Satyam Computer board needs a lesson or two in Corporate Finance and Corporate Governance

Last Saturday, we made a presentation on '10 Ways to Create Shareholder Value' based on an HBR study. One of the principles explained in the presentation ties very well to the Satyam Computer fiasco.

On Tuesday, Satyam announced its decision to pick up 51% in Maytas Infrastructure and 100% in Maytas Properties. However, as soon as the USD 1.6-billion deal was announced, it met with stiff market resistance. Investors were angry on the company’s acquisition of the infrastructure company — especially when the realty business is highly cash-consuming now. The Satyam ADR fell by as much as 55% on news of the acquisition.

Some newspaper called this Ulta-Pulta deal, because when you spell SATYAM in reverse order (ulta), it become MAYTAS (Maytas Infra and Maytas Properties are companies owned by Satyam Chairman's sons!).

The corporate finance lesson that the board of Satyam Computer need to learn is:

Principle: "Return cash to shareholders when there are no credible value-creating opportunities to invest in the business"

Satyam today finds itself in this situation - excess cash, undervalued shares, but limited opportunities of growth in IT business. As per this principle, Satyam could return the money to shareholders through dividends and share buybacks.

Advantages:

• It gives shareholders a chance to earn better returns elsewhere, rather than Satyam investing them in the companies owned by Satyam Chairman's sons.
• Reduces the risk that management will use the excess cash to make value-destroying investments–in particular, ill-advised, overpriced acquisitions. (This is exactly what they attempted to do yesterday - Value destroying investment)

Well, investors finally had the last word - they forced management to drop the deal. I saw one of the biggest institutional investors of Satyam on TV questioning the deal and asking why the company is not buying back the shares.

So, how should Satyam use the cash? Buy-back shares or give dividend? The thumb rule is simple:

• Repurchase shares only when the company’s stock is trading below management’s best estimate of value and no better return is available from investing in the business.
• Pay dividend when the shares are expensive and there’s no good long-term value to expected from investing in the business

In Saytam's case, the first point is true. So, the company should buy-back shares and refrain from such ulta-pulta deals!!!

It brings another point. Was it just about financing or also about Corporate Governance?

This episode raises serious questions about Satyam's corporate governance. Now, you know value of TATA group - they are a class apart when it comes to corporate governance. Mr. Ratan Tata, you may want to start a management education program on Corporate Governance. Otherwise, "these bozos" will never understand it...