The news that Tech Mahindra, the Indian IT company, has won the fire-sale to acquire Satyam should be reassuring for existing Satyam customers. Tech Mahindra is a joint venture of Mahindra & Mahindra, one of India’s largest industrial conglomerates, and British Telecom. Given the speculation over Satyam’s future since the revelation earlier this year that its former chairman, Ramalinga Raju, had fixed the company’s books for several years, there is at least a sense that Tech Mahindra will bring some stability — at least in the short term.  

Existing customers will, however, have to wait for some time before being certain that Tech Mahindra’s leadership will prove to be the right partner for a long-term strategic relationship, and prospective customers should continue their due diligence on the new ownership structure. Satyam is currently fighting several class actions in the United States by purchasers of American Depositary Receipts who have alleged, among other things, that Satyam had issued misleading financial information. Satyam is also fighting a long-running battle with UK company Upaid over allegations of falsifying signatures on contractual documents. Companies considering entering into a long-term contract with Satyam would of course be advised to undertake detailed due diligence on the company and assess the extent to which the company will be able to cover any liabilities arising out of these claims. It is also worth noting that the true state of Satyam’s financial health is still being determined - a process that could take several months.  

For those companies currently contracted to Satyam, what can they do if they wish to consider their contractual position in light of the change in ownership?  

While each customer’s opportunities will depend on its specific contractual rights, many outsourcing agreements include a provision allowing the customer to terminate the agreement without payment of a termination fee (or payment of a reduced fee) upon a change of control of the supplier. If applicable, this right may now have been triggered, and companies should review their contracts to see if they have a particular period of time in which to exercise it. However, because the customer bears the cost of re-sourcing the terminated services, termination usually makes sense only in the most extreme cases. Instead, the termination right is most practically viewed as a device for bringing the new owners to the table to negotiate additional protections appropriate in light of the changed circumstances.  

Those protections will vary but might include the following actions:  

  • Credit support, such as a parent ÆÆcompany guarantee or letter of credit. If Satyam remains intact as a subsidiary of the buyer (and early indications appear to support this being the case), a parent company guarantee would seem to be essential to protect against a future melt-down. In all cases, customers should consider whether third-party credit support of some kind will be necessary. Of course, the cost of any credit support required will burden the deal and could challenge the economics for both sides.
  • Financial covenants which, if triggered, would result in a requirement to provide credit support, a full or partial termination right, or both. Typical high-yield debt covenants are a good place to start in structuring these restrictions, though customers may find a complete set of covenants to be too much. Since the objective usually is only to establish an early-warning system, simple net worth, leverage or cash flow covenants may be enough. Covenants like these were more common in outsourcing agreements in the period just after Enron’s collapse but faced stiff resistance from suppliers, and demand eventually receded. Satyam’s failures are a stark reminder of the need to manage the risks addressed by these provisions.  
  • Periodic financial statements to replace publicly filed statements which may no longer be available or to supplement public filings with more regular or detailed information. For example, monthly cash flow reporting may be required to back up a minimum cash flow covenant.  
  • Escrow of key supplier-owned software or alternative protections against loss of critical software in the event of supplier failure. Frequent delivery of data and developed code is a key protection against unforeseen events.
  • Assurances as to continuity of key staff regardless of any reduction in force or restructuring.  

Where termination is a possibility in the future, the change in ownership might also provide an opportunity to engage in a more comprehensive review of the customer’s exit rights, confirming or negotiating for the following:

  • Rights to acquire key equipment and facilities  
  • Rights to acquire separate licences for critical software  
  • Step-in rights for critical functions  
  • Rights to hire key supplier staff
  • General termination assistance requirements for the period necessary to complete any re-sourcing  

Of course, while the agreement is open, customers may also want to address other issues not directly related to the change of control, including scope and price.  

In any case, customers should critically evaluate Tech Mahindra’s credentials and their specific rights under their agreements. Some agreements may limit termination rights upon a change of control, requiring a more creative response. Customers should also keep in mind that Satyam’s new owners are likely to have allowed for some customer attrition in their bid; while they are likely to make accommodations to retain revenue, customers making overly aggressive demands may find themselves forced to find a new service provider.