Right in the Bread Basket

On October 5, 2001, when disinvestment minister, Arun Shourie

announced the government’s decision to sell off 51% stake in the state-run

computer software and maintenance firm CMC Limited (the erstwhile Computer

Maintenance Corporation) to Tata Sons for Rs 1.52 billion, there were eyebrows

were raised. Not on the deal however. What made TCS take the plunge when 14

other suitors–Wipro Limited, HP, Compaq et al–had decided to exit the scene?

With time running out, Tata Sons not only emerged the sole bidder, it also

quoted a price 40% higher than the reserve price.

While no clear indications came in from the former suitors,

there was speculation about them quitting because there was not much synergy in

the line of business. So what made TCS venture into the territory that others

thought was forbidden? Is it an attempt to enhance the company’s pre-IPO

valuation or has TCS been able to identify areas of synergy that others may have

missed? But lets talk about the deal first.

In a statement issued to the media, the government said that

it has approved induction of Tata Sons as a strategic partner in CMC. According

to information available, the government got Rs 197 a share for CMC. While this

is 40% higher than the reserve price it had decided for disinvestment of this

public sector unit (PSU), it nevertheless was at a discount of 7.79% from its

closing price on the Bombay Stock Exchange (BSE) the same day. ‘‘Since the

Tata Sons bid was higher than the reserve price, the cabinet decided to accept

it,’’ disinvestment minister Arun Shourie said.

But that is not all. Under the Indian Takeover law, it is

essential for any investor acquiring more than 15% of a company to make an open

offer to the public shareholders to buy a minimum of 20% additional stake. What

this means is that TCS will also need to make an open offer to acquire an

additional 20% stake at a price equal to the average of CMC’s share price over

the last six months. According to the deal, the government, which currently

holds 83.31% in the company, will also sell 6% stake to the employees who would

have to pay only one third of the bid price or the market price, whichever is

lower. The buyers of the government stake would, however, be locked in to CMC

for a period of two years.

The ‘why’ factor

According to a senior TCS official, the acquisition opens a

creditable window to the domestic market. While CMC is one of the biggest

players in the local market, TCS has virtually no presence in the Rs 9,500 crore

domestic IT Services market. Despite the fact that the Tata Group may not have a

big share of the domestic market, it is more than six times bigger than CMC in

terms of revenues.

Experts suggest a more acceptable reason. Despite the fact

that CMC has not been performing too well during the last FY–its growth rate

dipped from 35% during 1999-2000 to 18% in 2000-01–what attracted TCS is the

stranglehold it has on the government market. In revenue terms, this accounts

for 34% of CMC’s total domestic market business. CMC is also a preferred

vendor to public sector banks that together account for 16% of the domestic IT

market. What’s more, in niche segments such as maintenance and support, which

is Rs 450 crore domestic market, CMC is the undisputed leader with an

overwhelming 70% market share.

Interestingly, while TCS is still working out the details of

the deal and may perhaps even come out with the offer price by the time this

report is published, there are two other companies working out their merger

deals too. Remember the HP-Compaq merger?

SHUBHENDU PARTH in

New Delhi