UPDATE 2-Satyam up on all-share merger talk

(Updates founders' stake, shares close)

By Sumeet Chatterjee and Janaki Krishnan

BANGALORE/MUMBAI, Jan 6 (Reuters) - Shares in Satyam Computer Services (SATY.BO) rose more than 7 percent on Tuesday following a newspaper report one of its smaller rivals had approached the embattled Indian outsourcer for an all-share merger.

Tech Mahindra (TEML.BO), a unit of tractor and utility vehicle maker Mahindra & Mahindra (MAHM.BO), is looking for a deal that could involve gaining control of a combined entity, the Economic Times said, citing an unnamed person with knowledge of the development. [ID:nBOM366195]

The report sent Tech Mahindra shares up as much as 14.6 percent despite officials from both companies denying it.

The vice chairman and managing director of Tech Mahindra said the company had not approached Satyam or its investment bankers with a merger proposal.

"It is pure fiction at this point in time," Vineet Nayyar told Reuters.

In a brief statement, Satyam said there was no truth to the report.

Another official at Tech Mahindra, which is 44.2 percent owned by Mahindra & Mahindra and 31 percent by Britain's BT Group Plc (BT.L), said the newspaper report was speculative.

"Anything before Satyam's board meeting...is so speculative that I just think we are getting ahead of ourselves," said C.P. Gurnani, head of Tech Mahindra's international operations.

Satyam's board is scheduled to meet on Saturday to consider options, including a share buyback.

Shares in Satyam, which has a market value of $2.5 billion, ended up 7.3 percent at 179.10 rupees, far outperforming a 0.6 percent gain on the Mumbai market .BSESN. Tech Mahindra rose 4.2 percent to 295.45 rupees.

Satyam stock slumped to a 5-year low late last month after its botched attempt to buy two firms in which the outsourcer's founders held stakes and after news it was barred from World Bank business.

The World Bank said last month Satyam had been barred from direct contracts for eight years for providing improper benefits to Bank staff.

Satyam shares have since rebounded by a third on speculation it could be a takeover target.