Satyam buy could prompt BT to quit Tech Mahindra

Written by Rachana Khanzode | Mumbai | Updated: Apr 22 2009, 05:15am hrs
Tech Mahindras acquisition of a controlling stake in the beleaguered Satyam Computer Services could possibly trigger the process of British Telecoms (BT) exit from the former. Analysts feel that Tech Mahindras acquisition of Satyam could lead to a larger risk and BT is already facing the impact of the global slowdown. Industry veterans view that the possible approval of BT on Tech Mahindras acquisition could be an indication that BT may be looking at an exit route.

When contacted, a Tech Mahindra official said, We do not comment on market speculation. Vineet Nayyar, MD & CEO, Tech Mahindra, had said at a recent media briefing that BT supports Tech Mahindras acquisition of Satyam. Richard Wright, director, corporate communications and PR, Asia Pacific, BT Global Services, said, We constantly review our investments, but there are no initials at the moment, adding, We are in complete support of this acquisition. BT retains a 31% stake in Tech Mahindra, which is also a key supplier to its outsourcing arm BT Global Services. BT had to write off nearly $500-million contracts signed during the tenure of former CEO Ben Verwaayen.

According to reports, on January 22, 2009, BT said in its earnings call that BTGS had overstated profits in 17 major contracts, and would be taking 340 million writedowns for 15 of them. BT has been unsuccesful in selling its stake in Tech Mahindra for quite some time, as it couldnt get higher valuations. Analysts add that at the moment BT is growing flat or degrowing and the concern is already showing. For instance, BT accounted for 9.1% of Infosys revenues last year, but contributed 6% this year.

An internal source confirmed that in March-April 2008, BT pushed back approximately 1,000 offshore employees of Tech M from London office to Mumbai, which had to be accommodated in the companys Mumbai and Pune office. At the same time, BT had always wanted Tech Mahindra to focus on telecom, which may no longer remain the same with Satyam coming into picture. Tech Mahindra had been trying to diversify by acquiring companies in the banking vertical, but BT made sure that Tech Mahindra remained telecom focus, a source said.

BTs possible exit is expected to impact Tech Mahindra in a big way as it contributes almost 60% of its business. The owner-client relationship would change once BT moves out. Tech Mahindra has a major exposure to BT and its exit has potential to impact since owner client relationship will change, says Anil Advani, head of research, SBICAP securities .

Tech Mahindra has already paid as much as Rs 1,000 crore to BT on exclusivity for various contracts. Tech Mahindra currently has around $ 2 billion of business coming from BT, under various exclusive long -term contracts.

At the same time analysts view that even if BT wants to go ahead with the stake sale at this point of time, it could be difficult. Harit Shah, an analyst with Angel Broking, says, With Satyam coming into the picture, it seems difficult at the moment for BT to get good valuations. Possibly, private equity players or mid-small size companies could look out for this option. On the other hand, Tech Mahindra might start getting business from BTs competitive telecom players, who have not been looking at it due to BTs presence.