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Two questionable deals by Indian IT outsourcer raise corporate governance concerns

Satyam, India’s fourth largest IT outsourcer, has cancelled plans to acquire two non-IT companies after investment analysts questioned the company's motivation.

Yesterday, the company said that it was to acquire a 100% stake in property developer Maytas Properties and a 51% share in railway and electricity infrastructure provider Maytas Infra for a combined value of $1.6 billion.

But the revelation that those two companies (named after Satyam in reverse) are both closely associated with Satyam chairman B. Ramalinga Raju and his associates set alarm bells ringing among investment analysts.

The deal – which Raju said “will further de-risk our core IT business” – would also essentially transfer more than $1 billion of company cash into his private coffers and those of his affiliates.

The acquisition plans raise serious concerns about Satyam’s corporate governance, said investment analysts at JPMorgan, UBS, Credit Suisse and Standard & Poor’s. Those comments triggered a 60% drop in Satyam’s share price, forcing the company to cancel the plans within 12 hours of their announcement.

The damage soon spread to Satyam’s peers, with Indian IT outsourcers including Infosys and Wipro also suffering a fall in share price.

Although Satyam’s decision to cancel the acquisitions has been welcomed, some observers predict it will have a prolonged negative impact on the company. "The current turn of events raises questions on the decision-taking abilities of the existing management of Satyam," wrote analysts for Indian investment advisory Anand Rathi Financial Services, according to the Thomson Reuters news agency (a Satyam customer).

The news rounds off a difficult year for Satyam. In October, US news network FOX News reported that a Satyam employee was involved in a hacking attack on the World Bank, an accusation that Satyam vigourously denied.

Finanically, however, the company is still performing. In its financial quarter ending September 2008 it earned $2.6 billion, up 20% from the same quarter of the previous year.

But as yesterday’s announcement that German engineering giant Siemens is set to pay over €1 billion in corruption-related fines shows, poor corporate governance can undermine even the most successful businesses.

Further reading

Satyam denies World Bank hacking allegations

AstraZeneca signs five year outsourcing deal with Infosys

Offshore 2.0 Organisations are now looking to their sourcing partners for technology and business process innovation

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