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.
Finally, there are 8 companies in race… L&T, Tech Mahindra, Spice, Apax Partners, IBM and 3 others.
Let us analyze, what could be possible rationales of these companies for Satyam’s Acquisition?
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 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
Financial Investor and no major Strategic Rationale
Financial Investor and major strategic rationale can be merger/ synergy with other groups IT / Telecom investments (Long Shot)
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
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
Economics of Credentials:
*Financial Credentials: Increasing Size, Narrowing Gap with leaders
*Geography Credentials : India Presence
Economics of Relationship: Not much cross selling opportunity
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.
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.
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!!