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Satyam deal could cause headaches for BT

Troubled outsourcer Satyam has been sold to an Indian company which is partially owned by BT and relies on BT for a large slice of its revenue
Written by Nick Heath, Contributor on

BT could face disruption from a deal to sell troubled outsourcer Satyam to one of its key suppliers, analysts are warning.

The auction of a 31 percent controlling stake in Satyam was won on Monday by Indian outsourcer Tech Mahindra, a company set up as a joint venture between BT and conglomerate Mahindra and Mahindra.

Satyam offers a wide range of IT outsourcing services and expertise, and it built up a base of 600 clients at its peak, including household names such as BBC Worldwide, Nestlé and Fifa. By comparison, Tech Mahindra is smaller and is focused mainly on telecoms and network services. It has about 100 clients and is reliant on one company, BT, for about 60 percent of its revenue.

Satyam has been looking for a buyer since March, following the arrest earlier this year of its founder and former chairman B Ramalinga Raju after he admitted the company's books had been inflated by nearly $1bn.

BT retains a 31 percent stake in Tech Mahindra, which is also a key supplier to its outsourcing arm BT Global Services. BT Global Services recently warned it may have to writedown £340m on 15 of 17 of its largest outsourcing contracts. Anthony Miller, managing partner with analyst house TechMarketView, questioned whether it was a good time for such turbulence at one of its key suppliers.

"The deal is fraught with risks, of which some are still yet to be quantified," Miller told ZDNet UK's sister site, silicon.com. "BT is in somewhat of a troubled state with regards to its global-sourcing business and what it does not need at the moment is another element of risk."

The structure and the nature of the two businesses is very different and any integration between the two is going to be very tricky, Miller noted. "It is going to take up a lot of Tech Mahindra's time while they try to make the business work and that could have an impact on their customers and BT," he said.

Phil Morris, chief operating officer for Europe and Asia at outsourcing advisors EquaTerra, said customers will need to brace themselves for difficulties during the takeover of Satyam. "The challenge is that what [Tech Mahindra] have bought is the dog, and they are the tail. Trying to absorb Satyam is going to be like eating an elephant," he said.

"The real work starts now in terms of what the hell Tech Mahindra is going to become. Will it revert into Satyam, or is it going to give it a whole new identity?" Morris asked.

Morris said customers should consider that Tech Mahindra's time might be diverted to other issues and customers, so they should get commitments about timelines and service delivery. "Failing this being tackled satisfactorily, they should look at putting in place other routes of supply, talk to competition and arrange for fall-back scenarios if the absorption of Satyam gets too distracting for either Satyam or Tech Mahindra," he said.

While BT may be facing disruption from the merger, the benefits are clear for Tech Mahindra: EquaTerra's Morris said the deal frees Tech Mahindra from its reliance on BT, expands its expertise from networking into wider IT outsourcing and to serving companies across a range of sectors. "The value of Satyam comes with the clients and the potential expansion of that client base. I would say that Satyam remains a fantastic asset for anyone that manages to leverage it properly," he said.

"BT has always supported Tech Mahindra in its bid to acquire Satyam and we continue to remain a shareholder," a spokesman for BT said. A spokesman for Tech Mahindra was unavailable for comment.

The deal with Tech Mahindra will provide some comfort to Satyam's existing customers, according to Patrick O'Brien, senior analyst for outsourcing with analyst house Datamonitor. "There will be relief among customers looking to move the situation on, but Tech Mahindra still have a big effort to convince clients they will be able to steady the ship."

"Tech Mahindra has a lot of work in the UK, they are obviously going to be looking at the potential of Satyam's assets, I imagine they would be wanting to cross over into more IT services rather than networking that Tech Mahindra specialises in", he added.

Chairman of Satyam's board, Kiran Karnik, said in a statement: "On behalf of all Satyamites and their families, we congratulate Tech Mahindra on being the highest bidder. This event ought to dispel the anxiety of all stakeholders as it re-positions the company's commitment to revival and good governance."

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