Satyam Computer Services and Corporate Governance

Satyam's Ramalinga Raju

Corporate Governance:

Today Satyam Computer Services was in the midst of news - for all the wrong reasons...

For the uninitiated: Established in 1987 by Ramalinga Raju, Satyam Computer Services has more than 51,000 employees on its payroll. In 2008, the company’s revenues crossed the $2-billion mark - and stands tall as the fourth (4th) largest Indian IT services company after TCS, Infosys and Wipro.

Satyam is among the youngest of all IT companies to cross $1 billion in revenue and sits on a cash reserves of more than $1.2 billion!

Now what can possibly go wrong with an organization with such great numbers?

Let me unfold story bit by bit - like a movie screenplay :)

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It also started yesterday when Satyam announced "Apple-style-span" style="color:rgb(51,0,0);">t
he acquisition of the privately held Maytas Properties for $1.3 billion and increasing its stake in Maytas Infra to 51 per cent for $300 million.

The company immediately faced strong negative reaction from its shareholders and its ADRs (American Depository Receipts) were down 55%, when Satyam management acknowledgeed the market sentiments and abruptly called off the acquisition.

Now one may think that market reacted strongly because Satyam was deviating from its core business. 

The discrepancy was obvious... Satyam - an IT services company was buying Maytas Properties and Maytas Infra - companies into a different business altogether.

Maytas Properties is a scale player in development of urban space infrastructure such as integrated townships, special economic zones, hospitality, retail and entertainment spaces in tier I and II cities across India.

Maytas Infra is engaged in the business of infrastructure construction and asset development spanning core areas of economic growth such as highways, metro/railways, ports, transport management systems, airports, power, oil and gas, irrigation and water treatment.

But Satyam founder Ramalinga Raju had a 'valid justification' for that as well. He said the acquisitions would pave the way for accelerated growth in new geographies and market segments such as transportation, energy and infrastructure sectors for the core IT business.

"The buyout will de-risk the core business by bootstrapping a new business vertical in infrastructure. This market segment can mitigate the risks attributed to developed markets and traditional verticals that are likely to be impacted by the recessionary economy," Ramalinga Raju had said in a statement.

Satyam was exhausting its entire $1.3 billion cash on non-core businesses - something unheard of any reputed organization. But that is not all!

That is not the only reason why Satyam stock was hammered so ruthlessly...that is not th reason why Raju had to call off the acquisition after facing a strong criticism from all the investors.

To understand the real reason - let's see the background of target companies.

If you were just told that the name of acquired companies, 'Maytas' is actually 'Satyam' spelled backwards...you would sense something fishy about it! But that is not all...

Now add to that a 'small' detail that - Maytas properties and Maytas Infra is currently owned and run by B Rama Raju and Teja Raju respectively - who happen to be sons of Ramalinga Raju ...what a coincidence!!!

So to put everything in perspective:

Satyam Computer Services (of which Raju owns just about 8%) is exhausting all of its $1.2 billion in cash to buy-out two Maytas companies, owned by Raju's sons...that too for non-core businesses, with justification of 'de-risking'!!!

So effectively, Raju is turning Satyam's cash (belonging to all shareholders of Satyam - and not just Raju) to his sons. This is a complete mockery of Corporate Governance!

The media, the shareholders and analysts have put Ramalinga Raju under fire. Investors and shareh

olders have lost faith in the management. They feel that Satyam has betrayed them.

Even though Satyam's deal with Maytas has been called off, it has completely shattered investors' confidence, which is clearly seen in the way the stock is being pounded. Even after cancelling the deal, Satyam stock fell almost 30% today. 

Although the company may have no malified intentions in the acquisition, this is definitely not a good strategic move to enter into a sector like infrastructure, which is itself in bad shape. The justification by the chairman is not satisfying. After all, the funding of this deal would have been from its core business which is information technology.

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This incidence is first of its kind in the Corporate India - but it has raised many serious questions about Corporate Governance - something that has not been discussed and debated much in Corporate India till now...

Funnily enough I am currently reading a very interesting book on Warren Buffet's investment philosophy (more about that book soon!!!) and to put my knowledge into application, I was looking for Indian companies satisfying the suggested criteria.

Surprisingly, Satyam Computer Services is one such good bet - with string fundamentals, healthy cash surplus, good financial ratios...and most importantly the right price! (The stock is almost at it's 52-week low)

But the numbers don't say anything about issues such as management vision, corporate governance, organizational culture - things that could have such a great impat on its future earnings!

Little that an investor who invested in Satyam 2-days back would have known about Corporate Governance (??) that Satyam has shown in Maytas...but for no fault of his, the investor has been hammered badly...who is to be blamed for this?

The institution

al investors and other biggies are considering ousting the Satyam management for not considering shareholder's interest...if that is done that will be a welcome decision that would send a strong message to top management of all firms - that they are there to serve interest of primary shareholders...