Wilbur L. Ross Jr., the New York-based private equity investor who rehabilitates distressed assets globally, is now eyeing India's most dented company—the fraud-tainted Satyam Computer Services (SAY). According to a source familiar with the bidding for Satyam, Ross has begun due diligence in an effort to buy a majority stake in the Hyderabad-based outsourcing outfit, the center of a scandal since its then-chairman confessed in January to falsifying its accounts since 2000. The other suitors include construction and engineering conglomerate Larsen & Toubro (LART.BO), Tech Mahindra (TEML.BO), and private equity firm Apax Partners.
Satyam would be Ross' third prey in India—after textile company OCM and discount airline SpiceJet—since setting up his Mumbai office in 2006. Ross' India team is exploring opportunities in cement, sugar, real estate, tech, and more. The main attraction for Ross, says the source, is Satyam's strong position in some
Ross' entry into the Satyam race is raising many eyebrows in India. A main issue, according to analysts, is the potential conflict of interest of Deepak S. Parekh, chairman of the country's largest mortgage enterprise, Housing Development Finance Corp. (HDFC.BO), and Ross' adviser on damaged goods in India. Parekh is also a member of Satyam's three-month-old caretaker board put in place by the government and has sat on the board of Tech Mahindra's parent, Mahindra & Mahindra (MAHM.BO), since 1990.
Both Parekh and Ranjeet Nabha, CEO of Ross' India operations, declined to comment. But a source close to the negotiations says everything is aboveboard, and no information is going to Ross that isn't going to every interested bidder. Some Indian lawyers are confident there won't be problems. "Every director has a fiduciary responsibility towards his company," says Yashojit Mitra, a senior associate at Mumbai law firm Economic Laws Practice (which is not involved in the Satyam bidding). "Parekh's a man of stature and will not abuse his postion of power."
In a way, Satyam's bidding process has been as controversial as the outsourcing company itself. First, the board has reiterated that a large amount of Satyam's data are still unavailable, because the fraud goes back to 2000. And whatever is accessible appears suspect, according to some people close to the bidding process. For example, Satyam had an official headcount of 53,000, but B Ramalinga Raju, the former chairman, who admitted to the fraud on Jan. 7, revealed the employee numbers were inflated by 33%. And in the past two weeks, two bidders—U.S.-based iGate and New Delhi-based Spice Group, withdrew from the Satyam race. B K Modi, chairman of Spice Group, has complained publicly about the lack of transparency in the bidding process.
The other bidders, too, are aware they will have to rummage through a pile of debris to gauge the magnitude of the fraud at Satyam. Time is running out, as New Delhi wants to sell off Satyam before the national elections begin on Apr. 16. "People will have to satisfy themselves on the quality of the numbers. How much of a business is there under the fraud?" says a source close to one of the bidders. Already Satyam's market capitalization has plummeted 93%, to $520 million, from $7 billion a year ago. The company faces class action in the U.S; some clients, such as State Farm Insurance, have left; and around 6,500 employees have moved on.
Locked In for Three Years
That's not all: The list of dos and don'ts specified by the caretaker board could be daunting. They include a three-year lock-in period for the new buyer, which would have to agree not to sell Satyam assets for two years. The buyer would also have to pay the investment banking fees of Satyam bankers Goldman Sachs (GS) and Avendus Capital. The head of a private equity firm who abandoned plans to consider bidding for Satyam says the buyers will have to cough up around $400 million for a controlling stake in the company. Ross has spent around $120 million for his two earlier acquisitions in India.
What's comforting for the would-be buyers is that Satyam still claims to have clients. "It does a huge amount of business and is a very effective competitor," says a source close to one of the bidders. That could be enough to have interested Ross in this unusual transaction.