Satyam Shares Nosedive on Allegations of Bad Governance

Satyam Computer Services (SAY) shares lost more than half their value Tuesday after the company announced a pair of related acquisitions that have triggered allegations of extremely bad corporate governance.

More specifically, Satyam says it has agreed to buy 100% of Maytas Properties, a developer of master planned communities and other projects, and 51% of Maytas Infra, which provides infrastructure construction, including highways, railways, ports and other projects. Satyam is paying $1.3 billion for Maytas Properties, and $300 million for its Maytas Infra stake, or $1.6 billion combined.

There does not seem to be any obvious synergy with the company’s core IT outsourcing business, which alone would raise red flags. But as analysts noted Tuesday, the two Maytas companies are controlled by Satyam Chairman B. Ramalinga Raju and his associates. The analysts note that the deals basically transfer all of Satyam’s cash - something north of $1.1 billion - to Raju. You’d be hard pressed to come up with a deal the Street would find more detestable.

• J.P. Morgan’s Manoj Singla Tuesday cut his rating on the stock to Underweight from Overweight. He says the effective transfer of all of Satyam’s balance sheet cash to Raju and other promoters of the two companies is “a serious corporate governance issue,” and advised investors to avoid the stock.
• UBS’ Govind Agarwal writes that the deals are “a big negative,” that there are no synergies in the transactions, and that the deal raises “serious doubts over corporate governance.” He contends the deal is not likely to go through.
• Credit Suisse’s Bhuvnesh Singh notes that Satyam’s “promoters and related entitites” hold 36% of Maytas Infras and 100% of Maytas properties; the two deals combined hand them $1.48 billion in cash. He also says there are “significant corporate governance issues” here, and says that “the risk of shareholder activism against the deal is not insignificant.” He keeps his Underperform rating on the stock.
• Standard & Poor’s analyst Dylan Cathers cut his rating on the stock to Hold from Buy, noting that not only would the company have to pay out all of its $1.1 billion in cash, but it will would have to raise additional capital to complete the deal. He cut his price target on the stock to $6, from $11.

Meanwhile, the deal seems to have cast a pall over other Indian IT outsourcing stocks.

SAY Tuesday was down $5.70, or 54.6%, to $6.85.

Among other outsourcing stocks, Cognizant (CTSH) was down 15 cents, or 0.9%, to $17.22; Infosys (INFY) was up 19 cents, or 0.8%, to $24.07; and Wipro (WIT) was up 28 cents, or 3.8%, to $7.69.

Comments

[Robert Nabloid:]

I'd stay away from Raju!!! Not only is he weakening the balance sheet of Satyam during a recession by extracting all that cash for HIMSELF (What?!>!), but he's forcing shareholders to buy another company in an unrelated field from HIMSELF!!! If it was a good deal, he wouldn't be selling 100% stake in the property company - he'd keep it. Instead, he walks away with cash and he still has some stake in the company through Satyam. Win-win for him! Lose-lose for shareholders!

The property company scares! I'm worried about liabilities from a property company that probably has HIGH debt levels in a recessionary economic time where credit is tight. Buyer beware! Who decides how much Satyam should pay for the company? Conflict of interest anyone?

Is he extracting all the cash and equity from a failing company while he can? Why take the cash out to begin with? I think the Maytas Property company is in trouble. Red Flag Alert! Many property companies are on the verge of failing and he conveniently sells HIS company to the public company he runs for a big cash deal? RED FLAG, BUYER BEWARE.

2008 Dec 16 06:02 PM

[donzelion:]

The only thing different about Satyam and most other major family owned/operated enterprises in the emerging markets is that in India, investors have a chance of finding out about such insider deals.

In China, Russia, and the Middle East, the Satyam details would never get published. Wherever the press is gagged or bought off, there are no investors - only gamblers thinking they can put one over on somebody else.

2008 Dec 26 04:17 PM