Tuesday, November 28, 2006

Will IBM buy Satyam? (2006)

Please Note: March 2009 Update: This post below is about the year 2006 rumor of IBM's Satyam acquisition plans and this post doesn't comment anything on the 2009 developments at Satyam.

Should IBM acquire Satyam? How true is the rumor related to this takeover attempt?

Genre: Mergers & Acquisitions, Hostile takeover, Indian IT business
Length: Over 2 pages

Executive summary:

Media speculations are thickening that IBM is looking into a possible acquisition of Hyderabad based Satyam Computer Services Limited (NYSE:SAY). While both companies have categorically denied any such possibility, a possibility of the same is not being ruled out by the experts. This post performs a comprehensive business analysis of such a possibility, pros and cons.

IBM blue logoDisclaimer: This post makes use of only those information available in public domain and or those information authorized for release into public domain. Views expressed here are the independent views of the author and not necessarily of the organization he works for. Readers are advised to use their discretion before taking any decision based on this post. The writer shall not accept any liability for any errors in the information or in the event of predictions not coming true. Images and logos sourced from internet, property of respective companies.

While rumors on this topic started spreading way back in January 2006, The JP Morgan India’s report titled, ‘Indian IT Services: Implications for sector if IBM were to buy Satyam management stake’ this October added fuel to speculations. Click here for a detailed view of MNC acquisition plans for India

Financial Times Report
Network World

IBM’s need:
A company looks for acquisitions when they feel the need for inorganic growth. (Organic growth involves growing internally, which is a slow and steady process, while for cash rich companies, inorganic growth by acquiring an existing company which has proven competency, resources and market share makes more sense).

It appears very much natural for the "big blue" to look for a greater offshore presence, given the cost factor of Indian companies. Most of the clients who buy IBM products often outsource the implementation to Indian IT service companies, purely because of cost advantage. If IBM can have greater presence in India and emerge as a low cost end to end IT product and service company, its profits will soar. From this angle, IBM’s attempt to acquire some established company in India makes sense.

While IBM has categorically stated that rumors about its attempt to buy Satyam are merely a speculation, recent capGemini acquisition of Kanbay does justify such a probability further.

A more detailed analysis of IBM's India plans can be found here:

Satyam Computers Logo
Why Satyam?

Now, assuming that IBM is in lookout for an Indian IT services company, let’s analyze why Satyam makes itself a fine target and not some other company.

Satyam is fourth largest IT Company in India next only to Infosys, TCS and Wipro. We’ll see why the other 3 are not attractive to acquire.

Majority of Infy shares are accumulated with Infy co founders and top management, who may not entertain any attempts by an external entity to take over. Even if IBM tries, a company like Infy with 60000+ people may not be an attractive buy given that market capitalization and brand value of Infy is very high.

As far as Wipro is concerned, Azim Premji holds over 80% of company stock and without convincing him its impossible to take over the company.

Coming to TCS, Tata’s themselves are on an acquisition drive (trying to buy Corus and other companies) and its unlikely that they’ll do away with their flagship company TCS.

So next in line is Satyam, with founder chairman Ramalinga Raju having just above 14 % stake in the company and majority of investors are of foreign origin, a forced acquisition is very much probable. Cash rich IBM can afford to corner a considerable amount of shares and stake an ownership claim.

Satyam’s statement:

Though Satyam has officially denied having any talks with "Global System Integrator"(interview with CNBC-Link here) and has stated that it will continue to operate as an independent entity, which will be in the best interest of all stakeholders, this kind of statement is quite natural and very much expected from senior management due to following reason:

Acquisition talks go on for years and years (When Wipro finally bought Quantech Global in early 2006 (details here), its believed that Wipro guys were behind Quantech Global for more than 4 years) and if such a highly sensitive matter gets released to public in early stages, it’ll bring down the employee morale and will severely impact immediate deliverables as every employee shall start thinking about his/her fate post acquisition.

Negotiations might have never occurred or might be in progress or may have failed totally. Any management prefers to remain tight lipped till negotiations reach a conclusion.

Why IBM is silent?

No acquiring company will make its plans public in advance due to following reasons:
1. If IBM makes its interest in Satyam official, Satyam stock prices will soar and IBM will end up paying more
2. If IBM fails to buy Satyam or decides to back off at a later stage, it'll be seen as a shame on IBM's part for not being able to acquire a 10 times smaller company.

Note: I'm not saying the statement is false-Just the compulsions which might have forced such a statement deserve a consideration. For the reasons specified above certain business decisions are better kept secret. But some smart journalist might have got a tip off from a key executive in either of the company, or someone else might have just triggered a rumor. No one knows.

What Satyam Can Do to avoid a hostile takeover?

If IBM is determined to acquire Satyam by hook or crook, what options does the later have? Here are few:

Corner majority shares: Satyam promoters need to spend a fortune and corner huge number of shares so that IBM will never be able to gather controlling amount of stake.

Take investors into confidence: Take investors into confidence and hope that they’ll not fall for temptations of IBM

Create poison pill: Hire more people than needed, partner with IBM’s competition and indulge in other such activities, with a sole purpose of making the company look inattractive for a prospective buyer

Find an alternate buyer: (This is exactly what Arcelor did when Mittal attempted a hostile takeover)This will trigger a price war and either Satyam gets more money than it would have otherwise got or the buyers will back off if they feel its not worth pursuing this hunt

What if it happens?
A quick analysis on what might happen if this acquisition ever takes place:

For Satyam employees: IBM employee policies shall supersede existing policies and IBM management will bring in an organizational restructuring as per their vision and expectation. Satyam may loose its Hyderabadi touch as IBM may not have any preference/sentiments/commitments that Satyam as an Indian company had. All these might be beneficial to some, while is sure to cause inconvenience to many of the employees, as their comfort zone will be disturbed. They'll have a MNC stamping to their resume but may loose their identity as they'll get lost in the sea of IBM's 300,000 plus headcount.

IBM may or might not be interested in all of Satyam's business. Satyam’s competency and service offerings extend beyond IBM products and technologies, including IBM’s competitors. So those service offerings which involve IBM’s competitor’s products might get disintegrated. (Even if they’re retained, customers won’t trust IBM to implement a competitor product)

Will there be a lay off? Considering the knowledge crunch, that seems unlikely. But if IBM feels it's better to reduce head count, there's no reason why they'll hesitate. They've done it in past, can do it again.

Other IT service companies in India might suffer a set back as they might loose considerable business in the field of IBM products and technologies. But this impact will not be severe enough to pose any threat to these companies.

For investors of Satyam: They can either choose to make one time big money by selling their shares to IBM or may choose to hold and get better returns in the long run. Getting acquired means loosing one’s identity and reporting to someone else. So people who want to run their own show may resist an acquisition effort. All depends on their strategic vision, tactics and expectations.

For IBM: IBM will be able to provide a better range of end to end business solutions to its customers at lower price. From requirement gathering to product development to implementation to testing to support, they can boast of a full cycle business solution.

For Indian Society: For the Indian society, it's better Satyam operates as an independent entity. IBM may not contribute to social causes to the extent Satyam foundation is doing.

So will it happen?Will the big blue engulf small blue?(IBM's "On demand business" and Satyam's "what Business Demands" sync very much :-)) If not Satyam then Cognizant appears to be the next attractive target.

That’s a billion dollar question only time can answer. As this is something which will happen at boardroom level we’ll wait and see.

You have just read the most popular post on this blog. More details on takover mechanism can be found at Wikipedia

While above article is more of an Indian perspective of this takeover speculation, I found following blog post very much useful as the post and comments analyse the situation from a western perspective: Deal Architect's Blog

Other Business Posts:
Removal of Government Guarantee for LIC India
Best Employer Surveys-An analysis
Stopping Piracy-An advice
Our Education System and Industry Attrition-An Observation
The Compulsions of software people



Anonymous said...

good analysis..but i differ i u r point on "IBM might not be interested in all of Satyam's business"..cos even IBM consulting and services supports products all the leading products in the market..

Shrinidhi Hande said...

Agreed, but for a product which is directly competing with an IBM product, will customer trust IBM implementing it or providing support?

Sai Maddali said...

I understnad in organic growth is what IBM is targeting rioght from aquring Dakshak 2 years back. But, is Satyam intrested .Rjau might be having only 14% but the point is all those so said froeign investors are close aides of Raju(family associates). Satyam could also be intrested, as in a global market it is geting increasingly tougher to get projects based only on cost. Satyam has clearly identified the ned of brand building to push forward. SSL(Satyam school of leadership) being a case in the point. they would perssit of being a independent entity,if the brnad building exercise yeilds value in the next 12 quarters or not ?

Effect to employers: If at all people are axed it would be the top management or the middle management. They wont touch the leve1-level 5 employees as going back to market and finding suitable resources would be a big headache.

Thus as usual speculation would be rife as to what would happen.

Shrinidhi Hande said...

I agree with you Sai. There's a saying "Dont believe in a rumor unless its officially denied..."

venki said...

Good analysis Mr.Hande. All said and done ,if this deal goes thru then the Indian identity associated with Satyam will be lost forever.

Shrinidhi Hande said...

@ venki:
That's true.

Veresh said...

Its better that satyam maintain its own identity otherwise it will be fall of one Indian star.It's also a lesson for Indian companies to aim higher and go up in value chain (it may sound cliche) . They should this downturn in economy to buy companies as most of indian firms are sitting on cash.

Shrinidhi Hande said...

@ Veresh,

Good to see this post receiving a comment after about 18 months..

Yes, it will be good if it retains its identity, but different people will have different calculations. You never know.