It has not been a good start to 2009 for one unlucky analyst at ABN Amro India. On Wednesday morning, the hapless number cruncher decided to upgrade his rating on Satyam Computer to “buy”. Hours later, shares in Satyam had plunged by almost 80% after B. Ramalinga Raju, its chairman and chief executive, confessed to fixing the company’s books in a $1bn fraud which is being described as the country’s “Enron”.
We reproduce the note below for your reading pleasure. The final paragraphs are particularly painful.
Satyam Computer (SCS IN; Rs178.95)
From here, where?
We see limited possibility of Satyam being an acquisition play. However, we believe any changes in management team and/or investor-friendly measures (buyback or a special dividend) will lift valuations. Upgrade to Buy.
We rule out a takeover by a global or Indian IT major…
For a global system integrator (such as IBM, Accenture and HP), we believe any interest in Satyam will essentially be for its offshore capacity, which is not an immediate priority given the current business environment and their already sizeable offshore presence. For a tier-1 offshore player, the significant overlap in client base and relatively lower pricing (thus lower margins) will make any deal financially unattractive, in our view, besides the added challenge of integrating 51,000+ employees
… but not from a European or tier-2 Indian player
We believe a deal could make sense for European players (such as Atos Origin or Logica CMG), who are seeing growing offshore interest from clients but lacking offshore presence. Also, tier-2 Indian players such as Tech Mahindra and MindTree might be interested in Satyam to build scale and diversify revenue. But, given their limited cash position and lower market cap, structuring a transaction should be complex. A private equity play is possible, but we think it will need to be from a player that could actively manage the business.
Any deal may not be as cheap as the market expects
We believe buying a majority stake would be a long and expensive process given Satyam’s fragmented shareholding (only eight institutional investors with a 1%+ stake). Also, the offer would have to be at a significant premium to the share price to attract institutional holders.
Management changes should lead to share price performance; upgrade to BuyWe expect changes to the board to lead to changes in senior management. This, along with a potential special dividend/buyback, should allay investor concerns and lift valuations. However, we foresee an adverse business impact from recent events with a lag, in particular from clients seeing vendor consolidation (eg, Citigroup). Further, Satyam’s relatively higher exposure to clients seeking corporate action (such as Merrill Lynch and Bear Stearns) and the risk of an adverse ruling in the ongoing Upaid litigation could cap upside.
Related link:
From the desk of B. Ramalinga Raju - FT Alphaville
