All about synergies

Written by Rachana Khanzode | Updated: Jul 6 2009, 04:42am hrs
The road to recovery of Satyam is expected to be a bigger challenge for Tech Mahindra. In a recent media presentation the company said it is looking forward to strengthen corporate governance, enhance customers delight, regain market share and build the brand. Tech Mahindras Executive Vice-Chairman, Vineet Nayyar said, The biggest challenge before Mahindra Satyam is in terms of governance, especially in matters of finance. We will look at retaining clients and growing the company.

The companys initial step to put about 8,500 employees on the Virtual Pool Programme is expected to help the company cut costs drastically. Tech Mahindra had initially avoided these steps and accommodated about 10,000 employees on the bench for more than two months, after it took over in April.

Tech Mahindra then brought a new identity to the Satyam brand by renaming it to Mahindra Satyam. Though it retained the brand name Satyam, experts in the industry feel that Mahindra might not retain it for a very long time. Diptarup Chakraborti, Principal Research Analyst, Gartner, says, The key brand is Mahindra and may be in the future we may see the merged entity under the flagship of Mahindra but with a new name and identity. Harit Shah, analyst with Angel Broking says, The Mahindra brand is a very strong brand and it is expected to help the overall brand identity of Satyam.

Tech Mahindra expects the merger between the two entities in the next 12 months. So, besides bringing the workforce of Tech Mahindra and Mahindra Satyam together, it will be important to merge the culture. Sanjay Kalra, CEO, Tech Mahindra, shares, We will synergise the capabilities of Mahindra Satyam with Tech Mahindras proven governance practices, financial rigour as well as business discipline.

Mahindras step to have CP Gurnani as the CEO of the Mahindra Satyam is being viewed as a bridge for the cultural difference between the two entities. Gurnani has been working with Tech Mahindra as President, International Operations and holds an extensive experience in building international business, monitoring start-ups, turnarounds, joint ventures and mergers and acquisitions.

In the quarter ending December 31, 2008, Mahindra Satyam had a profit after tax (PAT) of Rs 181 crore on revenues of Rs 2,206 crore. Figures for the same period the previous year were not available for comparison. In January, Satyam had a PAT of Rs 4 crore on revenues of Rs 647 crore, and for February, it had a PAT of Rs 52 crore on revenues of Rs 637 crore. The results indicate that Satyam has strength in it and if it continues with similar growth levels we expect it to post $1.5-1.7 billion by the end of the year, making it among Indias top IT companies, adds Chakraborti.

Experts also feel that during the process the duo should bring synergy between their go to market and back end strategies, in a bid to bring clients a large number of service options. Analysts in the industry feel that it becomes increasingly important for Mahindra Satyam to stop customer attrition in a bid to get ready to face competition with large giants like TCS, Infosys and Wipro when the economy finally revives. Some view it as an opportunity for Tech Mahindra as it could acquire Satyam at a low cost. More so, it gets some time to complete the integration process and bring back the company to its initial levels of delivery before the economy revives.

Going ahead Tech Mahindra is said to raise funds by selling 1.36 crore shares by the way of private placement or QIP. The company says that it would use the funds for repaying the loans it had taken to buy out Satyam.

The company is said to have borrowed around Rs 2,000 crore from various banks, mutual funds, institutions and NBFCs for the Satyam acquisition. Tech Mahindra already had a cash balance of Rs 700 crore in its books. The sale is expected to help Tech Mahindra pay off almost half of its loan amount. The sale of shares will bring a neutral impact on the company and the earnings per share (EPS) will increase as a good deal of interest cost on the Rs 1000 crore debt of about Rs 100 crore will be saved, says Shah.

How Mahindra takes on the challenge now remains to be seen.