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No Heads Rolling at Satyam -- Yet

By Rich Duprey - Updated Apr 5, 2017 at 7:51PM

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IT consultant finds itself in the thick of contention after failed merger attempt.

For a hot minute, it looked like hot-under-the-collar investors of Satyam Computer Services (NYSE:SAY) were going to get the head on a pike they sought. Rumors swirled that chairman and founder of the IT consulting firm B. Ramalinga Raju was going to resign in the wake of the failed attempt to buy two family-owned businesses at an inflated value.

Alas, that was not to be, but suffering shareholders might still see the same end result. A board meeting that was scheduled to occur Monday to discuss a potential stock buyback has been postponed as directors seek ways to repurchase Raju's shares and possibly sell the company.

Yet so much more has occurred in the wake of the $1.6 billion bid to buy Maytas Infra and Maytas Properties -- "Maytas" is Satyam spelled backwards -- that investors' heads just might be swimming from the flurry of activity.

There was a lot wrong with the attempted purchase to begin with, not least of which was that Raju's family owned the companies. The purchase price also seemed excessive, with the real estate business carrying a net worth of only $225 million, but Raju being willing to pay $1.3 billion for it. Further, some wondered how Raju could make such a unilateral decision without shareholder approval; he and his family control only 8.6% of the shares, and it would have obliterated Satyam's cash from its balance sheet and increased its debt load. This would have occurred at a time when other IT companies like Infosys (NASDAQ:INFY) and Cognizant Technologies (NASDAQ:CTSH) were -- and are -- conserving cash to weather the recession.

The takeover was possible due to the complicity of the board of directors, which backed him on the maneuver. However, in the aftermath of the stock cratering by 55% and the company backpedaling to say it wouldn't make the purchases after all, four directors have resigned.

The Indian market regulator and the country's Ministry of Corporate Affairs have launched an investigation into Satyam's bid and whether the company was involved in any stock market price manipulation or had committed any irregularities in matters of corporate governance.

Worse still is that the World Bank announced it was banning the IT consultant from getting any contracts for eight years "for providing improper benefits to Bank staff and for failing to maintain documentation to support fees charged for its subcontractors."

For its part, Satyam denies the allegations, is considering a lawsuit, and is demanding both a retraction and an apology from the World Bank. The company is India's fourth-largest IT company and does business with the likes of General Electric (NYSE:GE), Oracle (NASDAQ:ORCL), and Microsoft (NASDAQ:MSFT). The allegations and seeming lack of effective corporate governance may lead to a loss of such contracts from current and future clients.

It may partly be the reason why the board meeting to discuss the potential stock buyback plan -- a move that was generally greeted with derision -- was postponed till Jan.10. Rumors swirl that they're discussing ways to find buyers for Raju's holdings or even to sell the company to someone else.

While it's tempting to want to buy the shares in hopes of gaining from any bounce that might result from a bid for Satyam, there's simply too much uncertainty surrounding the company to argue in favor of that. Currently, there is no bidder for the company (though the names of three private equity groups have surfaced as possibly being interested), the founder still remains firmly ensconced in the executive suite and has shot down rumors that he will go away quietly, and with investigations launched against it at the same time global institutions are shunning it, there's little to recommend staking a claim here.

Microsoft is a Motley Fool Inside Value recommendation. Satyam Computer Services is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Microsoft Corporation Stock Quote
Microsoft Corporation
$291.91 (1.70%) $4.89
General Electric Company Stock Quote
General Electric Company
$79.93 (1.30%) $1.03
Oracle Corporation Stock Quote
Oracle Corporation
$79.15 (2.58%) $1.99
Infosys Limited Stock Quote
Infosys Limited
$20.11 (-0.20%) $0.04
Cognizant Technology Solutions Corporation Stock Quote
Cognizant Technology Solutions Corporation
$69.78 (1.54%) $1.06

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