Its been said that truth is stranger than fiction. Satyam Computer demonstrated it aptly this week - first, announcing the purchase of a company owned by a relative of its promoters, and then, withdrawing the proposal in the face of a falling share price. Several issues emerge - not the least, one of corporate governance.
The presence of external directors is supposed to mean that minority shareholder interest will be looked after. When you have as an independent Board Member, Prof Palepu of Harward Business School, who claims to research "corporate governance" and has, to his credit, a presentation made to Nasscom on "How to make corporate board more effective", you expect that some basic application of mind would take place. As events proved, you would be wrong.
Another worthy, Mr. T R. Prasad, a former Cabinet Secretary to the Government of India, the highest post a bureaucrat can reach in India, and another independent director had this to say “Even your uncle will not sell you the land at the price Maytas was selling it to Satyam". This, post the protest that shareholders registered at the conference call announcing the deal. Clearly, providence has awarded the man a particularly nasty set of uncles. It may be worth checking if he too had bought land along with Maytas and was therefore miffed if the transfer value eroded the value of this investment.
This well written article raises many pertinent questions. Not least, one of conflict of interest of the nature that required audit firms and consulting companies to be different entities in the US. When Prof Palepu generates close to $200,000 as revenues from Satyam, one cannot truely expect that he will be fair to minority shareholders. So is there just cause for a class action suit? After all, Satyam is a US listed entity !
Another, albiet somewhat peripheral point I would make is, that once again, it proves that education is no guarantee for integrity - a point most forget when we plead for "educated" politician. The most academically qualified PM currently runs the country, and has had the ignominy of presiding over an alleged case of cash-for-votes while facing a no-confidence motion. Human values and education qualifications do not have a high correlation!
But is it all the fault of the company, or are investors to blame for mixed signals? If corporate governance was such a big requirement for stock price performance, how do you explain that the highest "wealth generator" (where the criteria is market cap increase) for the past few years has been Reliance - not perhaps the epitome of corporate governance.
If the objection was to unrelated diversification, not too long ago, we had analysts suggesting that Unitech would "unlock value" by setting up a JV for its telecom business. Why on earth was the Unitech stock not hammered for attempting to get into telecom in the first place? It fell sharply only when it got into a liquidity crunch. If it is okay for a real estate company to attempt a telecom business foray, what is wrong with an IT services company getting into real estate - that too, when the promoters of the IT company are, incidentally, in the IT business, and their roots are in the construction business?
So is not corporate governance, and not unrelated diversification. It is really that Satyam's proposal would take out the cash from the company and give it to the promoters (largely). The mistake the company made was that they should have proposed a merger / share swap rather than a sale of shares. Maytas Infra share price had actually risen 15% between July to Nov 2008 when peer group shares fell 60% or more. Would this have been enough to satisfy promoter greed? As it turned out, clearly not. But I wonder if a merger would have generated significantly lower heat and dust.
Lastly, how have the institutional investors (and the investor in their funds) benefited. The deal has fallen through, but the stock price is down 25%. And the company is now suggesting a buy-back, while all analysts have changed their ratings to a "Sell". In the end, the promoters would have increased their stake (by reducing the outstanding shares through a buy-back) at a significantly lower cost than that prevailing a week ago. A few weeks later, once the dust has settled, this issue too will be forgotten. Who is the loser in this - it does not appear to be the promoter group. They should pay some royalty to Pakistan for stealing this terror of an idea!
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