The Hindu Business Line : Saving Satyam’s investors

Investors in Satyam may have got a better deal if the sale had been clinched after its financials, however tentative, were made public. Had these numbers been revealed at the bidding stage, the markets may have had an opportunity to discover a fair price for the stock, much earlier.

Aarati Krishnan

The rapidity with which the stock market has marked up the price of Satyam Computer after its ‘provisional’ financials were revealed, raises one critical question. Have investors in the company’s stock got a fair deal in the ‘Saving of Satyam’? Probably not.

By now, many of the protagonists affected by the Satyam scandal have reason to cheer. The government can take credit for having salvaged a company hit by one of India’s biggest corporate scams, in barely four months. The government-appointed Board can congratulate itself on a job well done. The draft financials, unveiled this week, show that the Board managed to keep employees together and clients engaged, through the turbulent initial weeks. Tech Mahindra may have the most reason to rejoice. Not only has it bagged a large-sized software company at a valuation of less than one time its (provisional) annual revenue, the ‘investment’ has already appreciated 38 per cent over its cost price. The Satyam Computer stock, now at Rs 80, is well above the bid price of Rs 58 at which Tech Mahindra sewed up the deal. But it is the investors who held on to the Satyam Computer stock through this entire saga, who have little to be happy about.

No attractive exit

They are facing a 57 percent-erosion in the stock’s value compared to its levels (Rs 188) just before the scandal broke. Though the Sensex has surged this year, the Satyam stock languishes at a fifth of its January 2008 price.

Nor does the long-awaited open offer, set to flag off next week, offer a particularly attractive exit. With the bid price at which Tech Mahindra bought out the distressed company becoming the sole basis for the open offer price, investors will receive just Rs 58 per share if they tender. This, in light of the company’s draft financials as well as current market prices, isn’t very attractive. (Street estimates for Satyam’s earnings next year now hover at Rs. 4-10 per share). Under normal circumstances, SEBI’s Takeover Code ensures that investors in a target company receive an offer price that does factor in market valuations. But the waivers that SEBI granted early in the process to expedite the sale, have done away with both the market linkage and the scope for a rival bid, in Satyam’s case.

The net result of all this is that investors are left with an open offer price that is based on just the bid price, which, it can be argued, was a “distress price”. Not only did the sale involve a scandal-hit company; it was put through in the midst of a severe liquidity crunch, at a time when the IT sector was at its most turbulent; factors that are likely to have reduced the number of serious bidders.

Risks of equity investing?

Detractors may argue that equity investors have to brace for such risks. First, if investors were informed of the scam way back in January, why didn’t they sell the stock? Probably because they never got a fair opportunity to exit? With the stock falling off a precipice (Rs 188 to Rs 40) within minutes of the scam being revealed and staying in the Rs 40-50 band until recently, any investor selling it was staring at a huge loss of capital.

With Mr Raju’s revelations raising fundamental doubts on the company’s business, the size of its revenues, the existence of profits, employee base, there was no way any equity investor could decide if the company did hold any prospects or not. Others may point out that capital losses are a part and parcel of equity investing. Well, equity investing is a risky business and investors should prepare for business or market-related events that can whittle down value.

But no investor can be expected to foresee and plan for the risk of a company’s entire set of financials being false; or for its promoter siphoning away its funds. If those were the risks of equity investing, there may not be too many takers for it! The entire framework of securities law, overseen by SEBI, is in place only to ensure that investors have complete financial information about a company, before they buy or sell its shares.

Leaving it to the market

Having recognised all this, is there any way that investors in Satyam could have gotten a better deal in this episode? They may have, if the sale of the company had been clinched after its financials (however, tentative) were made public.

After all, provisional financials were made available to the bidders in early April, at the due diligence stage. Had they also been put in the public domain at the same time, the markets may have had an opportunity to “discover” a fair price for the stock then (as they did now), possibly ensuring a better bid.

Seen in this backdrop, SEBI has acted well now, in directing the acquirer to reveal Satyam’s financial details to the public, before the offer opens.

With the market armed with the financials, investors at least have a choice of not tendering to the offer, if they believe it to be too low.

They risk equity expansion by holding on. But they can hope that, over time, the market will discover a price for the stock that is reflective of the true value of Satyam’s business.