Satyam - Issue of Corporate Governance

Satyam NSE 157.10 -69.45 (-30.66%)

I find it really strange when media and supposedly educated people talk wrong! First, no book on corporate governance says, diversification is wrong. An IT company is eligible by all rights to diversify and expand across non-core areas of operation and this includes real estate. The issue of corporate governance in this case should confine to the following.

1. Should the shareholders be consulted for a deal size of greater than $1 billion? If yes, then Satyam may have gone wrong with respect to corporate governance principles. It is to be noted that HCL Tech completed the Axon deal without consulting its native shareholders. One may well argue on the majority shareholding of the promoter, but the bottom line remains the same. Infosys did not consult its shareholders before completing the Philips BPO deal. So, its not prudent to argue that Satyam had to consult its shareholders before completing such a deal.

2. Second, should a company move out of space and invest in a non-core sector when the sector is heavily beaten down?

Its baseless to argue and say that companies shouldnt look at non-core sectors for growth or strategic fits. Lets take Wipro for instance. During the late 70's, Wipro was known to be a strong Vanaspati brand and had no IT exposure. So, do you prevent Wipro from using its cash when it intended to invest in IT(which was not a very good business to be in way back in 80's)?

What corporate governance should focus is the logical fit of the deal and if things are carried out with utmost transparency, integrity and honesty. Lets look at the prospective logical fit. I am quoting the points even though Satyam management hasnt highlighted on it.

a. Satyam could emerge as the prefered IT/BPO partner for Maytas.
b. Maytas could benefit by handling all maintanence related contracts for Satyam facilities as well as be the key infrastructure developer for Satyam facilities marked for the future. This by itself means significant cost savings from Satyam point of view and great revenue addition for Maytas subject to the fact that the IT business grows.
c. Maytas could help Satyam move away from city and expand infrastructure in towns closer to city. The advantage would be cheaper operating cost, less attrition and better quality of living for Satyam employees. If Maytas builds a SEZ by itself away from city, something like the Sriperambadur belt which is 50 km from the city of Chennai, then it could be bring in huge advantage for Maytas and Satyam.

3. Looking from a cost perspective, it is true that Satyam is paying a huge price to acquire a strategic stake in Maytas. But then, HCL acquired Axon at huge valuations too! Axon was valued at 30-times PE at 600 pence/share. Why would you want to pay such a price when top companies like TCS and Infy are trading close to 10-14 times PE? Acquisitions like these have to be looked strategically and not purely based on current value. If the question is based on value and if Satyam is proved wrong and biased towards its own party(son-promoter transaction), then it could well be an issue of corporate governance.

Corporate governance should look at ethical and correct manner of doing things. It does not say anything wrong on diversification.