People integration issues before Tech

Mahindra
Posted: Saturday, Apr 25, 2009 at 2336 hrs IST
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With Tech Mahindra’s acquisition of Satyam, the Mahindra group has become India’s
sixth largest in terms of turnover. While Satyam was the fourth largest among Indian
ITeS players, Tech Mahindra, in partnership with British Telecom, remains the second
largest telecom software provider from India.

Satyam is bigger and more diversified, into several verticals, than Tech Mahindra.
Satyam, at last count, employed over 48,000, Tech Mahindra has about 23,000
employees. Much of Tech Mahindra’s business is in euro while Satyam’s has been in
dollars, with six key customers accounting for over 80% of its business.

Since the scandal broke, Satyam’s revenue shrank from $1.8 billion to $1.3 billion.
However, thanks to the efforts of the government and the government-appointed board
members, all the key customers, with the exception of one, were persuaded to hold on to
Satyam.

One may cite global economic meltdown as a key reason for the continued loyalty of
Satyam employees. The day Raju confessed, it appears nearly a third of the employees
approached head-hunters. Anyway, thanks to the proactive, prompt and facilitative
actions of regulators and government, transitional trauma was contained and there is no
exodus of either customers or employees.

About 13,000 Satyamites are said to be on the bench and, according to Kiran Karnik, up
to 10% staff (about 5,000) could be redundant. Till the redundancies are carried out and
the pink slip trauma is over, uncertainty will be lurking in the minds of Satyamites.
Anand Mahindra, however, tried to dispel the insecurity and assure the employees that
effort will be made to retain everyone, if necessary through redeployment.

Tech Mahindra proposes to complete the integration process for Satyam in 100 days. Will
it prove a tall order? Given the vast differences in the scale and scope of both the
businesses, the approach has to be cautious.

The key issue in people integration is culture fit or the lack of it.

The culture of Mahindras is, at least till the slowdown started, to be soft on people and
hard on business. After Anand Mahindra took over the mantle, the group, especially
automobile sphere, has harnessed potential for fostering innovation, line ownership of
HR function and people empowerment.

Will a small company acquiring a big company create additional problems in integration?
Not necessarily, as we have seen in the instance of the October-2006 Tata Steel
acquisition of Corus, the biggest overseas buyout by an Indian company. With the
acquisition, Tata Steel leapfrogged in the global ranking from about the 50th to the ninth
position among the steel majors. A journalist said this acquisition is akin to a minnow
swallowing a whale. Tata Steel dealt with the differences in culture (Asian and
European), size and institutional arrangements (European Works Councils) diligently and
with restraint. Mahindra too is a respected business house. Though smaller in size and in
scope of operations in ITeS domain, it would be tactful enough to handle integration
issues.

HR due diligence in taking an M&A decision entails a thorough examination of people

integration issues, and it should cover data on organisation structure, staffing policies &
practices, workforce demographics, employee relations, executive compensation, details
of top 100 key employees drawing above a certain threshold of payment, occupational
safety and health issues and court cases involving staff. Special features, if any, of
Satyam’s commitments towards termination dues and bonus payments and employee
equity require special attention. Harmonisation of HR policies, including compensation,
may take some time, but the hygiene issues (such as working hours, leaves, etc) could be
straightened right away.

Insights must be gained, through formal and informal sources, about company values,
formal & informal organisational structures, inter- and intra-departmental issues, work
culture, morale & motivation, attitude of company management towards risk, team-
orientation, and orientation towards autonomy vs managerial control, centralisation,
formality, decision-making structures. These must be compared and contrasted with that
of Tech Mahindra.

It appears that Tech Mahindra will have to protect the employment of some key Satyam
staff under the terms of acquisition. However, it is usual for the acquirer firm to replace
the key people in the acquired firm with those in the acquirer firm. Does Tech Mahindra
have such a critical mass of top talent within its ITeS domain? If not, it would be
compelled to either retain some of the top talent or hire from the industry.

Appointing new board members is a relatively less painful job for Satyam because the old
board has been replaced by a six-member, government-appointed board, whose jobs was
to handle the stakes in Satyam till a new owner is found. Even though the new board will
not be responsible for the past sins, it will have the onerous task of cleaning up the mess
and winning over employees and key customers.

The early indications from the Mahindras are that they would like to retain most of the
top talent. One major challenge for Tech Mahindra is to figure out who among the so
many talented top team is an accomplice in the fraud so that appropriate decisions on
retention can be taken. The challenge is exceptionally tough when you deal with
intelligent white-collar professionals and go-getter task masters.

CS Venkata Ratnam is director, International Management Institute, New Delhi

Banks, mutual funds lap up Tech Mahindra debt issues

10.25% coupon on NCDs, 8.50% on commercial papers prove attractive.

The NCDs and CPs have been rated ‘AAA’ and ‘PR1+’ respectively by credit rating
agency CARE.

Our Bureau

Mumbai, April 16 The Rs 600-crore non-convertible debenture (NCD) and the Rs 275-
crore commercial paper issues of Tech Mahindra have been lapped up by a clutch of
mutual funds, banks and insurance companies.

The IT company is in the midst of tying up resources to finance its winning bid to acquire
51 per cent stake in Satyam Computer Services for Rs 2,889 crore.

In the current regime of falling interest rates and easy liquidity, the ‘attractive’ 10.25 per
cent coupon on NCDs of four and five years maturity and 8.50 per cent coupon on
commercial paper of one year maturity and the fact that Tech Mahindra is an almost zero-
debt company proved to be the clincher for the IT company.

Among others, Reliance Mutual Fund, UTI Mutual Fund, ICICI Prudential Mutual Fund,
Bank of India, Corporation Bank, YES Bank, and Kotak Life are believed to have
subscribed to the debt issues.

According to a senior public sector bank official, the yield offered by Tech Mahindra for
its bond issue is attractive, given the current scenario of falling interest rates. “In today’s
scenario a yield of over 10 per cent is very good. Moreover, the tenor of the NCD issue is
only four to five years. One can’t get this much yield on a corporate advance. The yield
for a 10-year G-sec is around 6.40 per cent. So, by comparison the return offered by Tech
Mahindra’s issue is excellent,” he said.

Bank of India has invested about Rs 10 crore in the Tech Mahindra NCD issue, said a
senior official from the bank. “The 10 per cent plus return is reasonably better compared
to the avenues that are currently available. Easy liquidity and slack credit off-take is
prompting banks to park their surplus with RBI at 3.5 per cent or in the bond market at 7
per cent,” the official said.

The NCDs and CPs have been rated ‘AAA’ and ‘PR1+’ respectively by credit rating
agency CARE.

According to CARE, instruments with AAA rating are considered to be of the best credit
quality, offering highest safety for timely servicing of debt obligations. Such
instruments/facilities carry minimal credit risk. Instruments with PR1+ rating would have
strong capacity for timely payment of short-term debt obligations and carry lowest credit
risk.

Tech Mahindra’s ratings, according to the rating agency, derive strength from
experienced management, established track record, strong domain expertise in IT services
for telecom companies, comfortable gearing ratios, comfortable liquidity position and
healthy order book position. However, concentration of revenues with limited customers
was a rating concern.

Kotak Mahindra Bank was the sole lead manager to the NCD as well as the CP issues.

Related Stories:
Tech Mahindra to form Integration Team
Tech Mahindra bags Satyam, top bidder at Rs 58 a share

More Stories on : Software | Corporate Bonds | Mutual Funds | Short Term Instruments | Satyam Computer
Services Ltd

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Tech Mahindra-Satyam merger stalled by ‘certain issues’

Published: Tuesday, Nov 16, 2010, 2:34 IST
By KV Ramana | Place: Hyderabad | Agency: DNA
Has the merger between Tech Mahindra and Satyam Computer Services hit a roadblock? Indications given by the
Satyam management suggest that the merger is not going to be immediate and there are certain issues that coming in
the way of integrating both the companies.

“Consultations with various board members on this issue have started. But, there are certain wrinkles to be ironed out.
It is a process. We are not going to that (the merger) in a hurry,” Vineet Nayyar, Satyam’s chairman, said.

Till recently, the company has been hoping to expedite the process of merger.
During the restatement for financials, the management had indicated that an application for carrying out the merger
would be filed in the Andhra Pradesh and Mumbai high courts after the quarterly results on November 15.

While not elaborating on the wrinkles to be ironed out, Nayyar said that the merger would happen only during the end
of next financial year.
“It is difficult to put a timeframe to the completion of the process. But, we think we should be able to do it by the end
of next year,” he said.

Nayyar said difficulty in achieving rapid growth and class-action suits pending in the US courts would remain key
challenges.

On New York Stock Exchange relisting, he said Satyam will achieve US GAAP compliance in the next five to six
months.

“Then we will decide whether to go to the NYSE or continue like this,” he said.
Interestingly, the company continues to carry the risk of Upaid and income tax related litigations.

In connection with the lawsuit filed by Upaid, Satyam deposited $70 million last fiscal into an escrow account pursuant
to a settlement agreement to settle the litigation.

It had obtained a favourable ruling from the Supreme Court of the state of New York declaring that the Upaid was
solely responsible for any tax liability under Indian law in respect of the settlement amount.