The Dhritarashtra Effect: Lessons from the Satyam-Maytas Fiasco

25 12 2008


It is more than a week since Satyam announced the proposal to buy into Maytas Properties and Maytas Infra. It took back the proposal after the media and investor community expressed their outrage strongly.


 The episode continues to occupy the first page in the newspapers. The Chairman of Satyam, B Ramalinga Raju, must be wondering why despite the next reversal of the decision why the uproar has refused to die. Besides, the fall in reputation, it is hurting the promoters where it hurts most, the stock price. Since the day the Satyam-Maytas proposal was announced, the Satyam stock has fallen from Rs 232 to Rs 134.


Satyam is not the first company to merge unrelated businesses of promoters. In fact, even after the Satyam-Maytas episode, JP Associates has announced a large scale merger of several of its promoter companies in unrelated businesses to its public listed company. Yet, Satyam received more flak than the others.


Some lessons from the Satyam-Maytas episode are:


Ø Foreign Institutional Investors (FIIs), when they smell a rat, vote with their feet immediately. They do not care if it is a loss-making proposition. Immediately, on announcement Satyam ADR, tanked by 58% in NYSE


Ø Investors have their own understanding about synergies. The synergies between IT and infrastructure explained by Satyam management, was not bought by the analysts. Even if there was one, it was a complete communication failure. Analysts just could not dissociate the fact that the Maytas twins werecompanies owned by Mr. Raju’s sons companies.


Ø Even if the merger was perfectly legal and Satyam was not violating any law, investors have their own perception of what is correct. Even after Satyam backtracked, the stock lost value considerably. The management lost the trust of the shareholders, with this episode.



Ø A Public Limited Company cannot be treated like a Private Limited company, if promoters have minority stakes.


Ø Timing of merger announcements is also important. The same merger deal if it had been announced in December 2007 could have been hailed as a masterstroke. Real-estate and infrastructure were hot sectors then and IT was under rough weather because of the weakening dollar.



Ø Having a high-profile of Board does not ensure legitimization of such deals, which blatantly favour the family of the promoters. In case of Satyam, the board meeting was chaired by the ISB Dean Prof Rammohan Rao, and the Chairman was not present when the decision was being finalized.


Ø Shareholders definitely wish to know how the valuations were arrived at and who has carried out the valuation. Satyam vaguely said, one of the Big Four audit firms had done the Maytas properties valuation. Later each one of them denied individually. This certainly made the whole valuation exercise look dubious.


Ø If Satyam had clearly believed that it had synergies with Maytas, it should have stuck it out. By back-tracking immediately, without even convening another board meeting, Mr Raju, gave an impression, that he tried pulling off a fast one, and since it has been seen through, he backtracked. This even made a newspaper give the headline “Raju Ban Gaya Gentleman “, as if he was not one before.


Ø The impact of such a gross act of discretion by industry biggie like Satyam can hurt the entire sector (the Indian IT industry in this case).


Ø A high-profile board is no guarantee of higher standard of corporate governance


Interestingly, Mr. Raju’s fall from grace has a parallel in the Hindu epic – The Mahabharata. Dhritarashtra, otherwise the righteous patriarch of the ruling dynasty of the kingdom of Hastinapur suffered a lapse of his usual sense of propriety, blind sighted by indiscriminate affection for his progeny.  


Everything said and done, the hasty retreat notwithstanding, the synergy effect of the Satyam-Maytas (the latter name is formed of the same letters as those of Satyam, in reverse order, let’s say in negative order) deal is now apparent: Satyam + Maytas = 0.


– G. Mohan




2 responses

1 01 2009

Perhaps no one had noticed that SATYAM when reversed become MAYTAS. Raju wanted to reverse everything. Now Infy, Wipro, Cognizant are sniffing in his ears…perhaps Raju wanted this long time ago..

8 01 2009

Now Raju has given up . 53 K employees with ESOPS in deep soup.

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