Tech Mahindra Ltd. has wrested control of Satyam Computer Services Ltd., which is currently at the center of India’s biggest corporate-fraud inquiry.

Tech Mahindra needs to “act fast and successfully integrate Satyam in the next four or five weeks” to benefit from the purchase, said Tarun Sisodia, a Mumbai-based analyst at Anand Rathi Financial Services Ltd., which recommends investors “buy” Tech Mahindra. “For Satyam, it’s simple, they get a new management and the uncertainties are over for the company.”

Tech Mahindra will gain control of a business serving Cisco Systems Inc. and Nestle SA., strengthening its ability to compete with larger rivals Tata Consultancy Services Ltd. and Infosys Technologies Ltd. The sale, once approved by India’s government, will help restore investor confidence and stem client defections after former Chairman Ramalinga Raju said he inflated assets by more than US$1 billion.

Venturbay Consultants Pvt., a subsidiary of Pune, India-based Tech Mahindra, will pay 17.6 billion rupees ($352 million) for new shares equivalent to a 31 percent stake in the software-services provider, Satyam said Monday. The price is 23 percent more than Satyam’s close of 47.25 rupees on April 9.

Tech Mahindra, partly owned by BT Group Plc, climbed 13 percent to 362 rupees as of 1:14 p.m. in Mumbai trading. Satyam added 6 percent at 50.1 rupees.

Tripling workforce

Tech Mahindra, controlled by India’s largest utility-vehicle maker Mahindra & Mahindra Ltd., had almost 23,000 employees at the end of March 2008, less than half of Satyam’s workforce of about 50,000.

“Tech Mahindra will benefit from this because with Satyam they will overnight become the fourth-largest

IT firm in India,” said Diptarup Chakraborti, Mumbai-based principal analyst at researcher Gartner Inc. “It helps them diversify from the single line of service they have, and reduce their dependence on their largest client.”

Tech Mahindra was advised by Kotak Mahindra Bank Ltd. and UBS AG. Satyam had appointed Goldman Sachs Group Inc. and Avendus Capital Pvt. as advisors for the sale.

Potential liabilities

Raju’s disclosure in January triggered probes including inquiries by India’s Serious Fraud Office and markets regulator.

Tech Mahindra will also have to cope with potential liabilities from investor lawsuits in the US. Fitch Ratings last month withdrew Tech Mahindra’s debt rating, citing uncertainties surrounding the bid.

Concerns over lawsuits and lack of financial information prompted IGate Corp. to pull out from the bidding process last month. Satyam’s financial statements are being reviewed by KPMG and Deloitte Touche Tohmatsu after its former auditor, the Indian affiliate of PricewaterhouseCoopers LLP, said in January its audit reports on the software maker were no longer reliable.

India’s Central Bureau of Investigation on April 7 filed charges against founder Raju for his role in the fraud. The charges include criminal conspiracy and falsification of accounts and carry a maximum penalty of life in prison, CBI Deputy Inspector General V.V. Lakshmi Narayana said at the time. Raju’s brother and former managing director, Rama Raju, and two partners at Price Waterhouse, the audit company’s Indian affiliate, were among nine people charged.

Losing customers

Satyam has lost outsourcing contracts from about 46 customers to rivals such as International Business Machines Corp., Tata Consultancy and Wipro Ltd., the Economic Times reported March 17, citing an unidentified person familiar with the developments.

The United Nations said March 23 it will terminate its existing contracts with Satyam. In January, State Farm Mutual Automobile Insurance Co., the largest home and auto insurer in the US, canceled its order in the wake of the accounting scandal. Still, Cisco, the world’s largest maker of networking equipment, won’t scrap its contract with Satyam, Chief Executive Officer John Chambers said on February 12.

Satyam may have also lost employees to customers and rivals. Bank of America Corp. may have hired as many as 300 people from Satyam, the Business Standard newspaper reported April 1, citing some of the employees without identifying them.

Satyam’s contracts and software engineers may still make it an interesting target, Kimberly Caughey, a senior equity analyst at Fort Pitt Capital Group Inc. in Pittsburgh, said before the announcement.

“The price you are paying is really for the contracts and the employees,” said Caughey. “It’s costly to acquire new people through the regular HR mechanism, but to be able to do it in one fell swoop, I think that’s a real win.”

Source: Bloomberg