IBM unlikely to bid for Satyam stake

Last Updated: Sat, Mar 07, 2009 05:17 hrs

New York: IBM is unlikely to bid for Satyam Computer Services Ltd as the advantage of expanding in India is outweighed by the legal and financial risks related to Satyam's accounting scandal, according to people familiar with the matter.

Satyam won regulatory approval on Friday to sell a majority stake in itself, about two months after founder and Chairman Ramalinga Raju admitted the information technology outsourcer's profits had been inflated for years and its assets falsified.

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Earlier this week, Business Standard newspaper said International Business Machines Corp was the "front-runner" to buy Satyam and had brought in a team of bankers and lawyers from the United States and Europe to India to assess the deal size and risks.

But two sources familiar with the situation told Reuters that IBM had not flown a team to India and was unlikely to be interested in bidding for Satyam. It is unclear whether IBM, which declined to comment, has hired financial advisers.

Satyam to call for global bids

Rumors of IBM's interest in Satyam have circulated for years, as the two compete on technology outsourcing and computer-related services.

Buying Satyam could help IBM expand its geographic presence, but analysts say the Armonk, New York-based company already has a lead in India with customers that include top wireless provider Bharti Airtel.

Compared to Satyam, IBM -- the world's largest technology services company -- also offers a fuller range of software and services including high-end consulting projects that bring in high margins.

"IBM already has a brand in India," said Susquehanna Financial Group analyst James Friedman. "I don't know that Satyam is going to help that."

Even if IBM were interested, it would be tough to get a fair assessment of Satyam's valuation, making an acquisition difficult, Friedman added. Fraud-hit Satyam's market value has plunged to about $550 million, from $7 billion last May.

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Looking but not buying

Technology bankers and analysts say they expect IBM, which has about $12 billion of cash, to take a look at Satyam's assets once its government-approved board invites formal expressions of interest.

But one person familiar with the sale process said a key issue that could deter IBM or another potential buyer is the lack of clarity on the extent of Satyam's liabilities. Satyam faces a class-action lawsuit from US shareholders that any new owner would have to assume some degree of liability for.

David Grossman, an analyst at Thomas Weisel Partners, said some Satyam capabilities, such as their partnership with SAP, would hold value for IBM "but you have to balance that against the liabilities that exist."

"Balancing risk and reward, I don't see an immediate need for IBM to buy," he said.

L&T to decide on Satyam bid after getting more details

Bankers and analysts also listed Hewlett-Packard Co and Computer Sciences Corp as other US companies that could be interested in Satyam. HP and CSC declined to comment.

But HP is still digesting its $13.9 billion acquisition of IT services provider Electronic Data Systems, and CSC may not have the financial wherewithal to buy Satyam, they said.

Larsen & Toubro Ltd, which controls about 12 per cent of Satyam, and diversified companies Spice Group and Hinduja Group have expressed interest in Satyam but said they had not decided whether to bid.

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Some assets compelling

Satyam provides back office operations to more than 600 global customers, including General Electric Co and Qantas Airways.

Two technology bankers suggested IBM might look at buying some Satyam assets rather than a majority stake. One banker, who has worked with IBM in the past, said its acquisition strategy of late has been to pursue companies that have strong intellectual property rather than services, which is Satyam's forte.

"If IBM needs to grow its market, grow its revenue stream, and position themselves for the recovery and expand their lead over HP, Satyam is the only choice that can accelerate those objectives," said Trip Chowdhry, an analyst at Global Equities Research.

IBM Chief Financial Officer Mark Loughridge said at a conference last month the company looks for software acquisitions that completes IBM's "content and overall services offering." At IBM's January earnings call, he said the company was looking at ways to use its $12 billion cash most effectively.

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Shares of IBM fell 1.91 per cent to close at $85.81 on Friday on the New York Stock Exchange.

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