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Investment Opportunities
Dec
30
Lessons From Satyam Investor Issues
Filed Under IT BPO KPO Services, India Business, India Investment Opportunities, India Real Estate, Indian Companies, Indian Stock Market, Metros
The Satyam event has been on the centre stage on Indian business for the last two weeks. This year 2008 has shown us so many events in the financial space that we are primed for every kind of possibility.
The Satyam event has no precedence in the Indian business environment where most Board members unanimously vote for the agenda proposed by the Executive Chairman (who may have only a minority share holding).
Satyam stock lost almost 40% market value (falling from Rs 225 to Rs 135) over the last two week, though it has now recovered about 20% (Rs 160).
The events of the past two weeks have raised many questions, but all of them can be summarized into two basic issues:
1. The viability of Satyam’s strategy to diversify into unrelated business like Real Estate
While the debate remains hot, we did not see any projections or scenarios of how the Maytas deal would have given a better EPS for Satyam shareholders. As a Satyam shareholder, I was fine with diversification if the company leaders believe they can execute it.
Maytas has Rs12,000 crore of orders, so the order book is good, and profits can be made there. And the Indian real estate market has potential for many more players at the top-end level, who can do metro rails, airports, highways etc.
If Mukesh Ambani or Anil Ambani of Reliance starts a diversified business, the shareholders are happy that a new revenue stream will start. Its because Reliance has been diversifying into every possible industry. There is no reason to believe Satyam will fail, if the business plan is good. Raju understands the real estate business well, and Maytas looks like a healthy business.
Now whether the valuation being offered for Maytas by Satyam was fair-value is a different question, and that brings us to the second learning.
2. The effectiveness of Satyam’s corporate governance
Its likely that investors felt the valuation of $1.6 billion for Maytas for much higher, and there is no way to solve such a question expect by taking different views into account. You can’t push a valuation without the support of majority investors.
Since only 8.5% equity of Satyam was with Raju/promoters, and 61% with FIs, Satyam board should have done two things:
(a) passed the entire business plan and projections through the FIs, and got them on board, and their agreement.
(b) It would have been even better, if Satyam asked each of the three FIs to give their valuation for Maytas, and finalized an average of it as the proposed valuation.
If the above two steps we were done, its possible Satyam’s investors could have supported the deal.
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Related Stories:
- Satyam reveals Fraud after Fiasco (latest post: 7 Jan 2009
) Customers trust Satyam: Ramalinga Raju tells employees Satyam shares in demand on possible change of guard Ex-cabinet secretary Prasad to continue on Satyam board Now, Satyam board can not decide on buyback
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