India’s fourth-largest IT services provider, Satyam Computer Services, was compelled to rescind its previous day's decision to expand into real estate and infrastructure due to strong shareholder protests. This retraction came after the company's stock price plummeted by 30% on the Bombay Stock Exchange (BSE).
Satyam had initially planned to acquire Maytas Properties and Maytas Infra, two companies controlled and managed by the promoter family, for $1.6 billion (approximately Rs 7,680 crore).
Satyam Chairman B Ramalinga Raju expressed surprise at the market’s reaction but confirmed that the board had decided to “call off these actions in deference to the views expressed by many investors”. The promoters hold 8.7% in Satyam.
Institutional holders had strongly objected to the unexpected diversification decision, which was communicated to the BSE after trading hours without prior consultation with shareholders. Additionally, there were complaints that the money allocated for diversification was not being returned to shareholders.
The larger concern among the investor community is that this action might negatively affect Satyam’s core IT business. Sources within the industry indicated that six to eight clients with long-term engagements are reassessing their IT outsourcing contracts due to dissatisfaction with the company’s intent and focus.
Analysts were also critical. “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 of 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 stated, “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,” Vadlamani concluded.