Satyam computers, was one of stocks which was in our radar for purchase as we believed that it offered tremendous value when it was quoting at Rs230 per share. One of the primary reasons for looking positively about Satyam was its huge cash reserves it holds in the Balance Sheet and its stable IT Services business, even after discounting the possibility of lack of growth from its IT business. Now it is quoting at Rs160 per share all in a matter of two days.
The question now is, is it still a buy? May not be the case. The reasons are:
Unrelated diversification: We all know that Satyam made an abortive attempt to buy one company by name Maytas Infra to diversify its business and revenue model and the fate it had over the next 12 hours. Satyam shares crashed on Nasdaq by a whopping 55% in a single day of trading. Indian markets followed that on Wednesday by giving Satyam a good 30% cut in its market capitalisation. The intention to buy an unrelated business is a big negative on the stock and it would hang in the wall forever.
Integrity of the management: I dont have any pity for the Satyam as they went into unrelated diversification of buying an infrastructure company. That too, at a very high valuation when the whole infrastructure/real estate industry is in the doldrums. The deal would not have caused such an uproar if not for the promoter and CEO of Maytas Infra is none other than Mr Teja Raju, son of Mr B Ramalinga Raju, Chairman and CEO of Satyam.
Corporate Governance issues: It has won lot of awards for its corporate governance initiatives earlier and they still have a very distinguished board of directors. Now only the directors' names have been irrefutably damaged due to this fiasco. Already vocies are being raised for removing Satyam's Directors and the top management team. I think with active FII investors, it is very much possible that they may be removed.
Lack of confidence of the top management on the core business: Satyam's top management attributed the reason for diversifying into infrastructure business as they were very negative about the business outlook for their core business, IT Services. They have predicted 2009-10 to be very bleak and negative growth for the company is a possibility. Now with the management itself is unsure about the future, no sane person can go and buy the stock.
What may happen with the money lying in Satyams's Balance Sheet?
May continue to hold the cash: Just maintain status quo and see what the shareholders want during the next general meeting. We can expect uproarious scenes during the next shareholders meeting.
Hefty cash dividend: Increasingly the shareholders have started asking for the money back from the company. Satyam management may decide to buy peace with the shareholders by giving some hefty cash bonus.
Look for acquisitions in the IT Space: May go after an IT company in India or outside.
Out of the three possibilities, I see the second one of hefty cash dividend happening in the near future. The management has lost the confidence of the shareholders, so they may buy peace with them with cash. But really doubt whether Ramalinga Raju would be able to survive beyond the next annual general meeting, particularly so as he and his group holds only 8.6% of the Satyam's share capital.
What I am going to do?
I may not buy the share now as the reputation of the management is in tatters. With their own outlook for IT business being gloomy, it is better you avoid Satyam and look for other companies.
Satyam may go on to become one of the first professionally managed IT company in India in the near future.