L&T – What is the satyam behind this stake hike?

By | January 28, 2009

he big news in the markets right now is undoubtedly L&T hiking its stake in Satyam Computers to 12% and stating that it is open to hiking it further to even 15% soon. There is major concern on the streets about how this would affect the core business of L&T. As one market punter put it succinctly, “don’t know why L&T is getting into this jhamela?” Not surprisingly, the stock touched a new low at Rs.611 on this news but soon bounced back, yet investors continue to remain jittery on the counter.

Yes, the perception on the street right now is that this move by L&T is not a very smart one and everyone seems to be questioning the logic behind L&T getting into this mess known as Satyam. But then if one looks at things logically, if this is about the growth of L&T Infotech, then this is surely a good thing. The kind of horizontal and vertical growth which would come to L&T Infotech could catapult it into the big league immediately, which under normal circumstances would be difficult to achieve.

The concern is that this “diversion” could drain the company. Well, that is unlikely to happen as L&T is too large. Unlike before, L&T is no longer undecipherable. After the realignment of business into divisions – Engineering & Construction Projects (E&C), Heavy Engineering (HED), Engineering Construction & Contracts (ECC), Electrical & Electronics (EBG), Machinery & Industrial Products (MIPD) and IT; it is easier to get a pulse on the company. Each division is a profit making unit and hence it makes sense to run each of them like a separate unit.

Another worry on the street is that with L&T making its intentions clear about being open to hiking its stake in Satyam to even 15%, there is now fear that this might trigger off an open offer. Under existing rules, any potential acquirer with a 15% stake in a target company is required to make an open offer to other shareholders to buy another 20% at not less than the average six-month a stock price. L&T is now pleading with SEBI to make an exception to this rule here as it would have to pay a price much higher than Satyam’s current share price if the rule is followed.

The average acquisition price for L&T’s 12.04% stake in Satyam is at Rs 80 a share. The expectation is that L&T is probably looking at an open offer price of about Rs 50 per share. This is surely much less than the price it would have to pay if SEBI’s open offer rules are enforced. As per the rule, the open offer price would not be less than the average stock price of Satyam for the past six months.

There are two possibilities now – either L&T would not hike its stake till 15% thus culling the entire issue of an open offer or SEBI would make an exception here as this is completely within its power to do so. What is sure though is that the Board of L&T will meet on the 30th Jan for consideration of the third quarter results. So maybe we will see some announcements coming in at that point of time. Yes, what is also sure is that L&T, irrespective of the open offer, would see a place on the Board of Satyam.

This story of L&T and Satyam is indeed getting more and more intriguing, better than the soaps that are being dished out on the idiot box!

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