Give back the cash, Mr Raju

Satyam Computer Services Ltd’s shares crashed on Wednesday, despite the revoking of the Maytas deal. That is unsurprising, given that the deal completely exposed the Satyam management. Behind the sell-off is the fear that, even if the deal has been called off, what’s to prevent it from doing a similar one in future, perhaps in more innovative ways. Trust has clearly been betrayed.

Some analysts point out that the Satyam management had also painted a bleak picture of the prospects for its IT business in its conference call on Tuesday.

The management had said that growth would be flat in 2009-10 and that the risk in its traditional verticals had increased because of the recession. It said that there was poor visibility in the IT market and that the IT business model had become riskier, specifically mentioning currency and hedging risks. As a matter of fact, the management had explained that the reason it wanted to buy an infrastructure company rather than an IT company was because of the clouded outlook for IT.

But that’s unlikely to be the real reason for dumping the stock—most analysts are perfectly aware of the risks in the sector. Moreover, it’s very likely the Satyam management’s downplaying of the outlook for IT was motivated by the desire to explain away its choice of buying an infrastructure firm. Both the Wipro and Infosys stocks were up on Wednesday.

Yet another reason, as a Citigroup research note pointed out, is that “Management focus seems to have been diverted—the unrelated diversification does suggest that. In that case, we expect the core IT business to get derated significantly.”

What’s the remedy for shareholders, apart from dumping the Satyam stock? Well, the obvious thing would be to change the management, which holds a mere 8.6% of the company’s shares. Company law expert Jayant Thakur points out that shareholders who together hold more than 10% of the total capital have the right to call an extraordinary general meeting and put their demand for electing a new management on the agenda. But he also says that there will be plenty of procedural blocks that the current management can employ to thwart these plans, including recourse to the courts with a view to delaying the process.

As for the Satyam management, the only way it can regain at least some of the trust of shareholders is by giving them back most of the cash in its books, perhaps by way of a special dividend. This is all the more necessary if its claims that it is unable to find a suitable acquisition in the IT space are true. But given its track record, it’s very unlikely it will do anything of the sort.