Angel Broking: Satyam Computer Services, after deciding to acquire a 51% stake in Maytas Infrastructure, a listed infrastructure company and a 100% stake in Maytas Properties decided to call off the deal following stiff resistance from its shareholders.

According to the contours of the deal, Satyam was to acquire 31% from the promoters of Maytas Infrastructure at Rs475 a share and would make an open offer for 20% more at Rs525 a share.

The value of the transaction amounted to a significant $1.6bn (Rs7,680 crore, at Rs48 to a Dollar). The company had said that this is part of its diversification strategy. Satyam was to take on debt to the extent of $400mn, with the balance $1.2bn being financed through its internal cash pile.
Management views the current business environment in the IT Services Business as challenging and this was the explanation given for this entirely unrelated diversification into the Infrastructure and Real Estate Sector.

We viewed this as totally unnecessary and were unconvinced by the explanations about the “synergies” and “shareholder value creation” that the management has given in the conference call.
There are several issues, such as the complete lack of any Corporate Governance standards, the blatant conflict of interest prevalent in these transactions, the business logic itself being questionable and the inability of the management to think long-term and ride out business cycles. A slowdown is facing the entire economy and not just the IT Services Business. Thus, management explanations on this issue do not wash with us.

Besides this, the huge valuation accorded to Maytas Properties ($1.3 billion), in spite of the fact that valuations of Real Estate companies have taken a beating in this market and are facing major liquidity issues with a slowdown in demand, is another issue. We believe these steps being taken by the management of Satyam were definitely not in shareholders’ interests. After the shrill opposition to the deal by shareholders, the management has backed out and called it off.

It should be noted that though the ADR was down over 50%, a recovery was witnessed in after-hours trading on the NYSE. We believe the calling off of the deal is a positive and any major fall in the stock would be an opportunity to BUY.

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