Satyam Debacle - Failure of corporate governance

The Maytas Infra and Maytas properties acquisition announced, and later cancelled by Satyam(SAY) earlier this week was a classic example of failure of corporate governance. I can understand the Chairman(Ramalinga Raju) wanting to buy these family companies at an inflated price for personal gains, however i am astounded that the board approved the purchase of these companies. They have some solid  people like Krishna Palepu (Harvard Business School), Vinod Dham (ex-Intel/AMD exec & father of pentium), Rammohan Rao (ISB dean) etc. as part of their board. How these guys bought into this whole idea is a big question and it will definitely impact their credibility in the market place. Alternatively were these guys out-voted by some of the other folks on the board? We would never know what happened in the backend.

If the decision to diversify into real estate (Sector affected by the current market conditions) was a bad one and it was precipitated by the artificial inflation of the price of these companies (almost 5x!!!!). Maytas properties price was pegged at $1.3 billion when the actual market value of its holdings is only around $255 million. This company is held by Raju's family and it raises serious questions around the credibility of Raju. Raju himself holds only little over 8% of Satyam and he was planning to use up around $1 billion of Satyam's cash reserves for his personal gains. If indeed the acquisition would have gone thru it would have led to Satyam ending up with $400M of debt from over a billion dollar cash surplus. The board should be fired for approving Raju's plan without doing the necessary due-diligence. In addition Raju should be sacked. The biggest irony is that Satyam won the ICSI National Award for Excellence in Corporate Governance earlier this year. They don't deserve it and should be stripped of that award.

The way the press release was handled during this whole ordeal was pathetic. Some of the terminology used like 'Risk in Core IT business' 'diversifying into real estate to derisk' etc can have some pretty serious repurcussions. It leads investors/customers to perceive that you are not doing well in the core business and would result in bad analyst reports/downgrades and customers looking for alternatives. It confounds conventional wisdom of sticking closer to the core and investing to improve your core capabilities during tough market conditions.

Here are some of the impacts that Satyam is going to face due to this incident:

Ø  Market credibility and reputation impacted

Ø  Downgrades by Financial analyst and possibly industry analysts as well

Ø  Loss of customer confidence leading to existing customers/prospects moving away in the near to medium term. I am positive that no new customers will want to do business with Satyam.

Ø  They will definitely lose some business in the next few quarters probably pushing Satyam into negative growth which again will have an impact on their share price/market cap

Ø  Loss of investor confidence due to credibility loss of the management/board & failure of corporate governance

Ø  Their stock has been hammered down and it has fallen more than 40% to around $7.8/share. Their market cap at the current price is $2.64B. They are an attractive acquisition target with considering that they have around $1B in cash reserves. I wouldn't be too surprised if someone mounts an hostile takeover bid for Satyam.

Ø  In the current market conditions some of the above factors can have a significant impact and may even lead to the fall of Satyam

This is a classic example of how a company can dig its own grave!! One of the lessons from this debacle is the importance of having strong corporate governance for sucess of the company.


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