India’s fourth-largest IT services provider Satyam Computer Services was forced to reverse yesterday’s decision to diversify into real estate and infrastructure following strong shareholder protests that saw its stock price fall 30% on BSE.
Satyam had proposed to acquire Maytas Properties and Maytas Infra, companies controlled and run by the promoter family, for $1.6 billion (around Rs 7,680 crore).
Satyam Chairman B Ramalinga Raju expressed surprised at the market reaction to this decision but said the board “decided to call off these actions in deference to the views expressed by many investors”. The promoters hold 8.7% in Satyam.
Yesterday, institutional holders had strongly objected to the fact that the decision, which the company conveyed to the BSE after trading hours, was not communicated to shareholders first and that the company did not choose to give the money earmarked for diversification to shareholders.
The larger concern for the investor communityis that this action might impact Satyam’s core IT business. Industry sources said six to eight clients with long-term engagements with the company are seriously re-valuating their IT outsourcing contracts “since they are not satisfied with the intent and focus of the company”.
The analyst community, too, is riled. “Though it has retracted the decision, it shows the weakness of the management. It will do little to restore confidence in the company,” said Deven Choksey, managing director, KR Choksey Securities.
“While their intent gets exposed it also shows that they do not know how to use the cash. Besides, there is no guarantee that a similar action will not be taken again, since the management has said it will work out an investor-friendly deal,” he added.
“Today’s announcement to reverse the decision is the right move. However, it will take quite a while for the company to regain its credibility,” said Harit Shah, research analyst (IT and telecom) at Angel Broking.
Meanwhile, Satyam chief financial officer Srinivas Vadlamani today said, “It’s a judgement call. We did a lot of background work on the buyout plans which were part of our overall diversification strategy.”
He added that “the characteristics of Maytas acquisitions are like any other buyout”.
“We followed everything under the spirit of the law. But we had not anticipated this situation. We don’t want everything to go down the drain. We are working together to address the volatile reaction in the right way and restore our shareholders’ confidence,” he added.