Theme Note

DOLAT CAPITAL

Satyams Daylight Robbery...!!!

SATYAM
India Research

Sanjeev Patkar (Head of Research)

Tel : +9122 4096 9745
17 December, 2008
E-mail: sanjeev@dolatcapital.com
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17 December, 2008 2
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Satyams Daylight Robbery...!!!

The Event
Satyam Computer Limiteds (SATY) attempted deal to acquire its group companies in Real Estate and Infrastructure has
been called of after a sharp reaction by investors on the stock price (not to mention the yelling at conference call!!). The
board had earlier approved taking a 51 percent stake in Construction Company Maytas Infra and buying a sister company
Maytas Properties for a total $1.6 billion - with a rationale of diversification and better utilisation of cash.SATY founder
and Chairman B. Ramalinga Raju, holds 36% in Maytas Infra and 35% in Maytas Properties.
Our Take
Till recently, Satyam was being looked as a cheaper proxy to playing the Indian IT outsourcing story fighting the turf
hard with the Top-3 Indian IT services firms for almost each and every deal. What are the undercurrents of the deal?
What deal means to Satyam Shareholders? Will this start a new trend of recurrences of appalling corporate governance?
We take account of each of the statement made by the promoters while explaining the rationale of the deal
a. De-risking the business the new acquired entity is in Real Estate a riskier business than Satyam and hence only
compounds the risk
b. Structure and financing of the deal to use close to US$1 bn cash from SATY balance sheet. The money goes
back to the promoter (who only owns 9% in SATY). The company in turn is left holding the baby with US$400mn
debt
c. The combined business prospects Contrary to SATYs belief the diversification puts to risk chances of any
additional deals particularly where critical outsourcing requirements emerge
d. The valuations are done by a big-4 (you would always findem in such deals) and hence are fair to be shareholders
of both companies. Further the non-promoters of Maytas are being bought at a premium too little a price to pay
to make the robbery an official transaction
We also attempt to pip into the psychology of the deal
a. The SATY story (almost like INFY) has been a carefully crafted vision with global ambitions. The management has
had privilege of interacting with smartest global financial minds on issues of shareholder interest (followed till
date). The problem at hand is grave for the promoter to have risked his golden goose nurtured with years of care.
Further, the fact that management was open to lose control at the expense of cash is also an indication of the state
of IT businesses. We should not be surprised if the company reports degrowth (>15%) over the next 12-18 months.
b. The most likely scenario is, the promoter in his individual capacity, has a problem of funding, and the only entity
that has cash is SATY. The best way to get the money is through acquisition of promoter entities. The promoter
gets the money (one can understand how serious is the issue!!!) and push comes to shove, loses control on an IT
company.
c. The very fact that promoters have opted for a brazen act of robbing minority shareholders (in fact the management
is in minority when it comes to SATY) is an indication that the business growth is the most serious challenge in the
IT business as things stand now.

What does this mean for

a. Shareholders of SATY No one gains here. Clearly the first option is to challenge the development. However,
this is a carefully crafted crime akin to the 26/11 plot. The Articles of Associations were amended in the recent
AGM and went almost unchallenged. The only option is a penal action against the company for a corporate action
with malicious intentions. A long drawn battle indeed. An early EGM might be eventful if few large stakeholders
come in together to dissolve the board. Either ways, a clear drag on price and collective energies.
b. Shareholders of Maytas Long-term or short-term who wants to keep his treasure with a dacoit. The sheer act
of desperation of the promoter to suck up cash from a family-jewel suggests all is not well with this business either.
Time to check-out irrespective of this event.
c. Markets in general This is a large scale day-light robbery by a market bellwether and has a potential negative
undercurrent to similar possible recurrences. SATY has been to Indian stocks what Goa incidents had done to
India tourism. The developments come on the heels of recently called off deal of Sterlite Industries re-organisation.
With the global wealth managers being molested it does not augur well for the markets in general. The India
story loses one more peg of its attractiveness (of corporate governance) with these developments. The silver
lining though is the premium to quality would only enhance with such events.

17 December, 2008 3
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The ratings are based on the absolute upside of our target price from the current price.
Upside Ratings
> 25 % Buy
15% - 25% Accumulate
0% - 15% Reduce
<0% Sell

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