The aborted Maytas acquisitions were probably Satyam's way of fulfilling its promise 'to find creative and productive ways to delight its stakeholders'. Still, we must thank Mr. Raju for making sure that promoters will now think twice before even considering such brazen attempts to loot minority shareholders. By Shivshanker Verma
On Wednesday morning, as usual I was checking how the US markets fared overnight. I don't normally pay much attention to Indian ADR prices, but that day was different. Satyam's ADR had fallen by almost half in just one trading session. That doesn't happen unless a company goes bankrupt or something like that. But, Satyam is supposedly a cash rich company that continues to enjoy healthy cash flows despite the downturn in business outlook. Then again, it is difficult to know which company is bankrupt these days. So I went straight to Satyam's website and read the incredible announcement of its proposed acquisition of Maytas Properties and Maytas Infra for $1.3 billion.
The press release did not mention, not even as a footnote, that Satyam's promoters own the privately-held Maytas Properties and hold a 36-per cent stake in Maytas Infra, a listed company. Instead the release said, "the two acquisitions pave the way for accelerated growth in our core IT business in additional geographies and market segments such as transportation, energy and several infrastructure sectors'.
Ok, I get it. The best way for Indian IT companies to grow in any vertical is to acquire companies which are actually engaged in that business, or so Satyam believes. In other words, if an IT company wants to grow its service offering in the telecom space, just go out and buy a real telephone company.
S Ramadorai of TCS, Chris Gopalakrishnan of Infosys and Azim Premji of Wipro, please note... you are way behind the curve; this is the way forward for the Indian IT industry!
Now don't say Satyam didn't disclose this strategy to its shareholders in advance. Satyam's latest annual report has a section on corporate governance (page 38) that says, "The Company's goal is to find creative and productive ways to delight its stakeholders." Maybe, not many shareholders who read the report earlier this year would have thought the company was quite serious about what it said.
But they must admit that it is impossible to be more 'creative and productive' than by transferring $1.3 billion of shareholder wealth to promoters who owns just 8.61 per cent of the company. Brilliant! This should be made a mandatory case study in all business schools!
Alas, the shareholders didn't quite get the promoters' bold vision for the future. The day after its ADR tanked, Satyam's stock price plunged more than 30 per cent on the local bourses. Though the stock recovered partly the next day, nearly a quarter of shareholder wealth has been wiped out. Maytas Infra shareholders are the worst hit, with the stock losing 40 per cent in two days.
So, B Ramalinga Raju of Satyam did a quick about turn and called off the acquisitions. Sensing that shareholders were still rebellious, the company has called a board meeting later this month to consider a share buyback. But it's too late. The damage has already been done.
What use independent directors?
I am still not sure how to describe it, but this one definitely ranks as probably the most outrageous decision by a major Indian company over the last two decades.
Even more outrageous stuff has happened earlier, but not since our companies started paying lip service to the amorphous concept of corporate governance, sometime in the '902s. The concept still remains amorphous to promoters of most Indian companies, but we kept insisting that our best companies do measure up to the global standards on corporate governance. That myth is now shattered.
It is even worse. Here is a company with a long and successful track record, one of the flag bearers of an industry which has brought the most visibility abroad for this country. Listed on multiple stock exchanges including NYSE, Satyam's board has a number of independent directors with very impressive resumes.
- Professor M Rammohan Rao is the dean of Indian School of Business, recently rated as one of the top-20 business schools globally.
- Vinod Dham, known as the father of the Pentium chip, is now a well known venture capitalist in the US.
- T R Prasad retired as the cabinet secretary to the government of India, the uppermost bureaucratic position in this country.
- Krishna G Palepu is professor of business administration and senior associate dean for international development at the Harvard Business School.
At Satyam's board meeting held to consider the Maytas acquisitions, all these luminaries voted in favour of the blatant move by promoters to enrich themselves.
This is serious. If independent directors with such stellar reputations cannot protect the interest of minority shareholders, why have them at all on company boards? Even after being so widely criticised, some of the independent directors continue to defend their action. T R Prasad was quoted as saying, "not even your uncle will sell you land at the price Maytas was selling it to Satyam."
For the benefit of those Satyam shareholders who don't have property dealers as uncles, it would have been nice if Mr Prasad explained why Maytas decided to make such a generous sacrifice!
For a moment, let us pretend that this was indeed a strategic decision to diversify into other areas and de-risk the company as it was claimed. If that was the case, did Satyam consider any other potential acquisition targets in the real estate and infrastructure space? How did Satyam, and the independent directors on its board, conclude that Maytas Properties and Maytas Infra were the best possible acquisitions in their respective sectors?
At the current low valuations, there must be a good number of infrastructure and property companies available for $1.3 billion. Given the dismal business outlook for these sectors, the promoters of some companies would be more than willing to sell out.
Why are independent directors so pliable and meekly swallow the decisions pushed down their throats by promoters? Is it because independent directorships are taken as cosy positions without much responsibility, but with attractive financial rewards?
Each of the independent directors of Satyam mentioned above was paid Rs12 lakh as 'commission' last year, apart from sitting fees. All of them received between 5,000 and 10,000 stock options last year, at a grant price of just Rs2 per share.
Krishna Palepu also took home another Rs79.51 lakh as professional fee, presumably for consultancy services.
But, when it came to a decision to protect the interests of the very shareholders who rewarded them so handsomely, they failed. In any case, how independent will be a director who receives more than Rs91 lakh a year, without counting the stock options, from a company?
Still, Mr. Raju deserves applause
Maybe, we should hold back the criticism and consider the long term benefits of Satyam's misadventure.
Think about it, no promoter of a major Indian company will dare to do something like this in future. They now know that, whatever be the dumb strategic logic they put forth, they will be punished by the market. Their reputations will be sullied and even clients will think twice before doing business with them, as Satyam is finding out to its dismay now.
So, Mr. Raju, thank you. You won the Ernst & Young Entrepreneur of the Year award last year. This year, nobody deserves the 'best corporate governance practices' award more than you and your company. Congratulations!