How will bidders value Satyam?

How does one put a value to Satyam Computer Services when its financial position is not known?

This is one question that's uppermost in the minds of analysts, marketmen and industry experts even as the Company Law Board on Thursday gave the scam-tainted IT firm's stake sale plan the go-ahead.

When contacted, Hinduja and L&T groups, two biggies interested in acquiring Satyam, declined to comment on the CLB move, saying they would take a call once the guidance on bidding procedures came out.

International operations' president of Tech Mahindra, a strategic investor in Satyam, C P Gurnani said, "We are still evaluating options. But as of now, we are not interested as there is still no information on the finances of the company (Satyam). Nor is there enough understanding on its customers. Rather there has been some attrition in the number of clients as well as employees."

Satyam board member Tarun Das had recently said that six-seven companies - both Indian and global IT, manufacturing and PE firms - had approached the firm for a complete buyout. The company's legal advisor, Amarchand Mangaldas, had appointed KPMG and Deloitte to give their findings in this regard.

The strategic investors in Satyam include L&T (which now has a 12 per cent stake in Satyam and has invested around Rs 670 crore {(Rs 6.7 billion) in the company so far}, Tech Mahindra, Aegis BPO (only interested in the BPO business) and iGate-PE combine.

L&T, in fact, has categorically expressed its interest to the government in acquiring management control of Satyam. India's Spice Group, too, wants to invest around Rs 2,000 crore in Satyam and buy a 51 per cent stake in the company.

Shiv Nadar of HCL Technologies, too, had publicly evinced interest in a buyout but with conditions. Other unconfirmed names include that of Japanese players Fijistu and Hitachi, besides three American companies, including IBM. And Fidelity International (FIL Asia Services Pty Limited) had recently raised its stake in Satyam to 6.79 per cent.

Clients are moving out of Satyam. The new board has already admitted that two major clients, including US-based State Farm Insurance that figured on Satyam's top-10 clients' list, have cancelled their contracts with the beleaguered IT firm.

However, industry sources said more than six medium-size clients have already jumped ship, while many smaller clients were evaluating their relationships. Satyam has lost its value with customers moving out of the company, according to Phaneesh Murthy, the chief executive of US-based iGate Corporation. "The process has taken time; customers have moved out and Satyam has lost its value. We have lost interest in buying the company," Murthy had recently told Business Standard.

Clients of Satyam have already approached outsourcing advisory and research firms such as Booz & Company and Forrester in a bid to review their relationships with the company.

Soon after Satyam's accounting fraud came to light, Forrester had predicted that around 30-50 per cent clients would review their deals with the IT firm. More than half-a-dozen providers have already called Forrester to discuss competitive strategies for taking over business in joint accounts. "Satyam has gone from one uncertainty to another," said Forrester (India) senior analyst Sudin Apte. Based on who bid successfully, clients would evaluate their relationship with the company, he added. "We see Satyam's current revenue ranging between $1.4 billion and $1.6 billion (as against the over $2 billion company)," he stressed.

"Most of them are tier-II bidders and Satyam was a tier-I company. It's logical that client perception may change further if a tier-II company takes over," said Avinash Vashishta, managing director and CEO of Tholons Capital. The advisory firm has issued a note to its clients, stating: "Lack of clarity in the medium to long term on the state of Satyam poses a heightened risk situation for clients, many of whom have outsourced mission critical work to the company. Therefore, we encourage clients to take immediate measures to manage the current crisis."

An industry expert, who did not wish to be named, said: "We estimate that Satyam may have lost $100 million (around Rs 400 crore) worth of business by now. Many others are in talks with other Indian and MNC IT vendors for rebadging."

Rebadging can take place when multiple vendors service the same client - as in the case of Satyam. For instance, if two vendors service the same client, and one vendor slips up, the other vendor is asked to take over the work and employees on its rolls so that there's a seamless transition (most contracts provide for such circumstances).

Since 2003, only a few IT services providers have had just one (exclusive) vendor in India. For instance, Citibank and GM are clients of both Wipro and Satyam. Major players like TCS and Wipro share many clients with Satyam and could benefit from the renewal of deals. However, Infosys may prefer to stay away from those contracts since the company believes it will dilute the quality of revenues (since Satyam has very low billing rates).

Cognizant could benefit relatively less given its limited strength in Satyam's mainstay - ERP, manufacturing and presence in emerging markets. Likewise, HCL Technologies may not be a beneficiary as its entrenchment in ERP is relatively low, according to Edelweiss analysts.

Around 40 per cent, or up to $1 billion of Satyam's revenue pie, could get redistributed among other IT players on an annualised run-rate basis by the end of the fourth quarter of CY09, said Edelweiss analysts recently. They assumed that about 70 per cent of revenues were up for renegotiation or renewal in Q1 and Q2 of this fiscal. A larger proportion of Satyam's revenues was non-annuity based and thus came up for renegotiation/renewal more often, they explained.

TCS is likely to gain the most (around $115 million in FY10 or two per cent of its FY09 revenues) since it has the maximum client overlap with Satyam. Wipro and Infosys follow behind with about $95 million and $80 million respectively.

As for Accenture, Edelweiss analysts said the company might still lean towards outsourcing contracts that have consulting embedded into the value proposition, else it could amount to revenue contamination for the company. IBM might be less selective than Accenture on this.

Legal liability needs to be accounted for. To begin with, at least 13 class action lawsuits have been filed in the US federal courts on behalf of shareholders who purchased American Depository Receipts of Satyam between January 6, 2004 and January 6, 2009. According to reports from the US, the lawsuits have alleged violations of US securities laws, including issuing a series of material misrepresentations to the market that artificially inflated share prices.

A class action, or a representative action, is a form of lawsuit where a group of people collectively files a case in the court. The suits have named Satyam founder B Ramalinga Raju and his brother and director B Rama Raju as defendants. Lawyers said damages could run into billions of dollars since the liability was "unlimited".

Though Satyam has withdrawn the disparagement case against Upaid, the UK-based mobile solutions firm's chairman and CEO Simon Joyce told Business Standard: "...I do not think this will impact the primary case of fraud and forgery. We have been saying this from the very start that both these cases are different, though the earlier management at the IT firm wanted to connect them."

The primary case comes for hearing in June 2009 at the Texas Court. If Satyam loses this case, the damages can run up to $1.1 billion (around Rs 5,000 crore).