* APRIL 13, 2009, 2:52 P.M. ET
Mahindra Makes Aggressive Push Into Outsourcing
Satyam Buy Moves Technology Unit Into Major Leagues
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MUMBAI -- Tech Mahindra Ltd.'s winning bid for troubled Satyam Computer Services Ltd. is a bold move in tough times for an Indian conglomerate known better for its rugged tractors than its software.
Tech Mahindra, a midsize outsourcing company, is part of the farm equipment-to-finance Mahindra Group, one of India's largest conglomerates. Its aggressive bid for Satyam shows how much it wants to expand its outsourcing business and profile in the Indian economy. Its bid was valued at $351 million for a 31% stake in Satyam, with the requirement to purchase 20% more at the same price per share later. The bid was 20% above that of the next closest bidder and more than double that of the lowest.
"Both companies can benefit from each other," said Anand Mahindra, chairman of Tech Mahindra and vice chairman and managing director of Mahindra Group, to reporters in Mumbai Monday.
Until the financial scandal in which Satyam's founder admitted to inflating the company's books by close to $1 billion, Satyam was one of India's most trusted outsourcing and software companies. Tech Mahindra is betting that the scandal won't ruin the company's business and that there is still great value in its 50,000 employees and hundreds of clients.
Mahindra was started in 1945 by Mr. Mahindra's grandfather and granduncle. It first made off-road vehicles and then farm equipment and auto parts. In the past 20 years, it has expanded into everything from outsourcing to resorts to real estate. Its annual revenue is nearly $7 billion.
Much of the group's diversification has been led by the 53-year-old Mr. Mahindra. The dapper Harvard Business School alumnus has been more open than most business leaders in India to expanding with foreign partners and through acquisitions. While most industrial companies in India are just starting to investigate potential profits from exports, Mahindra is already the fourth-largest tractor company in the U.S. and is exporting its farm equipment to China.
Its information-technology business has grown increasingly important for the group. Most of Tech Mahindra's business is building software for the telecommunications industry in Europe, analysts say. The unit is around 30% owned by BT Group PLC.
The Satyam acquisition moves the group from a niche player to one of the largest companies in the software and outsourcing industry.
Tech Mahindra was willing to bid so much because there is little overlap between its business and Satyam's, indicated Vineet Nayyar, vice chairman and chief executive of Tech Mahindra. More than 70% of Satyam's business is in the U.S. and not much of that is in telecommunications. Satyam leans more toward financial and design work.
"Satyam provides a partner which is almost completely complementary," Mr. Nayyar said.
With Satyam's profit margins at less than 3%, Tech Mahindra will have to find ways to cut costs and boost business at Satyam. Analysts say that the divergent businesses of the two companies could actually become a liability, making it tougher to find ways to reduce costs. "There doesn't seem to be any common thread of synergy," said Viju George, an analyst with Edelweiss Securities Pvt. Ltd in Mumbai.
While growth rates in the outsourcing business have slowed this year because of the global economic crisis and struggling financial customers, analysts and executives expect the industry to grow in the long run as more companies try to save money by sending complicated information technology work to India.
Mahindra wouldn't comment on how it plans to raise the close to $500 million it will have to put up for the 51% stake in Satyam. It will be difficult to raise money because of the global credit crisis, analysts say, but Tech Mahindra should be able to cobble it together through loans, selling shares or bringing in a private equity partner.
The stock market welcomed Tech Mahindra's winning bid Monday. Its shares on the Bombay Stock Exchange rose 12% to 359.45 rupees ($7.22).
—Jackie Range in New Delhi and Sonya Misquitta in Mumbai contributed to this article.
