India's Satyam-Mahindra poses 'serious threat' to rivals

Merger between Mahindra Satyam and Tech Mahindra will create consolidated Indian IT services giant with increased organizational size and capabilities, which will be strong threat to rivals, analysts note.
Written by Jamie Yap, Contributor

The merger between Mahindra Satyam and Tech Mahindra will pose a "serious threat" to competitors which cannot afford to "sit comfortably", say analysts who add that the biggest challenge now for the consolidated Indian IT services giant will be integrating each other's capabilities.

In a statement Wednesday, Tech Mahindra and Mahindra Satyam announced that their respective boards approved the merger, which would create a consolidated company with a 75,000 headcount and approximately US$2.4 billion in revenue.

Rohit Partha, Asia-Pacific industry analyst for ICT practice at Frost & Sullivan, said the merger came "right about time", noting that it was a good move to put the long-anticipated consolidation on hold after Tech Mahindra acquired scandal-ridden Satyam in April 2009, and renamed it Mahindra Satyam.

Partha said the parent company had to stabilize Satyam's business in light of client attrition as well as restate the financials, after Satyam founder Ramalinga Raju confessed to corporate fraud. It then also had time to understand the core competencies of both companies to get a clearer idea of how to combine the two eventually, he told ZDNet Asia.

Hansa Krishnamurthy Iyengar, senior analyst of market intelligence at Ovum, added that the delay of three years also allowed regulatory authorities to dig into details and the extent of the scam, as well as to ensure "all the books had been set right". She noted that while this was completed in mid-2011, the decision on the merger was timed to coincide with the new financial year beginning Apr. 1.

Both analysts were bullish about the future of the newly-combined entity.

Iyengar said the merged company, now placed among the top 5 Indian IT service providers, would "pose a serious threat" to rivals including Wipro and TCS.

Partha noted that the chances of success for the merged company "looks promising", adding that the the top three players in the field--Wipro, TCS and Infosys--"cannot sit comfortably".

Noting that the merged entity would be the fifth largest IT services company in India, the Frost & Sullivan analyst said: "It's a good size. Scale is important to compete for bigger deals [because] big clients including Fortune 100 companies look for scale."

Size aside, he added that the combined entity also has a "good chance" of generating deals and getting clients because it now has capabilities across the spectrum. While Tech Mahindra is predominant in the telecommunications sector, the merger would give it access to other verticals including manufacturing and enterprise management services in which Satyam is a major player, he explained.

The merged entity can now offer a "full lifecycle of solutions" from business process outsourcing (BPO), to application development and management (ADM), infrastructure management and enterprise business solutions, he added.

Integration--not image--now the main hurdle
But therein also lies their biggest challenge, Partha noted, of synergizing revenues and combining both companies' capabilities in the various verticals to deliver differentiated services to clients.

The merged company would likely look at cross-selling and up-selling services to existing clients of both Tech Mahindra and Mahindra Satyam, he added. "If they play everything right, [the new company] can easily be among the top 3 service providers in the next two to three years," he said.

He dismissed suggestions that Satyam's past accounting scandal would be a barrier. "That [tarnished] image is behind them".

Iyengar concurred: "It is evident from contract wins and a couple of small acquisitions that the Satyam name is no longer an issue." She noted that the challenge now is how the company adapts to customers which IT investment choices are impacted by the changing business environment.

Earlier this month, Mahindra Satyam acquired BPO company vCustomer's international operations for US$27 million, and in February, bought a 15 percent stake in software company Dion Global Solutions.

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