Roping in a strategic partner with less than 15% stake is seen as the easiest option for the management and also for the strategic investor. This is because an open offer for an additional 20% stake is triggered if the stake proposed to be acquired in the first instance is at least 15%. Considering the guidelines mentioned by Sebi, the open offer price could be double the current market price and therefore be a disincentive for the investor.
Sources in the know mention that IBM, HP and Cap Gemini are toying with the idea of picking up a strategic stake. However, the balance sheet of Cap Gemini is somewhat constrained (net cash of $1.3 billion) and its cash flow generating capacity low (free cash flows before acquisitions is just 4% of revenues). Also, Cap Gemini, in a significant acquisition, acquired Kanbay (an Indian offshore services firm) for 954 million euros in 2007, and will find it tough to fund the stake purchase, says an Edelweiss Securities report.
HP and IBM are therefore seen as the most likely candidates. Both the companies are pitted against each other to build global offshoring facilities. You dont have the opportunity to acquire a tier-one vendor in any industry very often. These circumstances are results of unusual developments, said James Friedman, a senior analyst with Susquehanna Financial Group.
Even private equity players are said to be on the prowl for possible openings. Players like Carlyle, TPG and KKR are said to be weighing in the options. Here, there is a chance of a governance arbitrage for PE players, says Edelweiss. With $1 billion in cash, Satyam looks to be a mouth watering prospect for PE players.
Edelweiss cites the example of a possible P/E arbitrage from the earlier case where Barings Private Equity Partners (Barings), an influential holder in BFL Software, did by merging MphasiS into BFL in 2001. It hired Jerry Rao and a host of heavy-weights from Citibank to head and manage MphasiS and also got rid of the management of BFL Software, who did not enjoy a great reputation with investors. They, then, merged BFL into MphasiS, making Jerry Rao and his team the managing entity. In doing so, Barings invested BFL with instant credibility and assured its investors. That one action and subsequent institution of a corporate governance framework sent the BFL scrip soaring 140% in three months time (during 2001), the report says.