Only three years ago, Satyam was at the centre of India’s largest corporate fraud. On Wednesday it was the subject of a merger with Tech Mahindra, which already owns 43 per cent of the information technology group. While the fraud was eye-poppingly big, alas the deal will not give the combined group the scale to take on larger rivals.

In some ways, Satyam’s has been a textbook recovery from its brush with infamy (the founder admitted in early 2009 that he had been cooking the books for years). Client attrition rates have halved, gross margins have improved, and Satyam’s balance sheet is restored to health. It now has Rs23bn ($454m) in net cash, compared with Rs3bn in net debt once its accounts had been corrected in early 2009. The newly merged company will be India’s fifth largest outsourcing group by sales. Neither that, nor BT’s 13 per cent stake in the enlarged company, will cause Tech Mahindra and Satyam’s rivals any sleepless nights, however.

There is a simple reason: Tech Mahindra derives 90 per cent of revenues from telecoms companies. The merger does not redress that imbalance enough. The effect of slowing sales to telecoms clients is already visible in Tech Mahindra’s top line – revenue grew just 5 per cent in the past nine months from a year earlier, seven times slower than at HCL Technologies, India’s fourth-biggest outsourcer (where telecoms account for just a sixth of sales). In spite of Satyam’s exposure to other sectors, the merged company would still obtain about 60 per cent of its business from telecoms.

Size matters in outsourcing: the merged Tech Mahindra and Satyam will have only two-thirds the sales of HCL and just a quarter of Tata’s. India’s top four IT outsourcers have been gaining share of global contracts – their total contract value has grown by an average two-fifths each year since 2007, outpacing overall contract growth, Standard Chartered notes. Merging with Satyam will give Tech Mahindra another leg. But it will not be able to run that much faster.

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