Ongoing Chaos !!!

Deal Cancelled:
Satyam, faced a backlash from investors after it announced a decision to buy real estate and infrastructure companies, managed and controlled by the sons of Satyam's founder-chairman Ramalinga Raju, for $1.6 billion.

Within a few hours, a chastened Satyam called the deal off. The developments come on the heels of recently called off re-organisation plan of Sterlite Industries. The silver lining though is that quality managements will command a premium.
For now, there are many questions that crop up. What are the undercurrents of the deal? What impact can this incident have on the future of the concerned companies? Should investors hold on to these stocks? To know the answers, read on.

Defeating logic:
The proposed deal to buyout 100 per cent stake in Maytas Properties for $1.3 billion and 51 per cent stake in Maytas Infra for $300 million is difficult to digest. The deal, had it gone through, would have consumed all the surplus cash on the books of Satyam, which is estimated to be $1.1 billion. The acquisitions would have netted the Raju family $570 million (they hold a 35 per cent stake in Maytas Properties and 36 per cent in Maytas Infra), while exhausting Satyam's cash reserves and leading it to raise $400 million of debt, leave alone the debt that would have added to its books on account of the acquired entities.
The explanation, provided for the said deal was to de-risk the business model of the company, in the light of a bleaker business outlook for the IT services company. But, to diversify so radically at a time when Satyam's rivals are hoarding cash to weather a global slowdown is disconcerting. A look at the margins of Maytas Infra (financials of Maytas Properties not available) also suggests that the margins of the combined entity would have stood reduced after the deal.

Ulterior motives?
The fact that the promoters of Satyam, who hold less than 10 per cent stake in the company, went ahead with the deal without the approval of its minority shareholders, just because it was "not required as per regulations", shows that corporate governance was not exercised in "true spirit" and yet again brings to surface, loopholes in the system. This, despite the fact that it was a related-party transaction and that it would have changed the risk profile of the company. "It is also difficult to fathom, why the company did not prefer a three-way stock-based merger of the entities, which would ensured that the cash would continue to stay in the system," says Viju George, analyst, Edelweiss Securities. The disclosure on the shortlisting process and valuations for the two target companies is also not sufficient, which seem grossly expensive.

High valuations:
As per the deal, Maytas Properties (unlisted) is being valued at Rs 91.47 lakh per acre (Rs 6,220 crore; land bank of 6,800 acres), despite the fact that bulk of the land is in tier II and III cities such as Vizag, Vijaywada, Kakinada and Nagpur. Analysts say that, on a realistic basis, the per acre price should average at Rs 40-45 lakh per acre or even less, given the current scenario.
On the other hand, Maytas Infra has been valued at nearly 1.6 times FY08 revenues even as mid-cap construction stocks on an average are trading at less than half their FY08 revenues. Even on a P/E basis, the valuations are high.