Hurrah for shareholder activism!

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Aarati Krishnan

Institutional investors’ interest in Indian stocks may be low but it is heartening to see that they remain interested enough in the businesses they hold, to turn activist if the situation demands. It is thanks to the loud protests by institutional investors that Satyam Computer was forced to backtrack on its proposal to acquire two companies linked to its promoter.

The move, announced after local trading hours on Tuesday and withdrawn before the market opened on Wednesday, had several questionable aspects.

One, Satyam Computer was to spend $1.6 billion, almost the entire cash on its books, to acquire equity stakes in two firms — Maytas Infrastructure (51 per cent) and Maytas Properties (100 per cent) — where top management positions were held by relatives of Mr Ramalinga Raju, Satyam’s promoter. This move was bound to decimate Satyam’s stock valuation at a time when companies are strapped for cash to fund their expansion plans and the stock market is actually paying a premium for cash-rich companies.

Adding realty risks

To compound matters, of the total consideration of $1.6 billion, $1.3 billion was to be used to acquire the unlisted Maytas Properties, about which few financial details, apart from its land bank of 6,800 acres, are available. That raised questions about how the valuation of $1.3 billion for this company was arrived at.

The claim that the addition of a realty business with a sizeable land bank would “de-risk the core business by boot-strapping a new business vertical” also rings hollow at a time when the property market is in the throes of correction, and large developers are saddled with devalued land banks.

If diversification was indeed the motive for the deal, Unitech, available at a market capitalisation of $1.2 billion, appears to have been a more attractive “buy”, given its longer execution track record in the realty space.

Mr Raju’s contention that he saw no reason to acquire an IT company in these depressed conditions also raises doubts about the prospects for the core business.

After all, Satyam’s peers — HCL Technologies and TCS — have only recently sewn up large acquisitions within the IT space.

And if the company really saw little use for its surplus cash, the best course of action would have been to return it to shareholders by way of dividends.

Low promoter holdings

Though the company’s move was well within the law and didn’t require a special resolution by shareholders, it was scuttled only because institutional investors held such a substantial chunk of Satyam’s outstanding equity. As per latest filings, while the promoters hold 8.6 per cent in Satyam, domestic mutual funds and insurers hold 14.7 per cent, and FIIs, a whopping 46.8 per cent. It is the mutual funds and select FIIs that have most actively voiced their protest at this proposal, forcing a retraction.

It is doubtful if Satyam could have been forced to retract so quickly had there not been such a large institutional holding in the company’s equity. The Satyam episode closely follows a move in September by the Sterlite group to effect a complicated three-way restructuring across group companies that helped increase the promoter stake. That proposal was finally shelved on opposition from a hedge fund which held a shade over 2 per cent in Sterlite’s equity.

Voting with their feet

To retail investors, these episodes reinforce the benefits of owning stocks with high institutional holdings. Yes, institutional favourites are more vulnerable to a market meltdown. But FII or mutual fund ownership in a stock may still be a safeguard against value-destroying moves by a company’s management. Indeed, moves such as this also tarnish the belief that Indian companies are well-regulated and follow reasonable standards of corporate governance.

The falling participation of retail investors in the Indian stock market and the rising dominance of domestic institutions (MFs and insurance companies have been the only consistent buyers in stocks in 2008), may not be such a bad thing in this context. If they are willing to vote with their feet when companies err, well, more power to them!


Related Stories:
Satyam to buy Maytas Infra, Maytas Properties for $1.6 b
ADR plummets 54%

(This article was published in the Business Line print edition dated December 18, 2008)
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