Unravelling events at Satyam Computer have not only brought India’s biggest corporate fraud to the fore, but has made a lot of investors poorer as its stock has plunged 75 per cent in the last three months. Things would have been even worse, had it not been for the new board’s moves towards infusing life into the company. The latest move is the invitation to various entities to bid for a majority stake in the company.
Bidding process
Although Satyam has not disclosed the list of bidders, Larsen & Toubro, Spice group, IGATE, Tech Mahindra and entities from the private equity and global software industry have reportedly expressed their intention to pick up a majority stake. Apart from the expression of interest (EOI), these bidders will also need to submit proof of funds (worth Rs 1,500 crore) available to qualify. Thereafter a shortlist would be prepared allowing the qualifiers selective access (subject to execution of certain agreements) to the company’s financial and other records. At the end of the process, Satyam would issue 30.28 crore shares (31 per cent stake) through the preferential route to the winner, who in turn, will also make an open offer for acquiring around 20 crore shares (20 per cent).
Pricing – anybody’s guess
The moot question however, is the pricing. Assigning a price at this stage is difficult as there are still several mysteries surrounding Satyam’s financials (like actual revenues, operating margins and receivables), businesses (like the tenure of major contracts, status of orders) and liabilities (law suits, claims).
One of the indications though is the amount of Rs 1,500 crore, which the bidders need to possess. Assuming this figure is for 50 crore shares, the value works out to Rs 30 per share.
On the other hand, considering the last audited financials (FY08) and assuming nil cash balances, the net asset are worth around Rs 2,500 crore or Rs 37 per share (about 18 per cent discount to market price).
On the flip side, various reports peg Satyam’s liabilities (including lawsuits, etc) in the region of $100 million to $1 billion, which will desist aggressive pricing. Nonetheless, experts expect the bidding price to be higher at Rs 40-60 per share, driven by Satyam’s vast client base, its intellectual property rights, etc. Says Apurva Shah, VP & head of equity research, Prabhudas Lilladher, “Given the uncertainties surrounding its potential legal liabilities and absence of detailed financials, putting a value on Satyam stock is a difficult task. However, given the likely number of bidders for the company I would be surprised to see a final price of less than Rs 60.”
What should you do?
Once the bidding process is completed, investor attention would shift to quality of new management and future course of action. The advice for investors now, says Ajay Parmar, head of research, Emkay Global, is that existing investors, who have bought at higher levels of Rs 200 and above, should remain invested for at least a quarter until further clarity emerges from the bidding process. They should assess the quality of the new management and impact on Satyam’s clients. And, for things to get clear, it will take about 2-3 months.