Shares of Satyam Computer Services Ltd have always traded at a discount to its peers, mainly owing to concerns about corporate governance. But the audacity of the move to buy out the promoter stake of Maytas Infra Ltd and Maytas Properties Ltd has surprised even its most ardent critics.
Satyam’s promoter group owns the two acquired companies as well and the way the markets are seeing it is that they have used surplus cash on Satyam’s balance sheet to cash out of their real estate and construction ventures. It’s no wonder Satyam’s American depository receipts more than halved in early trade on the New York Stock Exchange.
Here’s the deal: A majority of the $1.6 billion (Rs7,648 crore) payout will go to the promoter family of Satyam and related parties. For this, Satyam would have to not only use all of the cash on its books of about $1.1 billion, but would also have to add significantly to its current debt of Rs500 crore. With real estate and construction firms being desperately strapped for cash, one way to look at the deal is that it’s a bailout.
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One may argue that the promoter group may get this payout but would destroy the value of their shareholding in Satyam, a larger company. But promoter stake in Satyam is just 8.6%, which was valued at a mere $275 million prior to the deal announcement. The value of this would now fall to about $137 million, but compared to a payout of more than $1 billion, that loss hardly matters.
Whichever way one looks at the deal, it blatantly flouts corporate governance norms. One official from the mutual funds industry vented his frustration on a conference call with Satyam’s management, saying, “Do you realize what this deal could do to the perception of Indian companies by foreign investors? This will impact FDI (foreign direct investment) flow into the country.”
Incidentally, foreign institutional investors own nearly 47% of the company and are bound to try and stop the deal from happening.
The Satyam management seems to have foreseen this and have said that the decision has been taken unanimously by its board and doesn’t need shareholder approval.
If the company is able to go ahead with the deal, it would be a complete failure of corporate governance structures regulators have tried to put in place.
Considering the large amount of cash that’s involved and the fact that the promoter group stands to clearly benefit, minority shareholders of the company (with a 91.4% stake) must do everything possible to stop the deal. If a promoter with an 8.6% stake can get away with this, the mutual fund official’s statement could well be prophetic.