Satyam’s deal to take over Maytas may have been stymied, but has left analysts, stock holders and laymen aghast. Why was Satyam insistent on sharing its goodies with Maytas ? Moreover how were the promoters with merely 8 per cent of Satyam’s equity able to drive the “independent” board of directors? Or is the board not really “independent”? HNN examines.
Even as Satyam's deal to buy Maytas had to be hastily annulled in the wee hours of Wednesday morning as the company lost 52 per cent on its ADR listed on the New York Stock Exchange (NYSE), a credibility crisis has begun to grip India's fourth largest IT company. "How can we trust the management of this company and its board of directors after it tried to enter into a deal that prime facie would benefit only the promoters who just own 8 per cent of Satyam? We have to examine whether the management needs to be changed," cried analysts in a reflection of the deep anguish caused by the now stymied move.
"We have decided not to move ahead with the acquisition in deference to the investment community's views," said Satyam in an SMS sent out at 3.45 am to the media on Wednesday, clearly shaken by the reaction on the US bourse of its move announced barely 10 hours ago.
But this was clearly not enough to save the company: Satyam's stock tanked on the Indian bourses by 30 per cent, even after the company announced its decision to go back on the deal. "The deal was seen as Satyam buying into companies owned by its family members. Cash from a company where the Rajus own 8 per cent was being transferred to a company where they hold more than 35 per cent. This is what investors are resenting. It has become a corporate governance question. Whether the company can be trusted in future to take a proper decision is the moot point," pointed out another analyst. Satyam's scrip closed at Rs 158.05 which is a 52 week low.
"Nearly 58 per cent of Satyam is owned by FIIs and they had no inkling that such a deal was in the offing. There were questions about the future of Satyam after acquiring these companies when it doesn't have any experience in these businesses. It makes more sense to deploy your funds in related businesses or pay your investors," said Sourav Mahajan, analyst with Karvy.
Moreover, what irked investors was as to how Satyam decided to pay Rs 6,500 crore ($1.3 billion), just for Maytas Properties' assets, a land bank of 6,800 acres valued at almost Rs 1 crore per acre. "It is not easy to value real estate in this falling market. So there are questions on the valuation of the acquisition," said Monotosh Sinha, executive director of Centrum Capital.
Later in the day as the company started a firefighting exercise, Satyam's chief financial officer (CFO), Srinivasa Vadlamani told HNN: "We never anticipated this reaction. We underestimated it. We thought we could manage it." He also indicated that the deal had been on the table for the last few months claiming that for starters many other companies were looked at for being acquired. But the choice fell on Maytas Properties because it was zero debt unlike other companies that were in the consideration zone.
"As for Maytas, it had cash on its books. So, it was a judgment call and sometimes some judgments do not turn out to be good," Ram Mynampati, president of Satyam and a board member tried to reason.
Satyam’s move to acquire Maytas has now been stymied thanks to shareholder activism but has put the spotlight on the board of directors of the $2 billion plus company. The board had approved the deal “unanimously” against which the shareholders virtually revolted and Ramalinga Raju had touted this clearance as the basis for going ahead with the acquisition plan.
According to HNN investigations, 7 of the 9 members of Satyam’s board were physically present at the meeting, while two others were on conference call. All the independent directors said yes to the deal and only two family directors abstained because they were “ interested parties.” It is understood that the company’s board had been deliberating on this issue for the last three months. Interestingly members of the company’s audit committee were also present at the latest board meeting.
India’s fourth largest IT company’s board is star studded. Besides Ramalinga Raju, his brother and co founder Rama Raju, the board has the father of Pentium Vinod Dham, former union cabinet secretary T R Prasad, Dean of Indian School of Business (ISB) Rammohan Rao and former director of IIT Delhi U S Raju among others as members. Krishna Palepu who teaches at Harvard Business School and retired professor in many US universities Mangalam Srinivasan along with full time excutive Ram Mynampati also sit on the board.
“Forget experts, even laymen like me realise that there was something not correct with the deal. How is it that the directors did not question the deal? Do they sit on the board just to adorn the company ? “ asked an angry and dismayed corporate executive K Suresh.
“Independent directors cannot wash their hands off. It is their the duty to protect the interest of shareholders and not just that of the promoters. In this case the promoters hold less than 8 per cent of Satyam, so they should have scrutinised the proposed deal to see whether it was in the interest of other shareholders,” said Amitabha Guha, just retired deputy managing director of the State Bank of India.
“Well the case of Satyam demonstrates what corporate governance is all about in India. Company promoters want yes men and this so called independent directors agree to look the other way doing everything at the bidding of the promoters. I fail to understand how Ramalinga Raju with just 8 per cent shares was able to drive the independent board,” asked Monotosh Sinha executive director of Centrum Capital Ltd.
“It is strange that the independent board cleared such a deal. It is more strange that the deal was annulled in the wee -hours of the morning. Did the board meet again. Will Satyam tell us ?” asked Nandu Gupta, managing director of Insec Shre and Stockbroking Company.
Secretary general of Federation of Indian Chambers of Commerce and Industry (FICCI) Amit Mitra refusing to be drawn into a discussion of Satyam’s board, however says independent directors are inducted into company for their specific expertise and not for scrutinising deals. “ Different directors bring in different viewpoints and expertise. For example experts in marketing advise companies on marketing strategies, those are technology specialists bring in their technology expertise. so they can’t be blamed for everything,” Mitra said. But whatever Mitra may say the independent directors of Satyam have egg on their face. No denying that.
Recent dramatic development of Satyam calling off its $ 1.6 billion bailout bid of Maytas has put a doubt in the heads of major industry leaders keenly observing the NYSE-listed firms’ moves. They wonder if this was done to show stronger collaterals to financial institutions to raise funding for the metro rail project, given the dipping real estate valuations that Maytas Infra could have been banking on to raise money from the market to fund the project.
Senior industry persons point out that Satyam with its credentials of a major IT firm can still hope to raise more money as against an infrastructure firm in these times. Given that metro rail’s viability depends largely on real estate returns, banks could be shying away from lending for the project. “As against a land bank (the firm owns land along the three corridors of the project), a Satyam balance sheet is a stronger collateral, much more secure and more valid,’’ says a senior industry source, adding that once acquisition was in place, Maytas Infra would have been able to raise funding from financial institutions, banking heavily on the Satyam name.
“Given the subprime crisis the US faced, no bank would come forward to financially back the project. Satyam is a software company which is considered one of the finest in the country and I do wonder whether Ramalinga Raju was trying to work out something for the infra business with this deal,’’ ponders a senior official of an infrastructure major. He adds that Maytas would have become an ‘indirect’ Satyam company and posed as one during its interactions in the market for funds.
Industry observers say that the move to acquire Maytas does signal that Maytas Infra was not able to do its financial closure.
“There is a theory floating that the acquisition was perhaps aimed at funding the metro project through this route. But then, the bailout of $ 0.3 billion (for Maytas Infra) is only a fraction of the project’s cost of Rs 12,000 crore and, on the face of it, this logic doesn’t really stand,’’ says the head of a real estate firm. He, however, adds that it is only on a closer look one can realise how exactly Maytas infra would benefit from the Satyam name.
“Even without the acquisition, Maytas Infra may not have much of a standing in the market but for the common knowledge that the ‘parent’ firm is Satyam,’’ says a financial expert. Industry heads point out that metro project could well have been the reason to push the IT major into taking this messy decision.
Metro rail, the three corridor and 71 km project, is estimated to cost Rs 12,000 crore and industry experts speculate that the Maytas Infra led consortium would have to raise at least Rs 10,000 crore as debt from the market including loans from banks and financial institutions. Intriguingly, the government is not spending on the project with Maytas Infra not claiming a single penny under the ‘viability gap funding’. In fact, the consortium, which in a move not seen elsewhere in the country, will be paying the government for building the project. In return, it has got 296 acres of prime land from the government for commercial exploitation.
It made its first payment of Rs 11 crore in September this year at the time of signing the project agreement. It is now scheduled to pay Rs 50 crore in March 2009. In its fourth year, it is supposed to pay Rs 200 crore followed by Rs 100 crore in the 7th, 8th and 9th year of the project. From the project’s 17th to the 35th year, Rs 1,750 crore would be paid to the government per annum.
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