"What’s in a name?" exclaimed Shakespeare. How true he was. "Satyam", a Sanskrit word, means truth. Ironically, there is not truth attached to the Satyam we are going to talk about in the report hereunder.
In an announcement made a few minutes back, Satyam, India’s fourth largest software services company has called off its intentions of investing in two promoter group companies dealing in infrastructure projects. This is seemingly on the back of severe criticism that the management faced after it announced this move yesterday.
The 55% decline the company’s ADR (American Depository receipts, or shares listed in the US) yesterday must also have led to this change in management’s intentions of making a deal that would have been detrimental to you, the minority investor in Satyam.
As a matter of fact, the company yesterday announced its ‘diworseification’ into infrastructure business. The management termed it a good move at a time when the software services business is facing slowdown.
What is indeed more shocking is that Satyam planned to spend US$ 1.6 bn to buy stakes in two promoter group companies - Maytas Infra and Maytas Properties. Simply put, the cash on Satyam’s balance sheet, a part of which is owned by you, would have been shifted to the promoter of Maytas, which is the same promoter family. Maytas is in fact owned and managed by the son of Mr. Ramalinga Raju, the Chairman of Satyam who himself has a very small (8.6%) stake in the company.
We believe that by entering into this deal without the approval from other shareholders in the first place, Satyam brought tremendous insult to corporate governance practices that India Inc. otherwise boasts of. There is now a feeling of disgrace on the practices that the management adopted to transfer your money to his family and that too without needing your approval. A better use of excess cash on the balance sheet could probably have been by way of higher dividends, or share buyback.
While going back on these detrimental intentions might lead to Satyam save a run on its stock in the Indian markets today, we believe it has set an alarm for minority investors on how bad management practices can deal a blow to their investments in companies such as these.
And remember, Satyam is not the lone player with such intentions. We earlier talked about how minority investors of Reliance Infrastructure (erstwhile Reliance Energy) were duped by the company’s promoter who transferred the company’s power assets to another group company (Reliance Power) that came out with a mega IPO earlier this year.
Caveat emptor - buyer beware - can never have a better explanation than in situations like these.
For Equitymaster subscribers: We shall soon update our research report on Satyam factoring in our latest view on the management's practices and subsequent impact on the company's growth prospects.