The Tech Mahindra-Satyam Deal: What Challenges Lie Ahead?Published: April 23, 2009 in India Knowledge@Wharton
On April 13, Satyam Computer Services saw some resolution to an ongoing scandal that has shaken the firm and roiled India's information technology industry. Pune-based Tech Mahindra, a mid-tier IT services provider focused on the telecom sector, outbid competitors for a 31% stake in the company, at a price of US$351 million. Tech Mahindra also agreed to acquire an additional 20% of Satyam's shares, bringing the total purchase to US$582 million. What does Tech Mahindra hope to gain from its acquisition, and how will the company integrate its own, lesser-known brand with Satyam's now-tarnished image? India Knowledge@Wharton spoke with Wharton management professor Saikat Chaudhuri about the potential complications that come with this deal, the government's role in containing the scandal's fallout, and what the sale of Satyam will mean for India's IT sector.
An edited transcript of the conversation follows:
India Knowledge@Wharton: Can you first comment on the process behind the sale and the government's role in finding a resolution for Satyam? What worked well, and what could have been done differently?
Saikat Chaudhuri: I actually am very positive about the process overall. I believe that the government appropriately recognized the gravity of the situation because there was a chance that this would cause, amidst a downturn, a further deterioration of the prospects for the Indian outsourcing industry, and so they acted very quickly. They brought on board [former NASSCOM president] Kiran Karnik as well as [HDFC chairman] Deepak Parekh -- two individuals who have a very good image and enjoy stature in Indian industry. Having someone with that clean image, in particular, is very important towards managing the process.
There has been some criticism, naturally, given that the process was conducted very, very quickly. Some have argued -- in fact some of the bidders argued -- [that it would have been better] to wait a little longer, to allow the restatement of the books to take place and [have] greater clarity on some of the downsides, such as how many customers and employees are leaving, before conducting this process. But that's a tradeoff, because the sooner you get this taken care of, the sooner you can move on, and the more security you bring to everyone in the industry and beyond. So, I think the government acted with seriousness and with speed in order to minimize the anxiety and the uncertainty, and thereby got this process under way to reach a resolution very quickly.
India Knowledge@Wharton: And what impact do you think the Satyam case will have on foreign investment in India?
Chaudhuri: I think that it will bring perhaps a question or two from every investor, as to what are we investing in? And what do the books look like? But it's actually an opportunity to clean up in those cases where there is a lack of transparency -- on the part of individual firms as well as the system as a whole. So, I don't see that as a negative in the long run. I think it'll be appreciated.... If an investor asks twice or thrice: "Hey, you know, are we dealing with the right entity?" I think that's fine. There might be a small delay or setback in some investments, but overall, I think that it will be positive.
And statements made by some of the other executives, like [Infosys chief mentor] Narayana Murthi, for example, were very, very helpful. A few days after the scandal broke, [Murthy] said: "Come in and take a look at our books. We don't mind. We have nothing to hide." And I think that will go a long way in ensuring there is credibility and legitimacy. And I'm sure that those firms which maybe have certain intransparencies on their books right now are probably scrambling to quickly fix everything before they move on.
Of course, the large firms are in some ways more insulated -- they're already fairly transparent in their corporate governance structures because they are listed on foreign stock exchanges and have higher requirements [to meet]. I think the implications will be a little bit sharper for the small and medium-sized firms, because they're the ones who can't as easily lend credibility and legitimacy to their operations by name recognition or individual recognition. So, they'll have to be a bit more cautious [and] ensure that the right principles of corporate governance are in place in order to convince prospective investors. But, honestly speaking, I think India as a growth story, as an economy, is still poised to continue on a healthy track for the next decade or so at least. I don't think it will have too many negative ramifications.
India Knowledge@Wharton: So, looking very far ahead, the entire episode might be viewed as the canary in the coal mine that saved the coal miners?
Chaudhuri: I would say so, yes. That's how I view it. If you look at Enron and its role, it brought on additional legislation and heightened corporate governance, and I think that's been for the better. Of course, firms initially were [unhappy] about it because of the requirements on their part. Sure, it slowed them down maybe in the short-term, but overall I think people appreciate these kinds of moves. It really depends upon how well and how effectively the process is conducted. And by that I mean not just the transaction [in Satyam's case], but in terms of bringing greater transparency to corporate governance across a range of industries and firms in India.
India Knowledge@Wharton: Let's talk about the buyer now. Is Tech Mahindra the optimal buyer for Satyam? Tech Mahindra is a smaller firm. It has a more narrow focus than Satyam -- it focuses largely on IT for the telecom sector in Europe. Its biggest client is British Telecom. What is Tech Mahindra's strategy in this, and do you think the purchase was a good move?
Chaudhuri: On Tech Mahindra's part, it definitely makes strategic sense. And whether or not it was optimal overall -- that's probably hard to ascertain until we see the outcome. Tech Mahindra has been looking for a way to diversify in the IT sector and grow to become one of the larger players. As you mentioned, they were very focused on the telecom vertical and they had one primary client -- their partner in all this -- British Telecom. It was a fantastic opportunity for them to be able to instantaneously raise their profile and become one of the large IT services players. So it definitely makes sense.
In terms of the optimality of the outcome: I think what's required is a player that has credibility, legitimacy as well as the resources -- human resources wise, management wise, but especially financially -- in order to absorb the impact, because there may be further risks down the road as well as potential liabilities. And [Tech Mahindra] is a firm -- with Anand Mahindra at the helm and other very capable people in the management -- that is able to take this opportunity and run with it. Overall, it makes absolute sense for them to do it. And I do think it was a good outcome, considering the circumstances. There are of course questions around whether, for example, a foreign player -- such as an IBM, which was in the fray as well -- would have been better placed in order to handle the situation. Financially or resource-wise -- sure. They're giants. They would have subsumed [Satyam] as another back office or as part of their operations, which would have quickly ensured that the company perhaps would survive in some form, but not in as visible a form as what might happen under Tech Mahindra.
Tech Mahindra, like you said, is much smaller. So it's almost a reverse integration into the Satyam operations -- with some downsizing, perhaps, of Satyam, or the removal of entities that are undesirable, and the continuation of the operation. But, I would imagine that Tech Mahindra would be almost submerged into the Satyam operation. Whether it's called Satyam or not is a different question....
India Knowledge@Wharton: What are some of the marketing challenges inherent in a smaller brand -- like Tech Mahindra, in this case -- acquiring a much larger one?
Chaudhuri: You point to one of the key questions here, because there's obviously a trade off. IBM [for example] wouldn't have needed the Satyam name. Tech Mahindra is very well known in the telecom space, but their profile is not as strong overall. Of course, they could benefit from the [Satyam] brand itself. It would have been a potential source of value.
And here's where you have the dilemma: On the one hand, the [Satyam] brand needs to be reduced or removed in some way because of its being tainted. On the other hand, it's better known than Tech Mahindra's. So, there's a very difficult tradeoff. You're almost losing some of the source of value if you put [the Satyam brand] away or get rid of it completely. Perhaps there's a way of blending the brands for their IT group that makes it clear they're under new ownership. They could pinpoint, from a marketing point of view, [the idea] that the entity Satyam was doing quite well. It was just the owner or certain groups of individuals who did not act in a manner that would be expected of them. And [since] ownership has changed, those elements are no longer there. The rest of the entity is very successful.
And they do have some preliminary evidence from the probe which might suggest that. If it is indeed the case that money was siphoned off, as opposed to Satyam never having produced that revenue in the first place, then that's good for the Satyam entity. It means that they were actually performing quite well. It's just that the money was essentially taken out. So, this might bolster the case for someone to say: "Hey. New ownership. The entity was doing well. We'll run things differently in a more transparent fashion." And then they can use the brand. What they will do, ultimately, is very difficult to say. I think they're probably having these discussions as we speak.
India Knowledge@Wharton: What are some of the specific risks associated with this deal that Tech Mahindra might need to look out for in the coming months, and how would you recommend the company proceed?
Chaudhuri: I think there are two sets of challenges on the integration side. One is the complexities in assimilating the various assets, processes and people. And that includes the brand -- as well as, of course, the people, because the source of value here is capabilities more than anything, as well as perhaps customer contracts.
And then we have the uncertainties that you're alluding to here. On the uncertainty side, naturally there's the potential that customers may be leaving. There's the potential that employees -- good ones, in particular -- may be leaving. And there's the potential for future liabilities from a legal standpoint, especially after the restatement of the books is complete and the investigation is complete -- not just in India, but especially in the United States. All of those are just things that have to be responded to.
In terms of the uncertainty associated with them staying, employees and customers may have been waiting to see which entity takes over the Satyam group. If they feel satisfied, they may stay. And here's a great opportunity for the new buyers to go in and really allay the fears of employees and of potential customers by saying that things are going to run differently; there will be more transparency and here's how we're going to take things forward. So, those two uncertainties can be addressed.
As far as the legal suits are concerned, I think that's a little bit less under their control. It depends much more on the criminal investigation that's going on right now -- and, of course, on the actions taken by shareholders in India, the U.S. and potentially elsewhere. Let's not forget this has become a global company now. So, that's to be awaited. I'm sure some funds and legal resources will be put aside to handle that.
On the integration side -- the complexity side -- I think we talked about the brand. In terms of managing the people, who are really the heart of the capability here, that's another issue because retaining the best people is [only] one challenge. The second is, of course, making sure that you distinguish between those who may be -- I'll call them "less desirable" individuals, perhaps due to their association with the former ownership, who might actually harm the ability of Tech Mahindra to use Satyam to garner new clients and be able to execute effectively the current obligations and contracts. They have to very quickly decide [what to do with these individuals].
And again we have a dilemma analogous to the brand here, because Tech Mahindra does not have its own resources or the scale. It only has expertise essentially in one vertical. The sources of value -- the people -- are coming from the Satyam side. So, they need to keep as many people as possible at all levels in order to be able to benefit from the deal in the first place.... Here, the very source of competence is in the people, and Tech Mahindra needs to be very, very careful to look at how they manage that. The lower levels are fine. The mid-levels are probably fine. It's at the top level where some sensitive questions will arise, and they will need to find other employees internally or bring them in from outside, and then maybe keep the senior to mid-management people and the people who follow after that. It will be tricky, but they'll have to do their own audit on the competence side [regarding] whom can they keep or not. And that won't be easy. It will take some time, but given the early signs, I think they'll handle it fairly well.