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Satyam: Just what went wrong?

Leslie D'Monte in New Delhi | December 19, 2008 12:11 IST

Almost three decades ago, India's third-largest IT services provider, Wipro Ltd [Get Quote], successfully diversified from vegetable oils into the IT sector. However, earlier this week when the country's fourth-largest IT services company, Satyam Computer Services [Get Quote], attempted to diversify into real estate and infrastructure to grow its business, it fell flat on its face.

The $1.6 billion acquisitions were supposed to "delight shareholders". At least, that's what chairman B Ramalinga Raju and the board of Satyam believed. However, that was not to be. Irate shareholders forced the board to call-off the deal. They suspected there was more than that which met the eye since Raju's sons were on the boards of both the companies which were being bought -- Maytas Infra and Maytas Properties.

Analysts, too, were rattled with the move, and called for a 'Sell' on Satyam. The share prices of Satyam dipped by 30 per cent on December 17, 2008. Satyam investors lost around Rs 3,400 crore (Rs 34 billion) in the panic selling. Satyam's stock fell 55 per cent on the New York Stock Exchange as well. And questions of bad 'corporate governance' were raised.

Satyam chairman B Ramalinga Raju expressed surprised at the market reaction to this decision but said the board "decided to call off these actions. . . in deference to the views expressed by many investors". However, the decision did not cut ice with investors.

Satyam -- which means "truth" in Sanskrit -- was founded by Raju in 1987. The company employs 52,000 IT professionals across the world. Besides, it has ranked consistently in the survey-based top Employers list. Till last week, it was hailed as the youngest company to exceed the $2 billion revenue mark. Moreover, its quarterly volume and net profit growth figures, too, were perceived to be healthy.

What went so wrong with a company for investors and analysts to almost shun it now?

The crux of the problem it appears is one of "trust" and the perception that a unilateral decision was taken by the board, allegedly to favour Raju's sons' companies. Did he evaluate other undervalued real-estate and infrastructure companies too? Also, why did he eye the real estate sector (opposed to, say, an IT acquisition) given that the realty sector is in a slump too? All this, when the promoters have just 8.7 per cent stake in the company.

Incidentally, Raju founded Satyam after venturing earlier into other businesses such as construction (Maytas is Satyam spelt backwards) and textiles. He did his B.Com from Andhra Loyola College at Vijayawada prior to receiving an MBA degree from Ohio University. He has attended the Owner/President course at Harvard. For his achievements and contribution to society, he was awarded Doctorate by Anna University, Chennai, in December 2007.

Despite the battering he's taken over the last couple of days, he has loyalists who point out that like most successful industrialists, Raju has a social orientation too -- the Byrraju Foundation and ambulance services. The Foundation currently works in 180 villages. "This speaks volumes for the goodness of the man," says a confidante.

"The acquisitions, which backfired unfortunately, were extremely well thought-out. Raju is very meticulous in his planning. There was absolutely no intention of squandering public money through the deals," insists a senior executive who held a very strategic position in Satyam till a few months back.

Perception, however, can be larger than reality at times. Raju, who has held prestigious posts -- he has been the Nasscom chairman, too -- will have a lot of convincing to do to salvage the damage done to his and his company's reputation.

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