India's Satyam ditches construction company buyout

Indian outsourcer Satyam Computer Services said Wednesday it changed its mind about the proposed acquisition of two construction companies, a day after its stock price plunged on word of the plan.

Satyam, India's fourth largest outsourcer, announced on Tuesday that it planned to buy Maytas Properties and Maytas Infra for US$1.6 billion in a bid to deliver higher shareholder value in an otherwise challenging environment.

Investors, however, sent the price of the company's shares down nearly 55 percent in trading on the New York Stock Exchange on news of the deal, as doubts were raised by analysts whether it made sense for Satyam to invest its cash in the flagging construction business, even as its mainstay outsourcing business was going through difficult times.

In October, Satyam lowered its revenue guidance for the year citing the crisis in the U.S. and banking financial services sector. Its fiscal year ends March 31 next year.

The proposed investment in the two construction companies also rankled investors because the Raju family, which owns a dominant stake in Satyam, are key investors in the construction companies.

"This decision had both customers and investors surprised," said an IT outsourcing consultant, requesting anonymity. Satyam was not only investing in an unrelated area, but there was also a conflict of interest issue involved, as the key owners of Satyam and the construction companies were the same, he added

Satyam said in a statement Wednesday that it was surprised by the market reaction to its decision, but decided to call off the acquisitions in deference to the views expressed by many investors.

The IDG News Service is a Network World affiliate.