Posted by: John Elliott | December 17, 2008

Markets kick Satyam into line – but India’s reputation for corporate governance is hit

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:


  1. […]… and […]

  2. […] what  has happened – an accusation that was thrown at this blog in several comments when I first wrote about Satyam’s problems last […]

  3. […] after about ten hours last month triggered a series of events that culminated in today’s news)…  Markets kicks Satyam into […]

  4. thanks Shaan – yes I saw the story about the World Bank cancelling the contract – because, according to Fox News, quoting a World Bank official, Satyam provided “improper benefits to bank staff” and there was a “lack of documentation on invoices”. It’s in all the Indian newspapers this morning, but see the Fox report that started the news break on,2933,470964,00.html
    Satyam denied the ban when asked by India’s Mint newspaper in October – see

  5. Did you hear the news about the World Bank canceling its contract with Satyam? I think the board should be sacked.

  6. The Satyam Maytas story has been given a lot of undue attention by the media which was shocked when the Satyam Board announced the acquisition decision. The media which always manages to sniff anything was taken by surprise this time! ‘cos Satyam managed to maintain secrecy of the discussions. The media which got hammered ‘cos of the way it covered Mumbai terror attacks is now going to get regulated by the new regulations which will make it a lil more responsible. The business media should take a hint from the general news media and not wait for regulations to be implemented to tell them how to be responsible channels towards both corporates and society by showing the truth and not leading discussions out of their imagination of truth.

    I am as a person who had worked with Satyam for about 10 years pained by the way the media back home in India is questioning the governance of a reputed company like Satyam.

    I am sure Satyam that will come out stronger out of this situation. The Board would certainly take steps to ensure that stakeholder wealth that had been reduced over the last couple of days would grow again at an accelerated pace.

  7. Not to sound too optimistic, i still think the investors missed the big picture.

    Being one of the top 5 integrated IT-BPO firms, a lot rides on Satyam to set and exceed benchmarks. Take a look the history of the company. Satyam was the first to start an Internet Service Provider company with top notch customer care and uptime – Satyam Infoway. Satyam Infoway later became the first Indian ISP to be listed in NASDAQ. The JV with Dun and Bradsheet was strategic and robust enough to become a spin-off independent company. This spin off is now known as Cognizant Technology Solutions. The World Economic Forum held in the year 2000 at Davos recognized Satyam as one of the 100 most pioneering technology companies.

    And the list goes on…

    The point is, one can find several such examples where strategic and visionary decisions taken by the same management panned out damn well. I listen to all earnings calls conducted by Satyam at the end of each quarter/ year and investors love the numbers. May be we missed the vision behind this Maytas deal. Why would a proprietor of a cash rich firm risk all of the cash if he is not sure of what he is doing?

    My detailed thoughts on this here :

  8. From Tuesday through Friday, Satyam’s shareholders have lost 25% of their wealth, thanks to Satyam management’s decisions. CEO heads have rolled for lot less but in India, a buy-back seems enough to appease everyone. Meanwhile, Satyam, because of its ADR’s will get hit with suits that will become class action and eventually will settle, again costing shareholders more money. It will also spend a lot of money on “restoring” its brand, aka more shareholder money wasted on recovering from management’s decision.
    So what does it take for someone like Raju to admit his actions have cost huge amounts of money for the very shareholders he is sworn to protect and enrich?

  9. thank for all the comments – but I’m amazed that you are all now giving Raju the benefit of the doubt. He tried to change the nature of Satyam business without giving non-Raju-circle shareholders any chance to have a say – that would have been bad enough without the added unethical ingredient of him and his family owning both companies.

    Now he has cleverly diverted attention with his share buy-back idea. As analysts have pointed out, his offer will have to be at a price higher than it was before his announcement to have any value for outside shareholders. If he buys back at the current price he will get a bargain!

  10. I think we are getting too critcial here as this is not a question about the intent of Satyam management but about the judgement. They might have gone wrong in assessing an opportunity but not with a tainted intent. If not anything, the benefit of doubt can go in favour of Satyam, this time.

  11. Hi John

    I am not sure who fanning the media, but this is the same media which didnt show its maturity the way they it covered the Mumbai blast, the media at times need some news to fill it columns and it seems Satyam was the choice for those 2 days

    I do agree that managements across the globe are far more vulenrable to scrutiny now than ever and incidents i beileve will help managements and organziations to grow in maturity to manage the stakeholders expectations

  12. Interesting observations on reputation ( loss of it) of Satyam. Now that Satyam has backed out of the deal and wants to make amends to restore investors confidence.. I think Raju deserves another chance.

    What should Raju do restore the image / reputation of Satyam ? There is an insightful piece on Mint today that has Image and Brands experts offering counsel…perhaps Raju and Satyam will be better off picking advise given there..


    MINT link for those interested –

  13. Hi John. I am an ardent reader of your blog from a long time now. LEt me make it clear that I have nothing to do with Satyam. I agree with you that markets make sure that companies conform to the established standards of ethics and integrity. What I am not comfortable with is the fact that the mainstream media is portraying this as a hanky-panky affair. Satyam’s decision to retract the deal immediately following the negative shareholder reaction is also in good spirit. The management has apologised and that’s as far as any company can go. I really want to know who is fanning the flames here.

  14. thanks RC – the noise was not started by the media. It began in New York when analysts and FII’s attacked the decision and marked the ADRs down. That was reflected in the media. All the media reporting I saw (including mine in the post above) was fair and balanced – apart from The Economic Times which was unbalanced.

  15. What is wrong in making a drastic move to protect shareholder capital and the growth trajectory of the company. I remember such a concerted tirade when Wipro switched to IT when they were making soaps and cooking oil. There is nothing wrong if a promoter wants to diversify into other industries to de-risk ‘the group’ and to maintain the historical growth record. I think the the noise by media only suggests that Satyam as a brand enjoys terrific equity and the investors really care for the strategic direction it takes. I don’t think anyone was wrong here – neither the Satyam board nor the noisy investors

  16. Hi Amit, Rehan, Venkatesh, Rakesh and Srinivas – thanks for your comments!

    I’m always intrigued when suddenly there’s a surge of comments in one direction – in this case suggesting that Satyam was somehow the victim of bad media reporting, proved its loyalty to shareholders by cancelling the deal, and impeccable corporate governance.

    Were you all acting in concert, so to speak?

    The facts of course don’t support your views – but I must add that I am intrigued by the massive negative coverage given by The Economic Times which spread anti-Satyam stories across half its front page and nearly a page and a half inside the paper this morning (Dec 18).

    Any suggestions about who’s inspired such one-sided reporting?

  17. Compelety agree with the last point made by Venkatesh. Satyam has consistently proved its mettle for more than two decades now. so, lets not get carried away by just what the media says.

    i am 100% certain that time will show who was right.

  18. This is a good case for investor activism. But the way the story is being presented to general public gives a feeling that media has stopped a crime in progress. Media must appreciate that Raju himself proactively gave them every information they wanted on the deal. But it is good that a company of Satyam’s stature and cash reserves has actually addressed investor ire by back tracking on the deal. This should serve Satyam well.

  19. I will not comment on whether this decision is right or wrong, whether this is right de-risking of business model or not. Individuals and corporates can make mistakes – two things emerge out of this:
    Investor community is active and then can vent their anger and ask for a correction. The same was very well received by the promoters of satyam

    No doubts can be raised on Corporate Governance of Satyam as impeccable values of Satyam and the promoters are widely known across India

  20. The fact that Satyam reversed its decision within hours of receiving feedback from its shareholders has gone unnoticed. It it wasn’t for the concern that the management had for the shareholders they would not have done so. We need to look at the positive aspect which Satyam showed by giving respect given to the shareholders.

    Plus the work done by Satyam in bringing Hyderabad onto the global IT map cannot go unnoticed. They have worked hard to bring this city up and ensure that this becomes the hub for the best organizaitions.

  21. I think it was a sharp business move which was unconvential, as one reads the fine print it seems that they have not voilated any rules or law of the land, what it seems to be more of a question of bad communication or miscommunication

  22. And about time too. Some of India’s best known corporate names have blithely ignored issues of governance for years . Transparency of their accounting practices leaves much to be desired and auditors have often had major conflicts of interest without being picked up by regulators. Investment banks have not done due diligence before launching issues. This is just that bit much more blatant and therefore got what it deserved. Let’s hope that Indian investors and analysts follow the lesson inflicted by the international markets and recover their critical faculties. Maybe this is the first positive development of the disastrous situation of markets!

  23. What was the board of directors of Satyam thinking? Such a brazen and patently dishonest act that violated the most basic tenets of corporate governance was bound to get the violent reaction that it did and has done irreparable damage to the already somewhat dubious reputation of the promoters. Case in point–the satyam stock has always quoted at a much lower price earnings mutiple than those of its peers, over the last many years, precisely because of the persistent doubts the market had on corporate governance issues. However, it would be unreasonable to paint the other big Indian corporates in the IT sector with the same brush, as their corporate governance record, and transparency in business dealings and communication with shareholders, has been generally good.

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