With investor groups flagging down Satyam Computer Services' share buyback plan, the management of the fourth largest IT services firm is looking at other options to pacify its shareholders. This includes diluting promoters' stake. This follows a 40.75% drop in the scrip value of the firm after it did a flip-flop on the Maytas deal, where the firm was to shell out around $2 billion to acquire promoter owned firms in an unrelated business area of infrastructure and real estate development. This proposal was to be taken back after a strong protest from institutional shareholders.
Now the IT services provider has that it has appointed DSP Merrill Lynch as a merchant banker to review and suggest a plan to increase shareholder value. In the last two weeks, Satyam saw a 40% erosion in its market capitalisation. So what does this mean? It's likely Satyam may sell out.
Global IT services firms, including IBM, Accenture and Cap Gemini, could be suitors for Satyam, according to media reports. Satyam's willingness to dilute promoters stake also makes it vulnerable to private equity firms who are always on the lookout for troubled family run businesses. One factor which could be weighing on any prospective acquirer is that the firm is now available at realistic valuations after the current turn of events.
Satyam has now postponed its board meeting which was to be held on December 29, and said that the management in its next meeting will "consider to increase the size and alter the composition of the board, while effecting a change in the governance structure of the company."
The board meeting would now be held on January 10 to consider, as B Ramalinga Raju, Chairman and Founder of Satyam said, additional strategic options and issues arising from a possible dilution of the promoter's stake in the company
"Satyam takes the interests of its stakeholders very seriously, and we will take whatever steps necessary to reinforce their trust and confidence in the company," Raju added.
It may be recalled that on Tuesday, December 16, after market hours, Satyam founder-chairman B. Ramalinga Raju announced that the tech firm would acquire construction and real estate firms floated by him and his sons for $1.6 billion - a deal that raised concerns abroad over corporate governance besides serious concerns over valuations of promoter group firms.
After its announcement, foreign investors, who own nearly 47% of Satyam's stock turned heavy sellers, hammering down Satyam's ADRs listed in New York Stock Exchange (NYSE) by 55 % from $12.55 to $5.70. The stock at BSE reacted in a similar fashion and the firm's Indian shares plunged 30% to a 4-year low on Wednesday at BSE. To add to Satyam's woes, in an unrelated development the World Bank barred Satyam for eight years on charges of bribery and theft of information.
Fearing a backlash and clearing its stand, Satyam hastily announced that "Board did not anticipate the market's reaction". Going into a damage control mode, the management also announced that it would meet on December 29 to consider buy back of shares and issuance of dividends, a declaration to regain investor confidence. The satyam episode has raised several questions on corporate governance and on the decision-taking abilities of the existing management of Satyam. While the promoters stake in the company is 8.74%, FIIs hold about 47 per cent. The recent turn of events may see a significant reduction in Raju's stake in the company.