Corporate Strategy: Satyam Acquisition by Tech Mahindra

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2011
Corporate Strategy: Acquisition of Satyam by Tech Mahindra

Anshul Bahre Roll Number - eMEP -10-041 1/27/2011

Table of Contents

Jan 7th 2009: The day of confession ................................................. 3 The history of Indian IT Industry ...................................................... 4 History of Satyam............................................................................. 5 Indian companies confirm bids for Satyam...................................... 6 Acquisition by Tech Mahindra ......................................................... 7 A friendly merger: Mahindra Satyam & Tech Mahindra .................. 8 Reference....................................................................................... 10

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Jan 7th 2009: The day of confession
In any software project, according to an industry adage, programmers think they are 90% done for about 50% of the time. That paradox will be familiar to the owners of Satyam Computer Services, which was once India’s fourth-biggest software and services firm. The scam perpetrated by its founder, B. Ramalinga Raju, and his brother is equally hard to fathom. On January 7th Mr Raju confessed to cooking Satyam’s books for years, and admitted that a $1 billion cash pile did not in fact exist. But were there hands in the till? But when a liar confesses, can you believe him? Many suspect that even now only 50% of the truth is out. Cash, after all, is hard to fake. Satyam’s books were audited by PricewaterhouseCoopers. According to the Economic Times, an Indian newspaper, the auditor says it verified Satyam’s fixed deposits with the banks that held them. So perhaps the money did exist, but has since been spirited out of the company. Such tricks are not unusual in India, even if the scale of the Satyam fraud is extraordinary. Indian “promoters” (who include business families and other corporate insiders) still hold almost half of the shares on the National Stock Exchange (NSE). But many family firms are evolving into widely held corporations. The danger is that as the stake held by insiders falls, they have an incentive to rip off other shareholders by siphoning off money. Who will stand up for the minority shareholders? In America managers cower before pension funds and other powerful institutional investors. But India lacks a local equivalent. Its occupational pension funds hold assets worth 2.5 trillion rupees, only about 5% of GDP. They are permitted to invest only 15% of their holdings in shares, and actually invest even less. Some hope that foreign investors might fill the gap. They hold about 10% of the shares on the NSE, more than Indian banks, insurance companies and mutual funds combined. They ought to be wary of inscrutable companies, giving the firms an incentive to change their ways. But foreign investors can only take big positions in the firms they buy. And since half of India’s shares are held by promoters, a foreign fund cannot take a worthwhile position without managers’ acquiescence. So funds are reluctant “to cheese off management too much” by complaining about corporate governance. That complacency has been shattered. Indeed, in the wake of the Satyam scandal, investors have been swift to punish even small infractions. The shares of Wipro, another computing giant, fell by 9% on January 12th after the World Bank revealed it had barred the firm from doing business with it until 2011. Wipro’s transgression was to invite bank officials to take part in an oversubscribed share offering in 2000. Many who did so lost money. “It is a real debate whether it was a benefit at all,” says Suresh Senapaty, Wipro’s finance chief.

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Meanwhile Mr Raju, his brother, and Satyam’s chief financial officer are in custody, charged with criminal conspiracy, cheating and forgery. Satyam is in the hands of three directors appointed by the government. If they do not act swiftly, Satyam’s rivals may pick up its most lucrative customers and its...
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