The Tata Sons’ takeover of Computer Maintenance Corporation shows that it is possible to privatise without controversy

The monsoon session of Parliament wasn’t a particularly happy time for disinvestment minister Arun Shourie. The Balco hangover and planned big-ticket divestments, such as Indian Airlines and Air-India, saw many charges flying inside the House and out of it. Apart from the standard accusations of selling the family silver, thee were charges of underhand deals, favouritism and corporate skulduggery. It was not the Opposition alone; several members of the NDA coalition, including some of Shourie’s Cabinet colleagues, were doing all they could to stall the privatisation process.

So it should come as a relief to him that the next two privatisations have gone through with scarce a murmur. In fact, most observers see the Tata Sons’ acquisition of a 51 per cent stake in Computer Maintenance Corporation (CMC) as a win-win situation. There is, likewise, a lot of synergy in the Himachal futuristic Communications Ltd. Purchase of a 74 per cent holding in HTL Ltd. “It will kickstart the entire process of disinvestment,” says an analyst. There was a danger that it was getting bogged down.

Though it is technically Tata Sons that has taken over CMC, it will be Tata Consultancy Services (TCS), a division of Tata Sons, that will manage the company. TCS is India'’ largest software company and this, no doubt, played a part in making the deal so attractive. TCS CEO S. Ramadorai explains that everything went smoothly because of three reasons. First, the ministry of information technology, under which CMC falls, and the ministry of disinvestment saw eye to eye on the matter. 9In other words, there wee no ministers or bureaucrats putting up roadblocks.) Secondly, this is a growth industry and different yardsticks apply. (There is no legacy of redundant labour.)

Thirdly, the employees were in favour of disinvestment. “All the stakeholders were for it.” says Ramadorai.

But, even though the story has a happy ending at the moment, there was the possibility of the deal getting derailed. When the bids wee thrown open, there were 14 bidders, five international and nine Indian. Ultimately, however, only two - CDC (which was basically an association of CMC employees) and Tata Sons - remained in the fray. CDC could not come up with a bank guarantee and, with only one eligible player left, Tata Sons got CMC on a platter. Opponents of privatisation did suggest that a fresh round of bidding be called for, but it found no takers in the government. “The government took a decision to go ahead and it stuck by that decision,” says Ramadorai.

There was some carping on the price too. Prior to the divestment, the CMC share had been riding high, bucking the market trend. In fact, it reached a peak of Rs.315. Against this, the Tata Sons’s offering of Rs.152 crore worked out to just Rs.196 crore worked out to just Rs.196 a share. This has led to suspicions that the share price was being rigged just to scupper the privatisation. CMC has a low floating stock of around 17 per cent (83.31 per cent is with the government) and it does not need much money to manipulate prices. In fact, the Securities & Exchange Board of India (Sebi) is conducting an enquiry into the share price movements.

But the ministry of disinvestment had not only done its homework this time, but had also been transparent about it. The valuation of CMC had been done under various methods. These wee the discounted cash flow method (calculated value for 100 per cent of the company Rs.213.5 crore), asset valuation method (Rs.37.6 crore), balance sheet method (Rs.72.7 crore). And comparable companies method (Rs.102.5 crore). Based on this, the evaluation committee had fixed the reserve price at rs.108.8 crore for a 51 per cent stake. The Tata Sons’ bid was significantly above this.

But the CMC divestment actually demonstrates what Business India has been saying all along. Start with successful companies; they won’t be too full of people who are afraid of getting sacked. Start small; a big ticket item or a company considered a “national treasure” is bound to be more difficult to sell. Use these to set the pace, then there won’t be so many problems when the bigger units are put on the block.

While the CMC deal is cut and dried, some formalities remain. Tata Sons will have to make an open offer for the shares, which at the time of writing it was proposing to do at rs.281, which is the six-month average price under the Sebi takeover guidelines. This is significantly more than the price paid to the government. But that’s entirely a function of the average market price. There is no proposal to delist the company.

What does CMC bring to the table that makes it so attractive a deal for TCS? Explains Rajeev Gupta, executive vice-president of DSP Merrill Lynch, which brokered the deal from the Tata side: “There are two types of takeovers. One could be for business synergies, which enable one to enhance values. The other could be for strategic reasons. From TCS’s standpoint, the takeover of CMC has been for strategic reasons. CMC has a significant market share in India in software development. Besides, TCS has little exposure in domain knowledge areas in railways, ports, power utilities, oil and gas. CMC has a large and comprehensive high quality exposure in these areas.” 

Explains an analyst: “ CMC has domestic sales of Rs.442 crore, which is about 85 per cent of its total revenues. (For TCS, the figure is a low 10 per cent.) What CMC brings with it is that a third of its total revenues come from the government. In the maintenance and services segment of the Indian market, which is about Rs.450 crore, CMC has a lion’s share of 70 per cent. As part of the deal, for the next two years TCS is guaranteed government business. This means that revenues are assured during that period while TCS uses its expertise to build on this base.”

Ramadorai says that CMC brings to the table its expertise in infrastructure development, its domestic orientation and its presence in very specialised areas of education and training (“ Not the Lotus Notes sort of training.”) TCS itself is a whale on training, but its in-house demands are so high that it has not been able to hawk its services to customers. With the CMC deal, it can hope to leverage that.

Besides, CMC has a lot of untapped potential. According to an analyst, the company has been growing at 22 per cent compounded over a five-year period. But the Indian IT services industry has seen growth at 45 per cent compounded. CMC is bound to grow more rapidly now given the managerial input that TCS is known for. For TCS, which could be hit because of the slowdown in the West after the terrorist attacks, the domestic market adds another string to its bow. Actually, though one-third of its manpower is deployed on domestic projects, it accounts for only 10 per cent of revenues. This is a reflection of the rates for domestic projects compared with those abroad. The margins may be lower. “But the domestic business is very important for TCS,” says Ramadorai. “ After all, we are the creators of the IT industry in this country.”

While the CMC deal has its obvious pluses, will the integration be smooth? The obvious fear is that both have different corporate cultures. There are also reservations on what role the current CMC bras will have in the running of the company. The new CMC board structure that has been announced, will have six members from the Tata group, four public representatives and two from the government. Does that leave no place for people from CMC? No, says Ramadorai. “Once CMC is taken over, they will be Tata group people. We can appoint them as Tata representatives..”

But the fact does remain that some employees made a bid for the company. They may accept a Tata takeover, but will they co-operate? “You can’t expect all the people to subscribe to the same views," says Ramadorai. “It is the job of professional managers to change mindsets.”

CMC has some 3,200 professionals (TCS has 18,000). So isn’t it a tall order putting them all through the grind? “Not really,” ex plains another TCS hand. “We train 3,000 entry level people each year anyway.”

But, though pink slips are not being looked at right now, thee could be some who fall by the wayside. At TCS, under performers are left in no doubt about their rating. They are not given any additional domain responsibility, they stay at the same level. The CMC staff who don’t shape up to the high TCS standards may be similarly sidelined.

That’s in the future. Today, a six-member team has got down to the job of integrating CMC’s operations with that of TCS. Meanwhile, the company’s mainline business goes on. “TCS has three strong planks: consulting, product and outsourcing,” says Ravi Gopinath, head, manufaturing and process industry practice. “TCS’s goal is to earn its stripes as an efficiency creator; when you think of solutions, think of TCS. Our goal is to help clients ramp up operational efficiencies and deliver on he bottom line.”

N. Chandrasekaran, vice president e-business and head Seepz Delivery Centre, talks about E-TCS, the big new initiative in the company. “It is a process to digitise all businesses within TCS, whether they are on-site or off-site. It is a business process re-engineering which will offer real-time data. The benefits: one can identify the process with data points, see trend analysis and monitor feedback flow. This will be between various communities not just in India but across the globe. Whether it is software or hardware, corporate agents, business associates, suppliers, alumni or consultants, they can interact at various levels and exchange ideas.” A lot of money has been spent in putting E-TCS in place, but the company is not willing to spell out how much.

These initiatives will pay off in time. In the short-term, however, is the Rs.3,142crore,leading IT player in India with 89 offices in 24 countries and projects in 50 countries, going to face the pinch of the slowdown? Ramadorai agrees that the number of people visiting the country from abroad has fallen close to zero and sourcing of software from India has been frozen. But that is not going to have any short-term effect. In the medium term, he expects the situation to return to normal. “TCS will continue to double its revenues every two-and-a-half years,” he says. “And we will deliver a healthy bottom line by industry standards.” He adds: “Growth is not going to come from projects alone. It is going to come from leveraging our intellectual assets.” The company is upping its spending on R&D and training. CMC will also be a beneficiary in this exercise.

CMC will continue to operate as an independent company, however, though the 51 per cent holding means that its accounts can be consolidated with parent Tata Sons. Nor is thee any proposal to merge the various Tata Infotech interests, a subject of much speculation in the media. Ramadorai says that the various companies-Tata Infotech, Tata Elxsi, Tata Interactive Systems and Tata Technologies to name a few - operate in niche areas and thee are no great benefits out of any merger. There is anyway cross-pollination at the top because some of the board members are common.

On the other key question that always rises when TCS is mentioned, Ramadorai sees an answer soon. “Yes, the company is thinking about a public issue a lot more seriously than in the past,” he says. But no decision has been taken as yet. Nor is it settled whether it will be a domestic or an international issue.

At one time, when IT stocks were flying high, TCS could easily have been the most valuable Indian company if it had gone public. Today, it will still be way up here with the stars, even though the valuations may not be stratospheric. But investors will have to wait for the Tatas to take the plunge. In the meantime, thanks to the CMC takeover, that scrip could well serve as a proxy. It is obviously no real indicator. Bu sentiment-driven marketmen could see in the CMC price movements the shape of things to come for the TCS stock.