Saturday, 18 April 2009

10 challenges before Tech Mahindra

After over three months of suspense and anxiety, Satyam Computer Services has finally found its new knight in shining armour, Tech Mahindra (TechMa).

The company which suffered a deadly blow on January 7 2009, when its owner confessed to a Rs 7000-crore hole in its balance sheets, can be finally said to be on the road to recovery.

Tech Mahindra's acquisition of Satyam has come as a relief to both the market as well as most Satyam employees. Though worst may be over for Satyam, the deal is not going to be an easy ride for the Mahindra group company.

Embracing Satyam into its fold is not going to be an easy task. Here's looking into the 10 challenges that Satyam-Tech Mahindra deal present for the new management.

Challenge 1: Lack of experience
The factors that could make this integration a complex task are Tech Mahindra’s lack of experience in most of Satyam’s business verticals and issues relating to its own core business.

“Tech Mahindra certainly gets breadth in skills post merger (with Satyam). But what it lacks is depth in terms of client base and leadership in the new verticals that it would get access to after the merger,” said Edelweiss Securities IT analyst Viju George.

Challenge 2: Different business profiles
“The business profiles of both the companies are totally different. While Tech Mahindra earns majority of its revenue from the European market by providing telecom solutions, Satyam is far more diverse in verticals as well as geographies,” said India Infoline IT analyst Rajiv Mehta.

Also according to analysts, though Tech Mahindra has British Telecom's (BT) backing and a strong presence in the US, it is not very well known in markets such as Australia, where it will have to market itself.

Challenge 3: Marrying the work cultures
Analysts also said that integrating a large pool of some 43,000 Satyam employees across verticals that are somewhat unfamiliar to Tech Mahindra would be anything but easy.

Tech Mahindra faces challenge of marrying the work cultures of the two organisations and other human resource-related issues. Though the two companies began operations in the same year, they are said to be characteristically different.

Winning back employees' trust too will be a big challenge. Tech Mahindra will have to stop the attrition both at client and employee levels.

Challenge 4: Facing recession pangs
Tech Mahindra also faces challenges from its own business. The company, which earns three out of every five rupees by serving the UK-based BT Group, is suffering from the slowdown in global telecom markets.

“The single-biggest client, BT, is not doing well and this is going to put a lot of pressure on Tech Mahindra,” said SBICAP Securities research head Anil Advani.
According to an internal communication meant for its employees, the company could not clinch a single deal in March. Tech Mahindra is also believed to have let go about 250 employees in the past three months citing reasons of non-performance. “It had earlier set up two centres for every project as part of its disaster recovery plan. Now, due to cost-cutting, one location is being shelved for each project and employees asked to either shift to other projects or leave,” said another company official. The company had 25,429 employees as of December’ 08.

Challenge 5: Convincing existing customers
One of the biggest challenges for the new management will be to regain customer confidence. Tech Mahindra will have to convince the customers to stay on, and attempt to win back over $300 million worth of outsourcing contracts through competitive pricing.

Two large customer exits reported from Satyam are Telstra ($32 million/year) and State Farm Insurance.

Challenge 6: Legal liabilities
Satyam is facing half-a-dozen Class Action suits filed by shareholders in the US after its disgraced founder B Ramalinga Raju admitted to fudging the firm’s books. It is also fighting a legal battle with UK-based mobile payments services provider Upaid.

Challenge 7: Build new leadership
Another challenge for Tech Mahindra is the new leadership team and the role of top 100 Satyamites who would be retained. The retention of 100 key associates was one of the pre-requisites that Tech Mahindra had to agree to. The top management of Satyam is understood to have shortlisted key leaders.

Challenge 8: Cleaning the balancesheet
The Tech Mahindra management would have a challenging task of cleaning up the balance sheet of the scam-tainted company. The company is likely to be poorer than publicly stated earlier. The big question is by how much. Tech Mahindra has estimated Satyam's revenue to fall to $1.3 billion (Rs 6500 crore).

KPMG and Deloitte are doing the forensic re-statement of accounts, a process that is expected to be a lengthy one. It is expected to take at least six months. The new owner will have to cooperate with over half-a-dozen agencies and regulators probing the scam.

Challenge 9: Liquidity
The deal would pose financial and operational challenges for Tech Mahindra. Analysts say that the company may have to immediately invest Rs 1,000 crore in Satyam for operating expenses.

At the end of the December quarter, Tech Mahindra had $110 million in cash and cash equivalents. Assuming that cash kitty has expanded by another $30-35 million in the March quarter, the acquirer will still have to borrow or raise capital to fund the deal.

Challenge 10: Conflict of interest
Satyam's clients in areas such as manufacturing, auto and engineering services may be concerned. “There may be a conflict of interest among Satyam’s auto clients, considering that the company will now be owned by an auto major, M&M. The same will apply to telecom clients, as BT has a stake in Tech Mahindra and is one of its biggest clients. So, clients will do their own cross-questioning and due diligence on the deal,” said Diptarup Chakraborti, Gartner India’s principal research analyst.

“The next 60-90 days will be crucial to demonstrate a plan for existing Satyam customers. Satyam provides niche work in areas such as auto and engineering services, so clients will be concerned about the long-term plan in that space,” said Sudin Apte, a senior analyst with Forrester Research.