Satyam tumbles amid governance fears, merger overtures

BANGALORE, Jan 5 - Shares in Satyam Computer Services <SATY.BO> tumbled as much as 9 percent on Monday amid concern that corporate governance issues could hit new business at India's fourth-biggest software services exporter.

The Business Standard newspaper earlier reported that Satyam management and some funds had approached two smaller rivals about a merger to fend off any possible hostile bid. One of the firms told Reuters it was not interested.

"Confidence in Satyam has clearly been dented and they will have to struggle very hard to get new deals in the near future," said Tejas Doshi, head of research at broker Sushil Finance. "We feel that within the information technology services sector there are other good companies worth looking at."

Satyam shares have come under fire since mid-December when the software exporter was forced by irate investors to ditch an attempt to buy two construction firms in which Satyam's founders held stakes.

The stock slumped to a 5-year low late last month after it was barred from World Bank business, but recovered 31 percent last week on talk that a reduction in the stake held by the company's founders made Satyam a more attractive takeover target.

The outsourcer said on Friday its founder's holding had fallen by a third to 5.13 percent.

Broker JP Morgan said in a report dated Friday it believed Satyam, which is also listed in New York <SAY.N>, could see some "business pull-back" from top global customers if the corporate governance worries continued, adding that staff morale was low.

The broker cut Satyam's revenue estimates for the 2010-11 financial year by 10-11 percent.

"With most clients looking at vendor consolidation as they finalise 2009 IT budgets, Satyam is likely to lose out in some cases," said JP Morgan, which has an underweight rating on Satyam.

Satyam has hired the local unit of Merrill Lynch to look at how to boost shareholder value and rebuild investor confidence. Its board is scheduled to meet on Saturday to consider options, including a share buyback.

"While we think a smooth management change would be positive for the stock, the market has not factored in a potential disruption to business caused by uncertainty by the management/ownership change," UBS said in a Friday report.

"A prolonged period of uncertainty would be detrimental to Satyam," said the broker, which has a sell rating on Satyam.

"New contract wins will be the first to be impacted."