Satyam postpones buyback meeting, bigger restructuring planned

Software services provider Satyam Computers has postponed today’s board meeting to consider a buyback. Its chairman, B. Ramalinga Raju said that considering the questions that have been raised in the past two weeks, the need for them to be properly addressed and considering the interests of stakeholders, the company is broadening the scope of deliberations beyond a buyback.

Satyam’s decision to buy out stakes held by its promoters in two companies –Maytas Infra and Maytas Properties- angered institutional investors who forced it to call off the transaction. That sparked a debate on corporate governance standards of the company, and then revelations of the World Bank’s alleged 8-year ban on Satyam has done a lot of damage to its reputation.

In fact, if this were a fictional account, some unseen hand could be blamed for trying to wreck Satyam’s market reputation. But it is not and the promoters embarked on that diversification into infrastructure themselves. So, even if the World Bank has not officially announced a ban and Satyam is denying it, no one is buying that. Now, that spells bad news when a company is out in the market to win clients, in a business where trust means a lot, since IT companies often get intimate knowledge of their clients’ workings.

The purpose of the buyback, that was to be considered today, was to return spare cash to shareholders. But this seemed more like a move to pacify shareholders than anything else, especially as it would have returned only a fraction of the cash. But this matter seems to be going beyond shareholders now, calling for a massive confidence-building exercise.

Let’s hope Satyam gets it right this time.

What’s on the cards?
Additional possible options, the company says, include strengthening Satyam’s governance structure, conducting a review of strategic options to enhance shareholder value and addressing issues from a possible dilution of the promoters’ stake in the company. Now, improving governance as of now includes increasing the size and altering the composition of the board. Satyam has a 9-member board, with two Satyam founders and one executive Ram Mynampati. The rest are non-executive directors.

So Satyam’s first step would be to alter the composition of the board and increase the size. That the confidence of shareholders in this board has diminished is no secret. Perhaps if it is altered in a manner which inspires confidence, then it may help. But in India, a board is only as independent as the promoters want it to be. A lot depends on how serious Satyam is about improving its corporate governance. The size can be increased for sure, Infosys has 15 directors, so Satyam can add a few more.

Perhaps, it’s a good idea to bring in more industry (non-IT) veterans on the board, who could have perhaps averted the public relations disaster a fortnight ago. Satyam has appointed DSP Merrill Lynch to review the strategic options to enhance shareholder value. This needs to be combined with the third option, which is to address issues from a possible dilution of the promoter stake in the company.

Why would that happen, but for a fresh infusion of capital into the company? So, maybe Satyam is considering the induction of a strategic partner, maybe a private equity fund. A stake sale to an IT major is possible in theory but seems unlikely at this stage. A large investor with a representation on its board will give a lot more comfort to both shareholders and customers. But here’s where addressing the promoter stake dilution issue comes into play. Am not certain what that involves, could mean issuing new shares with differential voting rights, or even a corporate restructuring exercise.

All of this will become clearer by January 10th when the board meeting is scheduled to be held. It is perhaps Satyam’s best chance to redeem itself, to get rid of the cloud hanging over its future and its shareholders, ever since this issue came out in the open.

Update on Dec 29, at 4.00pm: Satyam’s board has seen three exits, two of which were announced today. Prof. Krishna G Palepu and Vinod K Dham’s resignations which were effective close of Dec 28 were announced today. Both were non-executive directors. Earlier, Mangalam Srinivasan, another non-executive resigned from the board. That leaves just six directors on the Satyam board who will meet on Jan 10. It remains to be seen if there are more exits from the board. Update on Dec 29, at 7.45pm: Prof. Rammohan Rao, a non-executive and independent director on the board of Satyam, also dean of the Indian School of Business, resigned from the Satyam board, bringing down the board of directors to five.

Update on Jan 5, 2008: This post states that the World Bank has not officially announced a ban. Author had checked the World Bank’s global site but did not check the Indian site. The World Bank’s India site does have a statement on the issue. This release on the Indian site dated Dec 26 states that Satyam has been banned from direct contracts for the World Bank under its corporate procurement programme for eight years. It was penalised for failing to keep documentation to support fees for its subcontractors. The bank’s decision was effective September 2008 but the statement also mentions that there was no evidence that Satyam was involved in malicious attacks on the bank’s information systems. The error is regretted.

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