Satyam's deal with Bear Stearns faces uncertain future

Satyam's deal with Bear Stearns faces uncertain future

The impending end of Bear Stearns & Co as an independent company could be a double whammy for Indian outsourcing firm Satyam Computer Services.

The Wall Street giant's software development and maintenance contract to Satyam, pegged at nearly $10 million a year, faces an uncertain future, but India's fourth largest software exporter may also be losing a trusted friend who helped it network with global business.

Market sources said Satyam may take only a marginal financial hit if the contract were to go away, as it accounts for less than 0.5% the company's revenues. However, the development shows that Indian outsourcing companies may be more vulnerable to the spreading menace of mortgage crisis than thought initially, they said.

"It was an important client and we have continued to do very well with them despite their problems in the last six months," a Satyam spokesman told ET on condition of anonymity. Neither Bear Stearns, nor JPMorgan Chase & Co, which has agreed to buy Bear Stearns, has communicated anything to Satyam so far, he said.

 The spokesman said the Bear Stearns crisis showed that the fallout of the mortgage crisis was not limited to the primary players in that market, but had also spread to secondary and tertiary levels. Less than 1% of Satyam's revenues came from the mortgage segment directly, he said.

Stock market analysts said JPMorgan Chase & Co had its own outsourcing strategy in India, including its own unit, and it remains to be seen whether it will retain Satyam for the Bear Stearns part of its business alone. Even if Satyam retains the contract, only the annuity-based maintenance work may continue and "any discretionary spending that can add to the value of the relationship is almost ruled out," one analyst said.

Satyam is confident the contract will continue for now, at least for the basic minimum parts of the work that its spokesman termed "keeping the lights on". He said, "We can't be given the boot, because we expect the baseline work to continue. It is not that Bear Stearns is being closed. It is a going concern... And JP Morgan is not a stranger to us either. I should think that at some point, this might actually be an opportunity," the spokesman said.

Industry observers say that Satyam might use its Bear Stearns relationship as a door-opener to JPMorgan, especially for technology work related to integration of the two companies and removal of duplication in operations. In addition to the outsourcing contract since November 2003, Satyam has had other relationships with Bear Stearns as well.

The bank was a joint lead manager of its sponsored offering of 13 million American depository shares three years ago. But the company will remember Bear Stearns for its role in one of its acquisitions. It was Bear Stearns that introduced Satyam and UK-based consultancy Citisoft to each other, leading to the acquisition of the latter by the former in 2005 for a total consideration of $38.7 million.

Bear Stearns was a common client of both companies and figured out that Satyam's technical skills and Citisoft's investment management expertise could do a lot better together.

Satyam was among the fastest growing IT companies in India during October-December. Its consolidated revenue grew by 8.1% sequentially to Rs 2,196 crore and the net profit rose 6 % to Rs 434 crore. The company expects 2007-08 revenue to match or exceed Rs 8,368.5 crore.