A shrewd buyer could benefit from Satyam purchase

March 10 2009

At the height of India's stock boom in 2007, speculation centred on when one of India's top five information technology outsourcing companies would buy an overseas rival, rather than vice versa.

Enter Satyam Computer Services. The $1bn scandal at India's fourth-largest outsourcing group, in which its former chairman, B. Ramalinga Raju, in January confessed to manipulating the company's books, has reduced its market valuation from about $7bn to a 10th of that. Even now, its true worth is unknown becauseauditors are still restating the accounts.

In spite of this, the group yesterday began auctioning a 51 per cent stake. Any acquirer would need to be brave indeed - the company also faces investor class-action lawsuits. Yet, Satyam could prove a good gamble for the right bidder. It has retained many Fortune 500 clients and Fifa, the soccer governing body.

Satyam could appeal particularly to European consultancies and software groups, which have not been as quick as US rivals such as Accenture and IBM to build a presence in India. They need access to India's abundant human resources to enable them to respond to big orders from clients.

For the shrewd buyer, Satyam might yet live up to the promise of one of its slogans: "Business transformation . . . it is not alchemy. It is chemistry."

How bad can it get and what are you (the company, as opposed to we, the people) going to do about it?

Shareholders in Cookson were among the first to be tapped for cash this year. Yesterday, it was the UK-based company's turn to shed more light on these two key questions. As for the first question, Cookson, which supplies ceramic components to the steelmaking sector, has been brutally realistic about the collapse in its end market. It sketches a scenario in which global steel production drops 20 per cent in 2009 compared with 2008.

What this reflects is massive destocking as industries such as automotive and construction adapt to a lower level of demand (at least, we have to assume it is destocking because if we are looking at a sustained drop in economic activity of this order, then we have greater things to worry about than Cookson). Investors should be relieved that the company is prepared.

Thanks to the early rights issue and some nifty negotiating with its banks - it has traded an early repayment of a bank facility in return for a more favourable covenant - it has bought itself plenty of headroom.

The answer to the second question boils down to self-help and the strenuous way in which the company is improving its cash position. It is cutting its workforce by about 10 per cent and shutting facilities - though under its most bearish scenario, it might have to take another swing of the axe.

It is wringing extra synergies out of what was in retrospect an ill-timed acquisition, reducing cash outflows (farewell, final dividend) and managing its working capital so as not to build up inventories of its own. For investors with nerves of steel, there is the hope that some of those huge fiscal stimulus plans will help revive demand. It would be unwise though, to bank on government infrastructure projects being shovel-ready soon. Fortunately, with a hard slog ahead, Cookson is.


To rescue or not to rescue Opel seems to be the pressing dilemma for Angela Merkel. The German chancellor faces elections in six months time and the question is whether she can afford the social and political costs of seeing Opel - which employs 25,000 in Germany - collapse.

She appears reluctant to orchestrate an expensive government bail-out and her instinct is to allow Opel to go bankrupt and be restructured under the protection of court administration. Berlin has been angered by the way General Motors has sought to put its back against the wall and also considers that there is not much left of Opel to be saved given that the Opel patents have long ago reverted back to GM in the US. Berlin also argues it is difficult to see how to save Opel in isolation from the other GM European assets.

But her SPD coalition partner and future challenger in the September elections have launched a noisy public campaign to save Opel and German jobs. Frank-Walter Steinmeier, the German foreign minister and SDP candidate in the forthcoming election, says allowing Opel to go bankrupt would be "irresponsible".

So Ms Merkel must now weigh the potential damage to her re-election chances if she decides not to salvage Opel with a large capital injection of taxpayers' money. She can perhaps take some comfort from a recent ZDF poll that showed that 50 per cent of Germans opposed a state bail-out of Opel, with only 44 per cent in favour