Satyam founder Raju under fire for bid to buy sons’ firms (Roundup)

December 17th, 2008 - 12:55 am ICT by IANS  

Bangalore, Dec 16 (IANS) India’s fourth largest IT bellwether Satyam Computers Services late Tuesday drew a barrage of criticism after it announced a decision to spend $1.6 billion (Rs.79.2 billion) to buy real estate and infrastructure firms run by the sons of its founder-chairman B. Ramalinga Raju.In a hurriedly convened conference call, investors and analysts questioned the move by the Hyderabad-based software exporters to pay such a huge sum to acquire companies linked to Raju and raised concerns about corporate governance at Satyam and its credibility in the eyes of global clients and shareholders.

Wall Street made its displeasure known by pummeling the Satyam stock, which lost over 50 percent of its value on the New York Stock Exchange (NYSE) to $5.71 at 10.40 p.m. (IST).

Ramalinga Raju, however, justified the decision, saying it was part of a “good diversification strategy” and that it was only “incidental” the target companies were controlled by members of his family.

Earlier in the day, the listed firm informed the stock exchanges that it would spend $1.3 billion (Rs.64.35 billion) to buy a 100 percent stake in real estate firm Maytas Properties and $300 million (Rs.14.85 billion) for a 51 percent stake in Maytas Infra.

Hyderabad-based Maytas Properties is run by Rama Raju, the younger son of the Satyam founder, and Maytas Infra by Teja Raju, the elder son.

Satyam chief finance officer V. Srinivas would only say the valuation of the real estate firm was undertaken by one of the ‘big four’ auditing firms but declined to name which one.

Srinivas also described that the board’s decision to buy the two companies was “unanimous”.

Investors have also raised concerns over how Satyam would fund the proposed acquistions and its impact on its IT business.

Ramalinga Raju told analysts the privately held Maytas Properties was owned by a “combination of some members of the immediate family and other related investors” while the promoters owned a 36 percent stake in the infrastructure firm.

Satyam proposes to acquire a 31 percent stake in the listed Maytas Infra from the promoters at Rs.475 per share and make an open offer for a 20 percent stake at Rs.525 per share.

Ramalinga Raju said he expected the process to be completed in about three months.

The infrastructure company’s stock lost 2.26 percent to close at Rs.486 on the Bombay Stock Exchange (BSE), while the Satyam stock gained about 0.5 percent to Rs.226.50 in Tuesday trading.

Satyam’s announcement was made after trading had ended.

When analysts and fund managers wanted to know why Satyam’s robust balance-sheet was being saddled with acquisitions that would dilute margins, Ramalinga Raju argued that the infrastructure sector in India was poised for high growth in the years to come and that there would “not be much of dilution, especially at the earnings-per-share level.”

“The business model of IT services has become riskier and depends on the export market and currency fluctuations. Rather than buying just another IT asset, we decided to de-risk and diversify,” he maintained.

Satyam posted sales of Rs.81.37 billion and net profit of Rs.17.16 billion during the last fiscal to March 2008. At the end of September, the IT firm had cash and bank balances totalling Rs.53.13 billion.

Representatives of institutional investors on the conference call were highly critical of the fact that Satyam had taken a decision which would change the face of the company without consulting the shareholders and warned of their strong opposition to the planned deals.

Ramalinga Raju said Satyam had to make a “judgment call” and came to the conclusion that buying businesses unrelated to software but related to him personally was the best course.

Representatives of investors such as Templeton and Motilal Oswal complained that Satyam had no business buying real estate or infrastructure companies and that their investment in Satyam was because it was engaged in providing software services.

There was a “fair amount of analysis and evaluation” before the deal was announced but there was “no dialogue” with companies other than those which Satyam decided to buy, Ramalinga Raju added.

Rama Raju, the vice-chairman of Maytas Properties, would have no role to play in Satyam while a decision was yet to be taken about what part Teja Raju would play in the affairs of the software company.

The Satyam founder predicted that the share of the software and BPO business to the company’s revenue would fall to 50 percent over four-five years, with the rest coming from the acquired entities.

Maytas Infra posted a net profit of Rs.969 million on sales of Rs.18.74 billion during the 12 months to March 2008.

Asked if the decision was reversible, Raju declined to give a direct reply, only observing that “there are other parties involved”.

He also argued that the credibility of Satyam would not suffer in the eyes of its clients.

“If we do the right things and make the right moves, there is no way the acquisition will dilute our ability to service our existing clients.”

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