Wednesday, January 7, 2009

FIIs and the Satyam Board: Executive Summary

Satyam's plan to acquire Maytas, an Infrastrucuture firm run by the Satyam promoter family, created a widely reported controversy over Satyam's Corporate Governance. The promoter family owned very little stake in Satyam while FIIs were the largest shareholders. FIIs alleged overvaluation of Maytas equity in the deal, and pointed out the strategic irrelevance of the IT services firm's diversification into Infrastructure. Independent Directors on the Satyam Board were attacked by FIIs, the financial media and one Member of Parliament for their complicity in approving the controversial deal, and all except one of the independent Directors resigned.
FIIs demanded the resignation of Satyam's promoters and approached several strategic investors such as IBM,Oracle, HCL and Tech Mahindra to buy out the promoter stake in Satyam. Strategic investors demanded a lower valuation of Satyam's equity despite the stock having plummeted due to the Maytas deal controversy.
This morning Mr.Ramalinga Raju, Satyam's promoter, resigned from the Satyam Board. In his resignation letter Mr. Raju revealed a total overstatement of Rs. 7,000 crore (around $1.45 billion) on Satyam's books as of the September 30, 2008 Balance Sheet. Mr. Raju, the outgoing Chairman of the Board, claimed individual personal responsibility for manipulating the Company's accounts;overstating revenues and assets; and understating liabilities; over a period of several years without the knowledge of any other Board members or the Managing Director.
It appears that what has really happened is that Mr. Raju has diverted the money from the Company during the recent controversy. This action was probably motivated by the FIIs' unwillingness to allow him to continue to run a Company which he personally founded and built from a few people to a headcount of more than 50,000 over a period of 20 years.
It is unlikely that the money will be traced through investigations. This correct understanding of the Satyam issue indicates that a significant part of the Rs. 7,000 crores diverted from Satyam will find its way to the Maytas stock behind the scenes. I would therefore advise investors with a 2 year horizon to go long on Maytas.

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