‘I am surprised,’ says Ramalinga Raju, but defers to shareholder views.
India's fourth-largest IT services provider Satyam Computer Services was forced to reverse yesterday’s decision to diversify into real estate and infrastructure following strong shareholder protests that saw its stock price fall 30 per cent on the Bombay Stock Exchange (BSE).
Satyam had proposed to acquire Maytas Properties and Maytas Infra, companies controlled and run by the promoter family, for $1.6 billion (around Rs 7,680 crore).
Satyam Chairman B Ramalinga Raju expressed surprise at the market reaction to this decision but said the board "decided to call off these actions in deference to the views expressed by many investors". The promoters hold 8.7 per cent in Satyam.
Yesterday, institutional holders had strongly objected to the fact that the decision, which the company conveyed to the BSE after trading hours, was not communicated to shareholders first and that the company did not choose to give the money earmarked for diversification to shareholders.
| SATYAM: HOME TRUTHS |
| Why were shareholders angry? |
| * Satyam was investing Rs 7,680 crore in two group companies, Maytas Infra (51%), a listed firm, & Maytas Properties (100%) |
| * Raju family owns around 36% in Maytas Infra; Satyam chairman Ramalinga Raju’s older son B Teja Raju is vice-chairman |
| * Second son, Rama Raju Jr., is a key promoter in Maytas Properties |
| * Money was to go to the promoters of Maytas Properties |
| * Raju could have chosen other undervalued real estate properties |
| * Deal was not approved by shareholders |
| What does Satyam plan to do with the cash now? |
| * Issue a bonus/dividend or buy-back shares |
| * It has not commented on whether it’s looking at acquisitions |
| * But says it will do anything to restore shareholder confidence |
| ...but the damage may be long-lasting |
| * Stock battered — Satyam down 30.22% on the Bombay Stock Exchange |
| * Many analyst firms have downgraded it to ‘sell’ |
| * 6-8 clients ‘re-evaluating’ contracts |
| ...And the irony |
| * Satyam won the Golden Peacock Global Award for Excellence in Corporate Governance for 2008 |
Investor confidence eroded: Neither today’s move nor the corporate governance principle of “delighting (the) stakeholder”, as stated on the company’s website, did anything to restore investor confidence. Satyam saw Rs 4,610 crore wiped off its market capitalisation and several analyst firms have rated the company as a “sell”.
The Satyam scrip, however, rose in the US market, with its ADR zooming 49 per cent at midnight (IST).
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“Yesterday’s developments have eroded investor trust in the management and the board to take the company forward,” said a note from Religare Capital Markets.
“It would not be surprising to find Satyam’s management selling its stake to more established players and exiting the company, which in our view would be positive for the company,” the note added.
Investors force...
The larger concern for the investor communityis that this action might impact Satyam’s core IT business. Industry sources said six to eight clients with long-term engagements with the company are seriously re-valuating their IT outsourcing contracts "since they are not satisfied with the intent and focus of the company".
The analyst community, too, is riled. “Though it has retracted the decision, it shows the weakness of the management. It will do little to restore confidence in the company,” said Deven Choksey, managing director, KR Choksey Securities.
“While their intent gets exposed it also shows that they do not know how to use the cash. Besides, there is no guarantee that a similar action will not be taken again, since the management has said it will work out an investor-friendly deal,” he added.
“Today’s announcement to reverse the decision is the right move. However, it will take quite a while for the company to regain its credibility,” said Harit Shah, research analyst (IT and telecom) at Angel Broking.
Meanwhile, Satyam chief financial officer Srinivas Vadlamani today told reporters, “It’s a judgement call. We did a lot of background work on the buyout plans which were part of our overall diversification strategy.”
He added that “the characteristics of Maytas acquisitions are like any other buyout”.
“We followed everything under the spirit of the law. But we had not anticipated this situation. We don't want everything to go down the drain. We are working together to address the volatile reaction in the right way and restore our shareholders’ confidence,” he added.
Shareholder activism: Parallels are being drawn with the example of Vedanta group company Sterlite which announced a restructuring exercise that was perceived as detrimental to shareholder’s interest. Though the company cancelled these plans, the stock languishes below book value, noted Emkay Global Financial Services analysts.
Analysts also suggest that Satyam may go the Patni way in which the eldest brother is preventing other brothers from selling their stakes in the company, a controversy that has impacted its business prospects.
Religare Capital Market analysts, too, note that historical evidence suggests that neither the market nor clients forget mistakes made by the management of an IT company.
The investment banking community's reaction is no different. “It’s an out-an-out bad deal. All real estate and infrastructure firms have cash problems. So to that extent there was cash requirement but using a business that is cash-rich to bail out another which is nothing to do with the core business is absurd,” said one investment banker.
Ajay Garg, managing director of Equirus Capital, added: “A better deal could have been a three-way merger at a fair valuation without any cash payout to the promoters.”
Bankers do not feel this particular action will spell trouble for the IT industry, “I don’t think that Satyam was ever a bellwether for the IT industry. Rather Satyam’s valuations have always been a couple of notches lower due to corporate governance issue,” said a banker who did not wish to be named.