Rarely can investors have forced a company to conform with international business ethics so swiftly and effectively.
Yesterday evening (India time), after local stock markets closed, Satyam Computer Services, one of India’s leading software companies, announced it was spending $1.6bn of Satyam’s surplus cash to buy out two Maytas real estate and construction companies controlled by the Raju family that founded and controlled Satyam.
Late yesterday (US time), it cancelled the deal after being hit both by the New York stock market that marked its price down 55%, and by vitriolic attacks from investors and analysts.
Such are the effects of globalization, especially in a downturn when investors look harder at deals that might be glossed over in a boom market. Satyam’s corporate governance has been questioned before but rarely has an Indian company been brought into line so rapidly and publicly.
The deal, which does not seem to have been discussed with shareholders outside the Raju circle, was challenged in this morning’s Indian business papers. The Business Standard said Hyderabad-based Satyam was “under fire”, and Mint asked quizzically “Will Maytas help Satyam turn around?”.
The markets were harsher, and Satyam’s shares (American Depository Receipts) lost 55% in New York amid a chorus of criticisms from foreign institutional investors that own a majority in the company. (The ADRs recovered half that loss after the deal was cancelled).
“This clearly raises questions about what kind of corporate governance you have in other Indian companies. That could hurt foreign investment”, Reuters reported Sachin Jain, a Jefferies & Co analyst, as saying.
Satyam reacted rapidly and cancelled the deal, less than 12 hours after it was announced. “In deference to the views expressed by many investors, we have decided to call off these acquisitions,” Ramalinga Raju, Satyam’s founder chairman, said in a statement.
Satyam had announced it planned to enter the depressed construction industry, where the Raju family has had interests for some time, by buying privately held Maytas Properties for $1.3bn and 51% of Maytas Infra for $300m. Ramalinga Raju and his associates own 36% in Maytas Infra and 35% in Maytas Properties.
Raju, who was chairman of NASSCOM, India’s prestigious software industry federation, in 2006-07, claimed that the Maytas companies would help “de-risk” Satyam against a downturn in the software business.
But as Reuters reported, analysts questioned the motives of Satyam’s top executives and pointed to a potential conflict of interest because they hold stakes in both companies.
Clearly the deals made little sense when technology outsourcing companies are preserving cash to help weather the global economic slowdown, and when the construction and real estate businesses are harder hit than IT.
“The company has lost investor confidence. Rescinding the offer does not restore that confidence,” said Janney Montgomery Scott analyst Joe Foresi. “The credibility of Satyam’s board of directors and its management is at rock bottom,” said Global Equities Research analyst Trip Chowdhry.
There’s a lesson here for many other Indian companies – foreign investors are no longer the over-excited and unquestioning buyers that they used to be.
And a message for India’s old-style business families: Put questionable deals on the back burner – they may be legal but the markets won’t like them.
See three later reports on this blog:
and an earlier one: