Will Satyam go for a buy-back?

Markets reacted strongly to the Satyam-Maytas deal. ADR down 55% while it closed down 30% on NSE/BSE. Satyam’s reputation built over 21 years has been destroyed overnight. So what will the management do to restore some confidence of the investors back into the company. Satyam holds Rs 5300 crs in Cash and Cash Equivalents. To quote from Ramalinga Raju’s interview to CNBC,

“Now that we are not going ahead with this transaction and it goes without saying that we will evaluate other options closely and take a decision that in our opinion is best for the investors”.

 Though increasing dividend is an option, my sense is that the company will go for a buy-back few months down the line which will help promoters increase their stake in the company from the present 8.61%. Satyam market cap is Rs 10,586crs at today’s closing price of 157. Assuming company utilises Rs 3500crs from its cash chest for the buy-back at a price of Rs 225 (closing price before the deal was announced), it can buy-back 15.55 crs from the market. There are 67.34 outstanding shares which means the company can buy-back 23% of its total stock. Promoters stake subsequently will be 11.19%. All this would lead to marginal relief to the investors as only 1 share out of 4 shares held will be accepted by the company. Corporate governance issue will make sure that Satyam joins the league of mid-tier IT companies when it comes to PE.

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3 responses to “Will Satyam go for a buy-back?

  1. Buy back makes a lot of sense, even otherwise, I do not think that deal would have harmed. Its good diversification for IT company as IT business can not utilize this much cash and the infrastructure is in-thing just now. Management would not have gained as much as it must have lost in recent melt down. Companies do buy into group companies and no body cribs. This matter is blown out without judging the material facts.

    krsnaKhandelwal

  2. Three things which market did not like:

    1)How was the valuation arrived at? Why did the management did not disclose the name of Big 4 firm? I dont think BIG 4 have put a confidentiality clause in the agreement. Its the management.

    2)Why promoter group company and not other companies?

    3) Why not utilise the cash for buy-backs instead of “diworsification” ?

    Agreed that growth is there in Infrastructure but market was paying for IT business. Wipro has two unrelated businesses IT and Consumer Care.

  3. The buy-back calculation is wrong in my post. I thought a company can buy-back upto 25% of its outstanding shares but it turns out that they can buy upto 25% of Equity Capital and Free Reserves. So it means company will spend Rs 1809crs for buyback. In this case, only 1 share out of 8 shares held by the shareholder will be accepted if the buyback is through tender offer at Rs 225 per share.

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