Agency Problem in Indian Business- Satyam & Maytas

Agency Problem is not new in the Indian context, though it is less talked of here than the other more developed markets. In the past, companies like Reliance Power and Vedanta Resources have witnessed this while issuing their IPO and restructuring respectively. The latest glaring example of this anomaly is the Ramalinga Raju led Satyam Computer Services’ board-approval to buy majority stake in Maytas Infra Ltd. and Maytas Properties. It is no coincidence that Maytas is Satyam spelt backwards. Infact, Raju's family members are the promoters and board-members in both Maytas Infra and Maytas Properties.

At the background of the problem is the Indian infrastructure sector that has seen a massive erosion of wealth and reputation in the last few months. Unitech, at less than 8% of its January’08 valuation, is a live example of the crunch this industry faces today.The story of the other companies in this sector is more or less the same. The haunting prospect of a possible liquidity crunch is forcing infrastructure firms to look for ways and means to finance their business commitment and projects.

In comparison, Maytas' stock is at a comparatively healthy half of its January value. Maytas Infra Ltd. is a BSE & NSE listed, civil-construction company incorporated in 1988. It has also bagged the ‘Fastest Growing Construction Companies in India’ award in 2007 by Construction World and National Institute of Construction Management & Research (NICMAR). Its top management includes the Vice Chairman: Mr. B Teja, Raju who also happens to be Ramalinga Raju’s elder son. Ramalinga Raju holds 10% of Maytas Infra shares as of now, the rest of promoters' shares being divided among the other members of his family. The shareholding pattern of Maytas is shown below:

The current financial downturn in the world has every company on its toes trying muster all the strength and remain liquid amidst growing cash-crunch. This is more so in the case of IT companies, as they expect a fall in the demand from their major clients based in US. Possibly this is what infuriated the share holders of Satyam and they forced Raju to reverse the decision a day later. Satyam was supposed to spend $ 1.6 bn to buy out the firms at Rs. 475 per share to the promoters and Rs.525 per share for an open offer. It seems the acquisition was nothing but a deal to transfer funds from one company to another, promoted by the same family.

To quote Satyam Chairman and Founder B. Ramalinga Raju, "The two acquisitions pave the way for accelerated growth in our core IT business in additional geographies and market segments such as transportation, energy and several infrastructure sectors. This will further de-risk our core IT business by adding a new – yet well-established – business vertical in infrastructure. This vertical can mitigate the risks in traditional verticals and developed markets that now face recession, and Satyam’s brand can further enhance penetration into the infrastructure vertical and emerging markets. The two companies being acquired in a challenging market offer potential for upside in future." The key point here is that if Satyam wishes to diversify in energy and infrastructure sectors, it could well have gone for other undervalued companies in these sectors which are facing the wrath of bears in the market. And to de-risk the core IT business, is it not imperative to look at acquiring firms that will give you a foothold in your core-competency i.e. IT? But, as he said, Maytas seems to have a potential in the future, as revealed by the comparison of its performance with its competitors. Maytas' PE stands at 18.28 as compared to single digit PE of others like Nagarjuna Constructions, Omaxe Ltd, Indiabulls Real Estate, etc.

Satyam, set up in 1987, has 62% of its shareholders as Non Promoters (Institution). The number of such institutions are 754 making the average share per institutional shareholder approx 90 lacs. Satyam has also not being faring well since the advent of the mortgage-backed financial specter. Additionally, it is facing stiff competition from the other giants of the Indian software space like Wipro, Infosys, TCS and Cognizant. So, the move to acquire the infrastructure companies seems a far-fetched and stupendous idea. The role of the Institutional non-Promoters should also be scrutinized, as a decision of this magnitude could not have been reached without their consent. No wonder, Satyam's share, also listed on NASDAQ in 1999 as Satyam Infoway (Sify), dropped 28% along with a drop of 20% in Maytas shares on the BSE; the day it announced the acquisition.

Overall, the Promoters together with the Board seemed to have overlooked their own vision Business Transformation. Together. They are ready to transform for sure, but they forgot the third and most important word: Together.