Satyam deal to help Tech Mahindra climb outsourcing ladder, diversify

Though Tech Mahindra's bid price of Rs.58 per share or $575 million buy of 51 percent stake in Satyam may sound pricey from the viewpoint of the current price Satyam scrip is trading for, yet, the deal can be termed as a fire sale as the bid price is well shy of Rs.542 per share the price Satyam once enjoyed before the exposure of the accounting fraud.

More importantly, by bagging Satyam, Tech Mahindra has not only gained in size but also has acquired a huge pool of technically qualified people, placing them in the same league as the top-three IT service providers. The combined entity will have about 73,000 staff and Tech Mahindra will become India's fourth-largest outsourcing firm from a current ranking of sixth, analysts said.

According to analysts, with Satyam in its fold, Tech Mahindra will be able to diversify outside the telecom vertical into other verticals such as financial services, healthcare, manufacturing, etc. posing a major challenge to rivals such as Tata Consultancy Services (TCS), Infosys Technologies, Wipro and HCL which dominate the segments at present. Currently, Tech Mahindra, which is 31 percent owned by British Telecom (BT Group), depends on the latter for a major portion of its outsourcing orders. Last May, Tech Mahindra signed the largest outsourcing deal ever, a $700 million contract with BT but its future became shaky recently after the telecom giant was rumored to be selling its stake in the joint venture.

However, Satyam, which serves customers such as General Electric, Ford, Nestle, Quantas, Nissan, Sony Corp. and Cisco, will be able to help Tech Mahindra build a better portfolio of customers.And, that is not all. Tech Mahindra gets more than half its revenue from Europe, and the Satyam purchase would help it significantly expand its presence in the United States."At present, Tech Mahindra is totally focused on its UK-based client BT. With Satyam's acquisition, it would have diversified client base and would enjoy the benefit of dispersion of client concentration," said Amitabh Chakraborty, president (equities), Religare Securities.