Satyam set for a shakeout, takeover: Research firm

By Fakir Balaji, Bangalore, Jan 1 : Beleaguered Satyam Computer Services is heading for a major shakeout or a takeover following its bid to diversify from its core business into the realty sector, a study by global technology research firm Forrester Research Inc has said.

"The management's attempt to shift the company strategy from the current business model has raised a red flag for Satyam accounts and prospects. We believe there will be major management and governance changes and even a potential sale of the firm after its board meeting Jan 10," the firm said in its advisory to its global clients.

The Hyderabad-based software export major has been in the throes of crisis management since its Dec 16 bid to acquire the two realty firms - Maytas Properties and Maytas Infra, run by two sons of its founder chairman B. Ramalinga Raju - for USD 1.6 billion (Rs.79.2 billion) by dipping into its cash reserves of USD 1.2 billion (Rs.53 billion).

A spontaneous and concerted revolt by institutional investors and analysts against the controversial decision forced the management to call off the deal within 12 hours Dec 17.

A belated disclosure by minority-holding promoters that their entire shares were pledged with financial institutions and that mortgaged shares were being sold to protect promoters' margin calls also antagonised investors and stakeholders.

The management's decision to convene a board meeting Dec 29 for considering a buyback of shares to shore up the promoters' minority holding (8.61 percent) and then postponing the meeting to Jan 10 led to the exit of four directors.

The directors who resigned included a venture capitalist, a Harvard Business School professor and an Indian School of Business (ISB) director.

"Though the repercussions may not affect delivery in the short term, clients need to monitor the company's strategic mindset over the next 18 months to ensure its commitment to IT services is not undermined with other ill-fated investment decisions," the study observed.

Forrester hinted that Satyam could become a potential target of acquisition by global majors like Hewlett Packard (HP) or Logica, which are bracing to expand their applications and offshore footprint, in the event of its stock price crashing and strategic investors pressing for change in the top management.

"Satyam clients should review the exit clauses in their current contracts and assess their portfolio. In the worst-case scenario, clients will have to shift work to alternatives if the contentious issues are not resolved in the next six-nine months," the study recommended.

"Changes in management and governance appear imminent after the board meeting and even a possible outright sale of the company," it forewarned.

Incidentally, whole-time director Ram Mynapatti admitted to Forrester that the Maytas' bid was a mistake, which was rectified quickly on realising its enormity.

"The board's miscalculation raised concerns over corporate governance and transparency, as evident from the precipitous fall in the company's share price on the New York Stock Exchange (NYSE) Dec 16 and on the Bombay Stock Exchange (BSE) Dec 17, knocking off investors' wealth," Forrester said.

In the run-up to the D-day (Jan 10), Satyam has hired global financial advisory firm DSP Merrill Lynch to "conduct a review of the company's strategic options to enhance shareholder value".

On the implications of the Maytas deal fiasco, Forrester said by putting USD 1.6 billion into construction and property firms, the company was 'consciously' walking away from IT.

"In this era of next-generation outsourcing and global delivery models, customers expect their IT services providers to be developing state-of-the-art processes and tools, domain expertise, and solution accelerators to improve their delivery," it said.

"At a time when attrition in the IT industry is being contained, Satyam employees become vulnerable, as they question the management's commitment to IT business, their particular business unit, and their career development," the study added.