How Larsen & Toubro got it wrong

J P Nayak, president of Larsen and Toubro, was upset when he came out of the banquet hall of Taj President in Mumbai after the nerve-wracking final bid for Satyam. He had a few words with his colleague, V K Magapu, senior executive vice-president of L&T's IT and technology services, and turned away from the media.

The price quoted by Tech Mahindra for Satyam was not expected by the engineering behemoth.

It was the aspiration of A M Naik, its veteran chairman who had founded the company's IT subsidiary, L&T Infotech, to acquire Satyam and scale up L&T's IT operations. To fulfil the dreams, L&T had earlier made some moves and picked up a stake in the troubled firm from the open market. From two transactions, it bought a 12 per cent stake for Rs 670 crore (Rs 6.7 billion), at an average cost of Rs 81 a share.

"The price quoted by L&T (Rs 45.90) in the financial bid is fairly decent, compared with the share price of Satyam in the last three months. The team of A M Naik never expected that anybody could quote 10 per cent above their price, as there was no clarity on Satyam's liabilities. Even if somebody had quoted less than 10 per cent of what L&T quoted, the company could have raised the bid in the open bidding round," said a source in L&T.

"We arrived at a value for Satyam on the basis of incomplete financial details and uncovered risks. Obviously, our assumption will vary from Tech Mahindra's. We expect that the new owner brings in value for Satyam, and indirectly to our 12 per cent holding," said an L&T executive.

According to the bidding rule, L&T has to wait for six months to offload its stake. Within this period, the company hopes the share price of Satyam will bounce back. If not, L&T will wait for some more time to ensure a decent return on investment, according to company sources.

Just before Satyam founder Ramalinga Raju's admission on fudging accounts, L&T wanted to get into a strategic alliance with the company. As that didn't work out, the engineering giant decided to buy shares from the open market.

After Y M Deosthalee, chief financial officer of L&T, met the government-appointed board of Satyam a week earlier, L&T came to a conclusion on the price of the beleaguered firm.

At the bid price of Rs 45.90, L&T has valued a 51 per cent stake of Satyam at around Rs 2,300 crore (Rs 23 billion), around Rs 600 crore (Rs 6 billion) less than what Tech Mahindra has bid.

L&T was confident of the synergy between the core strengths of Satyam and those of L&T Infotech. Satyam is the strongest player among Indian IT companies in the enterprise application space and the engineering segment, an area of interest for L&T. These two accounted for almost 45 per cent of Satyam's stated revenues.

Satyam had also set itself the target of emerging as the world's second-largest SAP implementer by the end of this year. SAP is a German software major and a proprietor of enterprise resource planning solutions, for which it has implementation partners.

L&T's bagging Satyam would have meant an additional $1 billion revenue and around 48,000 more employees.