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Friday, December 11, 2009

Satyam Computer More Questions than Answers

As James Friedman of Susquehanna Financial Group aptly observed, it is the “reckless behavior with regard to corporate governance and cash balance usage for other considerations while its (Satyam’s) peers instead are contemplating and/or pursuing share repurchases” that angered the shareholders of Satyam Computer so much that they simply dumped it.

It is an apt observation because, according to Oxford dictionary, ‘reckless’ means ‘having no regard for danger or consequences’, and obviously any behavior that springs out of such recklessness is sure to land anybody in trouble. And that is what indeed has happened to Satyam Computer Services.

Coming to the facts, Satyam Computer Services, the fourth largest software export company of India, recently announced its decision to diversify into realty and infrastructure to de-risk itself. Accordingly, it decided to acquire stakes in two companies: acquisition of 100% stake in Maytas Properties, a realty firm run by Rama Raju, the younger son of Ramalinga Raju, Chairman of Satyam Computer Services; and two, 51% stake in Maytas Infra, a listed company run by Teja Raju, the elder son of the Chairman of the Satyam Computer. These two companies, owned by the family members of Satyam’s Chairman, were to be acquired for a total consideration of $1.6 bn.

Satyam Computer Services claimed that these proposed acquisitions would diversify Satyam into infrastructure and realty, which are inherently considered to be more profitable in the long run, particularly, in difficult times, besides being assets acquired at better valuation, which is, of course, a result of the current downtrend in the stock market. But shareholders and fund managers fumed with anger at Satyam’s decision to acquire family-owned businesses with the shareholders’ money, that too, businesses that have no relationship whatsoever with the IT business of Satyam. These proposed acquisitions were considered by the fund managers as a stark attempt by Raju’s family, which holds a mere 8.5% stake in Satyam, to transfer the wealth from Satyam, into family-owned businesses. Angered by the move, Foreign Institutional Investors dumped the ADRs in New York stock exchange, driving down its price from $12 to $5.70—a straight fall of more than 58%. In the domestic stock market, the scrip suffered a fall of 36%.

The whole episode raises a battery of questions: First, can one believe Satyam’s claim that the acquisitions were suggested strictly on an arm’s length basis? The answer to this question is anybody’s guess, for some investment bankers hold the opinion that all real estate businesses are suffering from cash problems, and using a cash-rich company that has nothing to do with realty business to bail them out is a bad idea. Second, what is the role of independent directors in transactions of this nature? Interestingly, Satyam has some of the well-known intellectuals from the fields of technology and management education on its board: M Ramamohana Rao, Dean, ISB; Krishna Palepu, Professor, Harvard Business School; and Vinod Dham, father of first Intel chip, among a few others. It is hard to believe that such independent directors would just kowtow to the interests of promoters. As claimed by the company, did they discuss the deal threadbare and come to the conclusion that the acquisition of these two firms would de-risk the earnings of Satyam? Did they really foresee that Satyam is no longer geared enough to compete for business in the fast changing global IT scenario and hence felt that acquisitions of realty business, whose valuations are to the advantage of the acquiring firm, would put the idle cash to a strategic use? As Satyam has all along been sitting over a heap of cash—to be precise it has cash reserves of Rs 8,234 cr ($1.7 bn)—it is, of course, possible that the board might have genuinely felt that in the absence of any profitable avenue of investment within IT space, the company needs to diversify, maybe into infrastructure/realty. Here, it is also pertinent to keep in mind that had the firms proposed for acquisition not been owned by Raju’s family, the investors would not have reacted so wildly.

This leads us to our next question: Why did Satyam reverse the decision if the deal was truly meant for de-risking? If the board of directors had discussed the move threadbare before coming to the conclusion that the proposed acquisition was a strategic move to further improve the shareholders’ value, the company should have spiritedly defended its decision. Of course, their heeding to the sharp reaction of its stakeholders, all within a day, shows the company’s respect for the feelings of its investors. But by then, a lot of damage has been done, and this has exposed the hollowness of the company’s managerial skills.

There are a few more queries: Does all this mean flouting  of corporate governance? Would it ultimately pose any threat to Satyam’s business prospects? These two questions are sure to haunt the company, at least for some time to come, for flouting of corporate governance by an IT services provider will certainly impact the way its customers look at it. Their business being what it is, outsourcing clients are certainly sensitive to such violations concerning corporate governance. Which means, it will no longer be hunky-dory for Satyam to acquire new clients—it has to certainly do a lot of explanation to win back the customers’ confidence. After all, that is what ‘reckless behavior’ is known to invite: more questions than solutions.

- GRK Murty


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