December 17, 2008 10:19:29 am
Satyam Computer Services Ltd bowed to investor pressure and canceled plans to spend $1.6 billion to buy two builders, killing the deals just 12 hours after they were announced.
The quick change in plans, which was announced late on Tuesday, came after investors demonstrated their opposition to the deals by pushing shares in India’s No. 4 software services company down 55 per cent in New York Stock Exchange trade.
Tuesday’s unusual turn of events began after the close of India’s stock markets when Satyam said it planned to enter the depressed construction industry by buying all of privately held Maytas Properties for $1.3 billion and 51 per cent of builder Maytas Infra for $300 million.
Satyam founder and Chairman B. Ramalinga Raju and other insiders hold 36 per cent in Maytas Infra and 35 per cent in Maytas Properties.
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Analysts questioned the motives of Satyam’s top executives, saying there was a potential conflict of interest because they hold stakes in both companies. They also said the acquisitions made little sense at a time when technology outsourcing companies are preserving cash to help weather the global economic slowdown.
The company’s stock recovered some of its losses after Satyam withdrew the offers, climbing 50 per cent in after-hours US trading. But analysts said that Satyam may not be able to win back the confidence of investors.
“The company has lost investor confidence. Rescinding the offer does not restore that confidence,” said Janney Montgomery Scott analyst Joe Foresi.
Satyam’s shares, which closed down $6.85, or 55 per cent, at $5.70 on the New York Stock Exchange, jumped 50 per cent in after-hours trading to $8.89. Even after the evening rally they were still down 28 per cent from Monday’s close of $12.30.
“There is no victory here because many shareholders lost, getting out of the stock today and in some cases taking 50 per cent losses,” said Global Equities Research analyst Trip Chowdhry. “The credibility of Satyam’s board of directors and its management is at rock bottom.”
Satyam executives were not immediately available to elaborate on the company’s statement announcing that the acquisitions had been canceled.
“In deference to the views expressed by many investors, we have decided to call off these acquisitions,” Ramalinga Raju said in a statement.
The two builders work on infrastructure projects including highways, ports and water treatment systems. Satyam helps develop software for businesses including General Electric, Nestle and Qantas Airways.
Ramalinga Raju originally promoted the deal by saying it would “de-risk” Satyam’s core business in IT services.
But analysts responded using unusually harsh words as investors fled the stock.
“This is outrageous and very frustrating,” said Jefferies & Co analyst Sachin Jain. “This clearly raises questions about what kind of corporate governance you have in other Indian companies. That could hurt foreign investment.”
JP Morgan cut its recommendation on the stock to “underweight” from “overweight” and slashed its price target on the shares that trade in India to 175 rupees ($3.68) from 475 rupees. Janney Montgomery Scott reduced its recommendation to “neutral” from “buy,” while S&P Equity Research cut its rating to “hold” from “buy.”
“They were insensitive to global corporate governance standards. Their largest shareholders impressed that upon them,” Susquehanna analyst James Friedman said after Satyam quashed the deals.
“It was an error in judgment on their part,” Friedman added. “It would have been worse of an error not to rectify it.”
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