Strategic rationale of Satyam Acquisition

What are the strategic rationales for Satyam Acquisition and who can be the winner?

I wrote about Strategic Rationale for Mergers and Acquisition in IT sector and identified two main categories of rationales: Economics of Relationship and Economics of Credentials.

http://pareekhjain.blogspot.com/2007/06/strategic-rationale-for-m-in-it-bpo.html

Finally, there are 8 companies in race… L&T, Tech Mahindra, Spice, Apax Partners, IBM and 3 others.

http://in.reuters.com/article/topNews/idINIndia-38709320090326


Let us analyze, what could be possible rationales of these companies for Satyam’s Acquisition?

L&T

L&T has niche but strong expertise in ERP, Engineering Services and also has existing investment in Satyam. Satyam also has very strong presence in ERP space and emerging Engineering Services Space

Economics of Credentials: (Very Strong)
*Financial Credentials: Combined Entity, Tier 1 Player
*Capability Credentials : Combined Entity, Strong Credentials in ERP, Engineering Services to compete with Tier 1 Players, Good credentials in Other Horizontal Services: Business Intelligence, BPO
*Client Credentials: Increase in number of combined clients in different industry verticals, geographies
*Geography Credentials: Diversified Europe, Asia, Middle East, Australia, China, Japan

Economics of Relationship: (Limited)
*Cross selling opportunity for horizontal services to L&T’s existing clients – BPO, Business Intelligence. This depends on how many active client relationships L&T has that can be penetrated further via Satyam’s Services

Tech Mahindra

Tech Mahindra is a niche Telecom Vertical services player. Satyam has limited success in Telecom Vertical. Mahindra Group has investment in different IT companies: Bristlecone, Plaxion, Systech, Mahindra Logisoft, Mahindra Special Services Group and Mahindra Engineering, which they can think of combining together with Satyam to form a strong Tier1 IT company.

Economics of Credentials: (Strong)
*Financial Credentials: Combined Entity: Tier 1 Player
*Capability Credentials in Other Verticals and Horizontal Services: Business Intelligence, BPO, Engineering Services
*Geography Credentials: Key Telecom Markets: Scandinavia, China, Japan
*Capability and Client Credentials in Manufacturing/ Automotive Vertical

Economics of Relationship: (Limited)
*Cross selling opportunities for Satyam’s horizontal services to Tech Mahindra’s existing clients – BPO, Business Intelligence
*Cross selling Opportunity for Tech Mahindra’s Telecom Services to Satyam’s Telecom Clients

Spice

Financial Investor and no major Strategic Rationale

Apax Partners

Financial Investor and major strategic rationale can be merger/ synergy with other groups IT / Telecom investments (Long Shot)

IBM

Economics of Credentials: Leading MNC, No need for Satyam’s Credentials

Economics of Relationships: Satyam’s client relationship will not help a company like IBM.
IBM will be interested in buying more share of customer wallet or more precisely will not let it go to any other competitor. Many of the existing client contracts of Satyam may be renegotiated and these existing clients may hunt for new vendors. So instead of fighting then for new businesses, IBM may as well acquire Satyam and keep existing clientele intact

Other 3 Players (Guessing Game)

MNC – Can be HP, CSC or dark horse Cisco
Tier 1 BPO Player

HP

Similar rationale as IBM

Economics of Credentials: Leading MNC, No need for Satyam's credentials

Economics of Relationships: Satyam’s client relationship will not help a company like HP.
HP will be interested in buying more share of customer wallet or more precisely will not let it go to any other competitor. Many of the existing client contracts of Satyam may be renegotiated and these existing clients may hunt for new vendors. So instead of fighting then for new businesses, HP may as well acquire Satyam and keep existing clientele intact


CSC

Economics of Credentials:
*Financial Credentials: Increasing Size, Narrowing Gap with leaders
*Geography Credentials : India Presence
Economics of Relationship: Not much cross selling opportunity

Cisco

Cisco is diversifying. In other words Cisco is trying to get more share from its customer’s wallet. Cisco is getting into servers space and later may look for entry into services too. They already have joint venture with Satyam for Healthcare initiatives and want India to be Global Hub for their services. So they can be in race…

Economics of Credentials: Capability Credentials: Service Arm
Economics of Relationship: Yes, Cisco’s clientele can be penetrated with Satyam service offerings

Tier 1 BPO Player
It would have been a good Strategic buy for a Tier 1 BPO company such as Genpact, Convergys, EXL , Transworks etc to become an integrated IT and BPO Player, but as public information goes, none of BPO companies are participating in the acquisition process


The above analysis was of Strategic rationale from Buyers point of view.

From Customers point of view,

Satyam’s Clients must have got shaken by Satyam Fiasco, hence must be having decreasing confidence in Indian IT players. The trust betrayed by Raju is unlikely to get restored by Naiks, Modis or Mahindras in a short term. Clients will prefer US MNC’s such as IBM or HP to take over Satyam. Clients are unlikely to prefer Private equity Players, who might be investing now in Satyam to sell the company again.

For Employees


Job continuity and gaining back their prestige will be of paramount concern to the employees. They may prefer IBM and HP over L&T, Tech Mahindra. Employees would not prefer a Private Equity Investor who will be feeding them only to sell off later.

Bottom Line

So from Buyers point of view L&T has strongest of rationale and should be willing to pay highest bidding price for Satyam. From clients and employees point of view IBM would be best choice. But how much IBM will be willing to pay for Satyam, considering the fact that they are already on Global Buying Spree (Biding for SUN too) and risks are still uncertain for Satyam Law suites.

Finally Business decisions including M&A are not decided by rationale logic alone. If logic would have prevailed than Satyam fiasco wouldn’t have happened in the first place. So finally emotions may come into play and this race may have a surprise outcome…Mahindras!!

What next for Google? Google Cafe!!

Can it be Google Cafe ? This idea is not that far fetched ..
Friendster, a social networking site famous in South East Asia has tried this.




















Probably Google might try it also .."Google Cafe” based on cool themes, the way Google Office Campuses are designed.. Even “Orkut Cafe” might be a good idea.

Which other internet/ social networking site can spark interest as Cool Cafe?

*Yahoo : “Yahoo Cafe”, Sounds Great Idea
*Amazon: “Amazon Cafe” Sounds Great for Book Lovers
*MySpace: “MySpace Cafe” Sounds OK
*Linkedin: “Linkedin Cafe” May work for Some Special Types ( e.g. “Men in Ties”)
*Facebook: “Facebook Cafe” May be can work
*Microsoft: “Microsoft Cafe” No Way

Well that speaks of internet branding and Why Microsoft needs “Yahoo Cafe” to compete with “Google Cafe”?

Did Outsourcing and Offshoring led to Financial Crisis?

Well this sounds strange but it can be true. Every thing can be proved by data and statistics!!

In my earlier role, our team did research on Offshoring Maturity and Financial Performance for Fortune 500 companies and found out that top 30 Offshorers or Outsourcers ( or a better term Globalizers !!) outperformed S&P index by three times.

http://pareekhjain.blogspot.com/2007/06/offshoring-and-financial-performance.html


The top Globalizers were having highest growth rates, better profitability and increasing shareholder value than their peers. The biggest contribution to top 30 Globalizers list was from banking and financial sector (no wonder, the financial crisis!!)

Many of the companies, which are in dire trouble today because of financial crisis, were ironically from the top Globalizers list. This is even true for companies outside banking and financial sector such as automotive and manufacturing sector.

What is cause and effect? Did outsourcing and offshoring led to financial crisis? Or is it the risk taking behavior of these companies which was rewarded in the good cycle and punished in the bad cycle? And this heavy offshoring was a characteristic of risk taking behavior.

Or are these pure random events and not necessarily have cause and effect relationship. (My view on cause and effect changed after reading Tyeb’s “Black Swan”).

Interestingly earlier research on outsourcing and financial performance was considered for getting published in Harvard Business Review but it didn’t go thru ( Probable reason might be that outsourcing/offshoring leads to better financial performance is a common knowledge). Now Ivy League Economists can find answers to this uncommon question: Did Offshoring led to financial crisis?

Imagining India: Mobile Number as Citizen Identity

I wrote in my earlier post while reviewing “Imagining India” that I disagree with Nandan’s approach on a separate citizen database and suggested we find unique answers to our problems like using mobile phone number as citizen’s identity.

http://pareekhjain.blogspot.com/2009/01/imagining-india.html

“Finally, I differ with one of the solutions Nandan proposed in ICT in India. The Single Citizen ID, this problem is rightly identified but I differ with the solution approach Nandan proposes. Stated solution approach is classic example of what Nandan’s Fellow Infosys Board Member, Rama Bijapurkar, wrote in her book “We are like that only” - India will not develop like any other country because of change in circumstances and India’s solution will have to be designed with keeping in mind the current realities. I believe India has more cellular phones than any other government generated identification document, Passport, Voters ID card, Driving License, Ration Card, PAN Cards etc. So instead of finding out any western solution of Single Citizen ID, why can’t we start with Mobile Phone Registration and start from there?”

Well, glad to see in the news that Indian Government has started working on this idea of making mobile number as citizens identification number (ID) in collaboration with Alcatel Lucent.

http://www.siliconindia.com/shownews/53165

The idea is still at conceptual and prototype stage. If it happens, then India will move one idea forward!! Few more to go and India will be there…

Bank Bailout: “Men in Ties”: Obama should Divide and Conquer Them

Bank Bailout, where fear of nationalization by Obama administration is looming large in US and debate is on pro and cons, it looks Government is running out if ideas or have enough of ideas which are not producing results. Even though the government is helping banks, it looks much money is going to “Men in Ties” for all bonuses and their good work last year ( well the logic is, performance is relative and they did their best job in reducing over all losses in a difficult year !!) What ever the case, my take is Obama can try taking a different approach and can try using Divide and Conquer Strategy to tackle the crisis created by “Men in Ties”

Why do we need Bailout of Banks? Banks (or Men in Ties) took huge business risk and suffered, so why their businesses need to be bailed out with public money? Well the answer is if the banks go burst, they will cause suffering to public especially millions of small investors. The current problems in banking industry are because of the structure of this industry.

On risk of being over simplistic, Banks functions can be classified into three buckets:

* Generating Funds by channelizing deposits from public ,
* Distributing Funds to the public in form of loans and other investment vehicles (Here “Men in Ties” are most active!!)
* Transmitting Funds and keeping the financial systems working by providing short term liquidity, funds to various entities.

In the current banking industry structure, big banks provide all the three functions and are the ones which need desperate government help.

How can these problems be fixed? Well structure of utility industry may give ideas.

Take analogy from structure of utility industry where three functions Generation, Transmission and Distribution of power are separate and managed by separate entities. Similarly banks functions are like Generation, Transmission and Distribution of funds. These three functions can be separated into different entities. This division can help in narrowing down the present and future problem areas under different entities. Then government can nationalize or utilize other tools to solve these problem entities.

There can be three types of banks:

* Generating Banks: Which can channelize generation of funds by taking deposits from public. There is no problem in this system and banks are doing much better than government. ( Here “Men in Ties” are not that active and mostly marketing and efficiency is required)

* Distributing Banks: Which can distribute the funds to public for loans and as investment options. This is the problem area, where banks have taken reckless risks which in turn started problems. Here “Men in Ties” are most active and have turned Distributing Bank into Disturbing Bank. The troubled Distributing Banks can be nationalized if required.

* Transmitting Banks: Which can act as intermediaries between Generating Bank and Distributing Bank and can keep the financial system running. Transmitting Banks should be completely overtaken by government to keep the system working.

So by employing Divide and Conquer Strategy

* Generating banks take deposits from public and pass these deposits on to Transmitting banks at pre approved rate of interest. Government pays them few basis points more to cover their expenses and profits.

* Transmitting banks then should provide money to Distributing Banks at pre approved rate of interest. “Men in Ties” in Distributing Banks should be free to invest but should be of greater scrutiny. The troubles ones should be nationalized.

* Government should take the role of Transmitting bank and ensure liquidity in the system.

In this model if there is trouble in any entity, it can be treated as an isolated case. Government can nationalize the trouble entity or restructure it as required with out jeopardizing the whole financial system.

Divide and Conquer is an old strategy of every politician. Obama should not have problem in using it in banking industry for larger public good. Will “Men in Ties” like to wear government hat? Well, one can’t choose color of tie some times!!