Satyam's decision was rank bad in spirit

MUMBAI: It took Satyam Computer Services 21 years to build the credibility it enjoyed till Tuesday afternoon. One decision announced after the market closed on Tuesday threatens to vapourise all that.

The company, whose promoterse hold under 8.6% stake worth about Rs 1,450 crore, has decided to buy Maytas Properties (run by Satyam chairman Ramalinga Raju’s younger son B Rama Raju), an infrastructure company, and 51% stake in Maytas Infrastructure, run by Raju’s elder son Teja, by using all the cash the till-now debt-free company had.
Satyam had reserves and surplus of Rs 8,235 crore as on September 30, 2008. Of this, nearly Rs 7,100 crore will go to the family now.

Bhavatosh Vajpayee and Nimish Joshi, analysts with CLSA Asia-Pacific Markets, in a stinging comment after the deal announcement said while the decision to acquire an unrelated business is bad enough, the implicit enrichment of Satyam’s promoters using Satyam’s cash pile is likely to be a permanently game-changing event.

“We see eroding focus, business momentum and market credibility (issues) ahead,” they said, calling it one of the worst corporate governance events in India.
What’s the promoters’ rationale behind what is, by their own admission, “unconventional diversification”? Because the next one year is tough for IT.

The analyst call that followed the announcement was something chairman Ramalinga Raju, CFO Srinivas Vadlamani and president, healthcare and international business, Ram Mynampati would rather forget.

There were insinuations of filial aggrandisement — family pocketing the money rather than give it back to shareholders through a buyback — at the call.

Certainly, there is a corporate governance issue here, because the deal hurts minority shareholders.

Institutional shareholders are no less miffed. Franklin Templeton, the mutual fund giant, has said it will go to any level to stop the decision.

To say how foggy the management has been on the deal, just listen to the answers it gave at a conference call following the announcement on Tuesday evening:

Who were the advisers to deal?
Ramalinga Raju: We have taken the help of a Big Four firm.

Can you name the firm?
Raju: We can’t, because of confidentiality clauses.

How was the valuation arrived at?
No clear answer.

Does the money go to promoters?
Raju: It’s not as simple as that.

Will it go to the promoters of Maytas Properties (the Raju family has 35% stake)? It will. Do you understand that no foreign investor will touch an Indian company after this move? Why didn’t you let the shareholder decide where to put the money?
Raju: The point is this is a decision that has been made based on a judgement call we took.

But minority shareholder wealth is getting affected by this decision…
Raju: If valuation is right, what is the problem?
Srinivas Vadlamani, CFO: Look at the landbank for Maytas: It’s 6,800 acres of prime land in and around Hyderabad, Chennai, Nagpur, Vizag. There is a potential to build 245m square feet. DLF has a landbank of 10,000 acres. They have potential to build 750m square feet. Now look at the valuations: Despite the price crash, DLF is valued at Rs 60,000 crore. Now this particular company being acquired at Rs 6,000 crore.

While the management’s thesis that infrastructure has better potential than IT has validity, who will answer the question of the millions of Satyam Computer shareholders — that they didn’t invest in Satyam, an infrastructure firm, but Satyam the IT company that’s the epitome of the Indian software dream?

They could have directly invested in Maytas Infra, even? This is faith-shattering.
Also, it leaves Satyam with a large pile of debt — and no cash reserves at a time when the IT sector is going through turmoil.

If this is allowed to happen in so arbitrary a manner, who is to stop promoters of other companies from doing such unrelated diversifications just based on board resolutions?
Someone needs to save minority shareholders from minority promoters.