MUMBAI: Indian outsourcer Satyam Computer Services Ltd will buy two infrastructure companies for $1.6 billion to diversify its business, but its American shares fell more than half with analysts slamming the unexpected move.
Satyam, India's No. 4 software services exporter, said on Tuesday its board had approved the proposal to buy the entire stake in unlisted Maytas Properties for $1.3 billion and 51 percent stake in Maytas Infra for $300 million.
Promoters of Satyam, led by founder and chairman B. Ramalinga Raju, hold 36 percent in Maytas Infra and 35 percent in Maytas Properties. The sister companies build infrastructure such as highways, ports and special economic zones.
At 1650 GMT, Satyam shares traded in New York were down 53.8 percent at $5.79, making it the fourth-most active share on the exchange and the biggest percent faller. The Dow Jones industrial average rose 1.3 percent.
The deal was announced after the Indian stock market had closed, and traders expected the stock to fall sharply on Wednesday.
Analysts said the acquisitions made little sense at a time when outsourcing companies were preserving cash to cope with slowing business momentum, and the construction business had also been badly hit by the economic turmoil.
They also questioned the valuation of the deal.
"On the face of it, the deal looks outrageous," said Tejas Doshi, head of research at Mumbai brokerage Sushil Finance.
"They are doing it without taking the consent of the shareholders. It dents the confidence of shareholders in promoters," he said. "In this deal, the money is getting transferred to promoters."
Ramalinga Raju said in a statement the acquisitions would "de-risk the core business" and that the integrated organisation would be stronger and more diversified to deal with the market uncertainty.
"The two acquisitions pave the way for accelerated growth in additional geographies and market segments such as transportation, energy and several infrastructure sectors for the core IT business," he said.
Ramalinga Raju said 75 percent of the acquisition value "would be addressed by (Satyam's) cash reserves" and the rest through debt.
Satyam, based in southern Indian city of Hyderabad, proposes to acquire 31 percent in Maytas Infra from promoters at a price of 475 rupees a share and make an open offer for an additional 20 percent at a price of 525 rupees a share, the statement said.
Satyam's Chief Financial Officer, V. Srinivas, said Satyam's profit margins would be diluted as a result of the acquisitions in the first year of operations of the combined entity, and he expected the margins to improve after that.
India's software services sector, with its focus on exports, is facing an uncertain 18 months, a lobby group said on Tuesday, as the global slowdown and a recession in the key U.S. market forces companies to cut spending on technology.
In October, Satyam, which specialises in business software and offers back-office services, said revenue in the year ending March 2009 would grow between 19 percent and 21 percent in dollar terms, slower than 24 to 26 percent growth seen in July.
Satyam's outsourcing clients include General Electric, Nestle, Qantas Airways, Emirates Bank International and Fujitsu Services.
Among the top Indian outsourcers, Wipro, the third-ranked software services exporter, also has interests in computer hardware, consumer products and lighting, with software business accounting for a bulk of its revenue.
In the current financial year to March, the Maytas acquisitions would add $500 million to revenues, and in three to four years about 50 percent of Satyam's consolidated revenues would be from infrastructure, Ramalinga Raju told television channel CNBC TV-18.
Satyam said it would retain its emphasis on information technology and related services.