A sharp surge in the shares of Satyam Computer Services means its new parent will likely need a second preferential issue to gain a majority stake in the company at the centre of India's biggest corporate fraud.
Tech Mahindra won a auction in April for control of Satyam. It bought a 31 percent stake of new equity, and on Friday launches an open offer to buy up to 20 percent of shares in the open market at 58 rupees a share to take its stake to 51 percent.
But Satyam shares now stand at 80.85 rupees, having risen by their daily 10 percent limit on each of the three days since the firm released financial details on Tuesday that showed it remained profitable despite the fraud.
"Logically, people will not tender their shares for a price that is sharply lower than the current market price, even if we assume some correction in the days ahead," said Tejas Doshi, head of research at Mumbai brokerage Sushil Finance.
Tech Mahindra can revise the offer price till June 22, but analysts see little reason for it to do so.
If the offer is not fully subscribed, under the auction conditions Tech Mahindra can opt for a second preferential issue from Satyam to raise its stake to not more than 51 percent of the further expanded share capital.
"I don't see any reason why Tech Mahindra would raise their offer price," Doshi said. "They would prefer to spend money that goes back to the company it has acquired than giving it to the shareholders."
If Tech Mahindra did seek another issue of new Satyam stock, it would dilute existing shareholders equity.
Officials at Tech Mahindra, based in western Indian city of Pune, were not immediately available to comment on the offer.
Satyam's founder and chairman shocked investors in January by saying profits had been overstated for years, putting in doubt the survival of a company once ranked as India's fourth-largest software services exporter.
Tech Mahindra, a unit of tractor and utility vehicle maker Mahindra & Mahindra and 31 percent-owned by Britain's BT Group, made a bid worth around $580 million in April's auction for a controlling stake by the new Satyam board.
PRESSURE ON BALANCE SHEET
Brokerage Religare said while the challenges of integration, growth revival and potential liabilities remained, near-term sentiment would remain positive on the Tech Mahindra stock due to the better-than-expected Satyam financials.
It rates the Tech Mahindra stock at hold with a target price of 694 rupees.
Shares in Tech Mahindra was trading 1 percent higher at 793 rupees at 0656 GMT on Thursday. The stock has more than doubled since winning the bid for Satyam on Apr. 13, taking its market value to $2 billion.
Harit Shah, a sector analyst with Angel Broking, said Tech Mahindra may have to opt for the second preferential issue of Satyam shares, or increase its stake through permitted market purchases of up to five percent of shares each fiscal year.
"However, in the event that Tech Mahindra raises the open offer price, this would entail additional pressure on its balance sheet, which would warrant a re-look at our estimates," he said.
Kotak Mahindra Capital and UBS are managers of Tech Mahindra's public offer, which closes on July 1.