DEALTALK-Private equity, IT firms seen courting India's Satyam

By Sumeet Chatterjee

BANGALORE, Dec 30 (Reuters) - A host of private equity firms and global information technology majors are likely to vie for a stake in Satyam Computer Services, as angry investors look for an exit or a change in the Indian outsourcer's management team.

The embattled firm, which is also listed in New York, saw its shares plummet to a five-year low last week after a botched attempt to buy two firms in which Satyam management held stakes and after news it had been barred from World Bank business.

The company has said it will hold a board meeting on Jan. 10 to consider options to improve shareholder value and corporate governance, leading to speculation of a possible stake sale or takeover bid.

Satyam, hit by accusations of a lack of transparency, has hired DSP Merrill Lynch to review ways to enhance shareholder value, but did not give further details.

Four independent directors have resigned from Satyam's board in the past week.

Analysts say any acquisition of Satyam, India's No. 4 software services exporter, would give access to a profitable company with a cash balance of about $1 billion, a good set of clients such as General Electric and Qantas Airways, and a well trained workforce. While top technology firms such as IBM and Capgemini could be the potential buyers of Satyam, private equity firms such as Carlyle, TPG and KKR could also be weighing their options for a stake buy, investment bankers and analysts said.

"You don't 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.

"I would think that both strategic and financial acquirers are going to be busy this holiday season."

MARGIN CALLS

Speculation of private equity interest and a management change saw Satyam stock jump as much as 9.5 percent on Tuesday, extending Monday's gain of 9.4 percent to its highest in a week.

Satyam's promoters, headed by its chairman, held 8.74 percent in Satyam as on March 31, 2008, while institutional investors owned 61 percent of the company, according to information on the firm's website.

Satyam has said the promoter's stake may have been diluted as institutional lenders, with whom the promoters had pledged all their shares, may already have exercised options to liquidate shares to cover margin calls.

Aberdeen Asset Management, one of the largest shareholders in Satyam, said on Tuesday it was open to the idea of an investor picking up a stake in the outsourcer with a view to bringing in new management to protect shareholders' interest.

Satyam's market value has plunged about 31 percent to 106 billion rupees ($2.2 billion) since it announced plans to buy the sister firms.

Brokerage Edelweiss said a global major such as IBM or Capgemini coming in as a strategic investor in Satyam was "palatable option" because of the synergies and the ability to get offshore work done at a cheaper cost. A technology firm would also be best placed to replace Satyam management and provide new leadership, it said. "Thus, IBM, a name bandied about so often in the past, still seems the most likely horse needed to ride out Satyam and its management," Viju George and Kunal Sangoi of Edelweiss wrote in a report. "The name of Capgemini is (also) doing the rounds."

A Capgemini spokeswoman told Reuters the company would not comment on the talk, while a spokeswoman for IBM in India said it did not comment on rumours or market speculation.

Jefferies & Co equity research analyst Sachin Jain said technology firms with little or no direct presence in India would be the front-runners to pick up a stake in Satyam to boost their ability to deliver projects from cheaper locations. "Clearly, in a slowing economy clients would be looking for more cost effective solutions. So for that reason, they would be interested," he said.

FINANCIAL BUYER

The Economic Times reported on Tuesday some institutional investors in Satyam had approached IT firms and private equity players for a stake sale, citing market participants as sources.

Investment banking sources told Reuters firms like Carlyle and Kohlberg Kravis Roberts & Co could be willing buyers in Satyam, but there was no confirmation of any talks.

"This is a great PE story," said the head of a private equity firm, who declined to be named. "It is among the top IT companies in India, great strengths, a strong workforce and a presence across all verticals and great bunch of clients."

However, analysts say the main stumbling point in a Satyam deal could be the price at which the promoters or institutional investors would be willing to sell and a potential acquirer would be willing to pay in a tough global credit environment.

"The issue is that even the big stakeholders won't be willing to sell their stake at a marginal premium right now and if they are expecting a substantial premium then who are the buyers right now?," said Jefferies' analyst Jain. (Additional reporting by Narayanan Somasundaram in MUMBAI and Dominique Vidalon in PARIS; Editing by Mark Williams and Lincoln Feast)