst at tech research firm Ovum.
If the accountants and lawyers do sign off, a Satyam acquisition could help fuel IBM's long-term growth after the recession, Madden says.
Satyam cut its ties to its outside auditor, Price Waterhouse in India, last month. Two auditors from that firm were arrested in connection with the case. Price Waterhouse in India says it has created a new advisory board and named a head of quality assurance, a new post.
Satyam's new CEO, A.S. Murty, spoke about the company while in Singapore on Tuesday, on his first overseas trip since being appointed last month. Murty, in a statement posted on the company Web site, said it was "business as usual" for Satyam and the company still has "a promising future." |
