The Street is miffed that Larsen and Toubro has picked up a 12 per cent stake in Satyam Computers. Brokerage Morgan Stanley has said, “We (in line with the rest of the market) viewed the development with mounting concern.” While the average price per share may be just Rs 80 per share, the Rs 650 crore paid out so far isn’t insignificant at around 20 per cent of the current year’s consolidated profit forecasts. The stock has lost nearly Rs 8,000 crore in terms of market capitalisation since the end of December—the stock is down 17.6 per cent compared with a fall of 6.7 per cent for the Sensex.
It’s surprising that L&T is buying into Satyam even though several weeks after the fraud, Satyam is still a bit of a black box. If there are fresh revelations coming in, they’re only more alarming. When L&T Capital bought the first 4 per cent holding after Satyam’s aborted acquisition of Maytas Infrastructure, L&T justified the purchase saying it was a strategic stake—it felt L&T Infotech could partner Satyam, bid for projects together and compete against bigger players. One could give L&T the benefit of the doubt because the fraud hadn’t yet been discovered and no one knew that the Rs 6,000 crore cash didn’t exist. And no client had complained about the quality of Satyam’s services.
But once Ramalinga Raju confessed that he had cooked the books, it became increasingly clear that apart from the financials being in a shambles, Satyam was vulnerable to a host of class action and civil suits especially in America, not to mention other liabilities. Independent directors were resigning, auditors admitted to irregularities, even the number of employees turned out to be lower than originally estimated. There was also the forgery case with Upaid. Why then did L&T pick up an additional 8 per cent?
L&T says it did so to protect its initial investment, it believes there is ‘embedded value’ in Satyam. Since a fresh balance sheet hasn’t been created, we don’t know what Satyam’s financials look like but for 2008-09, the firm reported revenues of Rs 8,473 crore. At Rs 5,000 crore, L&T has valued Satyam roughly at 0.6 times market capitalisation to trailing sales; for Infosys the multiple is 4.4. That could be argued to be a cheap buy, even if Infosys has $4 billion of cash and Satyam has none. But this should not end up being a penny-wise-pound-foolish deal which it could well turn out to be, given the high level of risk relating to the legal liabilities.
L&T chairman and managing director A M Naik claims he has some clarity on the liabilities, which strangely enough, no one else seems to have. It would have been wonderful if he had shared this information with shareholders because they would have been reassured. He also claims he is in touch with everyone connected with the Satyam issue—whether in the government or on the board of the company. So does that mean Mr Naik is privy to some information that others are not? It’s not clear how L&T plans to play this deal from here on. Is it planning to up its stake and hoping to be spared from making an open offer since this is an exceptional case?
An open offer at Rs 275 per share (as per SEBI rules) would cost around Rs 3,700 crore if 20 per cent of the equity was acquired. Has the government assured L&T that the open offer price would be reduced substantially? It’s another matter that L&T should not be given preferential treatment and other options such as open bidding should be allowed to be fair to others. The key issue here is, how is L&T going to make this work? Also, there’s the governance question of whether Mr Naik should take shareholder approval before committing so much of the company’s resources. Has the L&T board discussed the transaction?
Also, Mr Naik says that through L&T Infotech he has been in touch with some of Satyam’s clients who have said they are willing to stay on. Sure, some may. But it’s more likely that some of them—the bigger ones probably—will move to TCS, Infosys or Wipro, even if it means paying more, or the Tier II players like Patni or EDS. Also, simply because a CEO and CFO are appointed, it doesn’t mean the company is back in business. Even in the best of times alliances and acquisitions don’t always work too well. At Satyam it’s going to take even longer to make things work and integrating the operations of L&T Infotech with those of Satyam will not be easy. Besides, it would distract the management at a time when the core business is in a bit of a spot with the economy slowing down and orders expected to be delayed. If L&T does somehow manage to buy Satyam’s business without the liabilities, it might be well worth the effort. But, as of now it would seem that the management has acted in haste.