Satyam Computer proposes buyback, will have limited impact

Satyam Computers has entered into damage control mode, proposing a buyback to return cash to shareholders. The IT services major recently proposed a buyout of two group firms –Maytas Properties and Maytas Infra- in the construction and infrastructure business. The move angered shareholders who went on a selling spree, from which its shares are yet to recover.

It has a cash pile (including loans and advances) of Rs 5,700 crore on its books. The unrelated diversification idea came about because it foresaw a bleak future for IT and it could not find suitable acquisition targets either. It has run out of reasons to hold the cash on its books now and has little choice but to return it. How it does it remains to be seen; India’s buyback laws allow it to either buy back shares from all shareholders (including promoters) at a fixed price or from the market from shareholders except from promoters. The former proposal will return cash to promoters too, who can then use it to infuse cash into the Maytas companies.

As per the buyback laws, the company cannot buy back more than 25% of its paid-up capital during a year, so that works out to 16.8 crore shares with a face value of Rs 33.6 crore (Rs 2 face value per share). Also, it cannot spend more than 10% of its net worth on the buyback, which amounts to Rs 837 crore. This is the limiting factor. If we assume a buyback price, of around Rs 170, that will lead to 4.9 crore shares being extinguished, or 7% of its equity capital. This will lead to its earnings going up by that extent.

The financial impact is not very significant but its symbolism will calm shareholders, as they see some cash being returned than being frittered away in an unrelated diversification.

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