India's Tech Mahindra will pay more than $550 million for a controlling stake in Satyam Computer Services , throwing a lifeline to the fraud-hit firm and propelling itself into the top tier of Indian outsourcing firms.

Tech Mahindra, 31 percent owned by Britain's BT Group Plc , beat engineering conglomerate Larsen & Toubro , which many analysts had seen as front runner, as well as private equity firm WL Ross & Co to be the highest bidder for a stake of up to 51 percent in the company at the center of India's biggest corporate scandal.

Satyam's sale could help restore confidence in India's IT services sector at a time when the global economic downturn has slowed growth. But Tech Mahindra will still have to move quickly to restore stability at its target.

Tech Mahindra will really have to act fast now and if they don't ... client erosion will continue at Satyam, said Tarun Sisodia, head of research at Anand Rathi Financial Services.

Three months ago, Satyam's founder and chairman shocked investors 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.

The government quickly stepped in and sacked the board to limit damage to India's once-shining IT sector.

CALCULATED RISK

Mumbai-headquartered Tech Mahindra said it would meet Satyam clients such as Citigroup Inc and Cisco Systems Inc to help restore confidence.

We have taken on a challenge but we are going to make it work, Chairman Anand Mahindra told reporters. We have taken a very calculated risk ... We think they are reasonable risks, but there are going to be risks.

With the buy, Tech Mahindra will be better equipped to wrest market share from rivals Tata Consultancy Services , Infosys Technologies and Wipro , and diversify away from telecoms, analysts said.

Satyam's annual revenue fell to about $1.5 billion at the end of the March and could fall to $1.3 billion in the year to end-June, Tech Mahindra CEO Vineet Nayyar said.

The bid has to be approved by the Company Law Board, which expects Satyam to seek approval within two to three days.

Tech Mahindra will pay $351 million for a 31 percent preferential allotment of new shares and will then make an open offer for a further 20 percent of the company at a cost of up to around $225 million.

The holders of Satyam's American Depository Shares would be able to participate in the public offer.

Tech Mahindra plans to raise 6 billion rupees through the sale of bonds, sources told Reuters.

The combined entity will have about 73,000 staff and Tech Mahindra will become India's fourth-largest outsourcing firm from a current ranking of sixth.

Tech Mahindra, a unit of tractor and utility vehicle maker Mahindra & Mahindra , offered 58 rupees a share, a premium of 23 percent to Satyam's previous close.

Tech Mahindra shares surged by as much as 25 percent after Larsen & Toubro, which owns 12 percent of Satyam, was reported to be out of the race, but trimmed gains to end up 12.3 percent at 359.45 rupees, their highest close in nearly six months.

Satyam shares rose 3.6 percent to 48.85 rupees, after earlier jumping more than 16 percent to a nine-week high.

UNCERTAINTY OVER VALUATION

Analysts have said Satyam, which means truth in Sanskrit, looks attractive due to its long list of blue chip clients. However, they were unsure how to value the company due to uncertainty about its accounts and legal liabilities arising from lawsuits filed in the United States by its shareholders.

The vast majority of Satyam's customers have stayed on through the stake sale, Karnik said. Staffing has dropped by about 5,000 from 53,000 reported at end-September.

Tech Mahindra's Nayyar said the bid was made after an assessment of legal liabilities, but said Satyam's financial viability and retention of clients would be key challenges.

Satyam has not reported results since releasing July-September figures in October. Its accounts are in the process of being restated.

Satyam's board had appointed Goldman Sachs and Avendus Capital to find a strategic investor. Tech Mahindra was advised by Kotak Investment Banking and UBS .

(Additional reporting by Prashant Mehra, Narayanan Somasundaram and Devidutta Tripathy; Writing by Sumeet Chatterjee and John Mair; Editing by David Holmes)

($1=49.9 rupees)

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