| Had the company considered only Maytas Infra, things would not have been worse |
‘Investors sought to know as to why the company did not put the matter for ratification of an emergency general meeting’.
failed attempt: IT professionals at Satyam Computer Services in Hyderabad.
No corporate house must have been battered as much as Satyam in the recent times. The company’s announcement of acquisition of Maytas Infra and Maytas Properties turned it into a punching bag for investors, broking houses, analysts, and, of course, the media.
What actually went wrong with the Hyderabad-based IT bellwether that went to occupy the enviable position of being the fourth largest IT services provider in India? What drove the company to amalgamate its “own and very own” companies — Maytas Infra and Maytas Properties — into itself? Will the ‘misreading of the market’ by Satyam bosses trigger a leadership change, as it is being made out by analysts? Markets are abuzz with several such questions.
In spite of occasional brickbats from some quarters, the company always basked in the afterglow of numerous achievements, including the Golden Peacock Award for excellence in corporate governance. Never had Satyam’s prestige, which rode on the crest of its popularity, hit its nadir like now.
Why did Chairman Byrraju Ramalinga Raju give a thought to diversify from the IT business in the first place and enter infrastructure and real estate sectors? Consider two scenarios.
By his own admission in several interviews soon after announcing the decision of acquisition, Mr. Raju thought that the two acquisitions would pave way for an accelerated growth in additional geographies and market segments such as transportation, energy and several infrastructure sectors for the core IT business, besides de-risking IT.
In such a case, the IT major would have maintained the growth it has anticipated. And, the company expected a bullish reaction from the market and steep rise in its stock price in the hour of economic downturn.
He remained committed to his views even after the company “reversed the decision eight hours after the announcement,” as observed by Srinivas Vadlamani, Chief Financial Officer.
In the second scenario, assume that Mr. Raju considered a bailout package for the two companies headed by his offspring — Teja Raju (Maytas Infra) and Rama Raju Jr. (Maytas Properties) — Maytas Infra would have benefited by becoming a vertical of over $3 billion combined entity. For the company’s net worth would have easily fetched it contracts for huge projects and it wouldn’t have had to depend on consortia for taking up projects. Satyam proposed to take a controlling stake of 51 per cent in Maytas Infra by paying $0.3 billion.
The acquisition of the privately-held Maytas Properties, valued at $1.3 billion, would have served two purposes. (1) large-scale cash flow into the immediate and extended family of Mr. Raju that would be useful to unlock the potential of the assets held by them and (2) Maytas Infra and Maytas Properties would have complemented each other’s functions in terms of securing contracts and executing the work due to the ‘swollen balance sheet including that of Satyam’.
Had Satyam considered only Maytas Infra, things wouldn’t have been worse. On the other hand, the share price of the combined entity would have jacked up, said an insider.
But investors threw the proverbial spanner in the wheel pushing the two listed entities — Satyam Computer Services and Maytas Infra — into a spin. The promoter’s group is an interested party in the target companies. Can the two companies ever make up for the loss of credibility and market capitalisation in the near future is a “billion-dollar question” staring at them.
While investors sought to know as to why the company did not put the matter for consideration and ratification of an emergency general meeting, analysts talked about leadership change. Ambareesh Baliga, Vice-President, Karvy Broking, felt that large investors might push for a leadership change. Edelweiss in a report said: “Satyam’s proposed acquisition of Maytas Properties (unlisted) and Maytas Infra (listed) marks a new low in the conduct and integrity of corporate governance in our view notwithstanding that it has called it off later.” In fact, Mr. Baliga predicted that the P/E (market value of the share divided by earnings per share) multiple of the company would come down to four or five.
Analysts Angel Broking went to the extent of calling the deal “dubious” and that it could hurt India’s corporate governance perceptions.
Independent directors on the board, however, strongly came in support of the decision. Dean of Indian School of Business Mendu Rammohan Rao, who chaired the session as the interested parties exited the board meeting, said, the company made a presentation to the Board and expressed the facts that there was likely to be a slowdown in the growth of the IT software services industry, that in the next five years, margins would be squeezed. Business growth would shift from mature economies, where the business of software services originally thrived, to developing economies. It was therefore important for the company to diversify.
The company had been valuated by one of the “big four” global accounting firms, it was a conservative valuation. Besides, the proposal from Satyam was lesser than the valuation. It therefore made sense to go with the proposal.
The largest stakeholder, the Rajus, have 8.6 per cent (largest stakeholder group) of the 67.34 crore shares. Institutions have 61 per cent and the remaining is held by the public.
Will the share buyback instil confidence among investors is another big question. Mr. Baliga felt that the company might choose the “safest” market purchase route, instead of going in for an open offer, for the company must buy in the ‘open offer’. It is only a conjecture of time before the board of directors decides the buyback pattern on December 29.
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