(Adds analyst comment, background, updates share price)
MUMBAI, Dec 16 (Reuters) - India's Satyam Computer Services Ltd SATY.BOSAY.N shocked investors by saying it plans to spend $1.6 billion to buy two builders partially owned by Satyam's top executive, triggering a 55 percent plunge in its share price.
India's No. 4 software services company said on Tuesday it planned to enter India's depressed construction industry by buying all of privately held Maytas Properties for $1.3 billion and 51 percent of builder Maytas Infra MAIL.BO for $300 million.
The two are builders that work on infrastructure projects including highways, ports and water treatment systems. Satyam helps develop software for other businesses.
Satyam founder and Chairman B. Ramalinga Raju and other insiders hold 36 percent in Maytas Infra and 35 percent in Maytas Properties.
“This is outrageous and very frustrating,” said Jefferies & Co analyst Sachin Jain. “This clearly raises questions about what kind of corporate governance you have in other Indian companies. That could hurt foreign investment.”
The acquisitions make little sense at a time when technology outsourcing companies are preserving cash to cope with slowing sales, analysts said.
Ramalinga Raju said in a statement the move would “de-risk the core business,” making his company stronger.
“The two acquisitions pave the way for accelerated growth in additional geographies and market segments,” he said.
They will help diversify the company’s revenue base at a time when its core technology outsourcing businesses in developed countries are suffering because of the recession, he added.
Several analysts questioned the motives of Satyam’s top executives.
“They are doing it without taking the consent of the shareholders. It dents the confidence of shareholders,” said Tejas Doshi, head of research at Mumbai brokerage Sushil Finance.
JP Morgan cuts its recommendation on the stock to “underweight” from “overweight” and slashed its price target to 175 rupees ($3.68) from 475 rupees. Janney Montgomery Scott cut its recommendation to “neutral” from “buy,” while S&P Equity Research reduced its rating to “hold” from “buy.”
“We see this as a serious corporate governance issue and believe investors should avoid the stock,” JP Morgan said in a note to clients.
Satyam plans to fund 75 percent of the acquisition with cash and the rest by selling debt.
The company, which is based in the southern Indian city of Hyderabad, plans to acquire 31 percent in Maytas Infra from its promoters, or company insiders, at a price of 475 rupees a share. Satyam also plans to make an open offer for an additional 20 percent at a price of 525 rupees a share.
Maytas Infra shares fell 2.26 percent in India to 486 rupees before the acquisition was announced.
Satyam’s Chief Financial Officer, V. Srinivas, said the acquisitions would hurt his company’s profit margins in the first year after their completion, though he expects profitability to improve after that.
The company cut its sales forecast in October, saying that revenue would grow between 19 percent and 21 percent in U.S. dollars in the year ending March 2009, slower than 24 to 26 percent growth seen in July.
Satyam's revenue jumped 46 percent to $2.14 billion in the fiscal year to March 2008. Net income climbed 40 percent to $417 million at the company whose clients include General Electric GE.N, Nestle NESN.VX and Qantas Airways QAN.AX.
In the current financial year to March, the Maytas acquisitions would add $500 million to revenue, and in three-to-four years about 50 percent of Satyam’s consolidated revenue would be from infrastructure projects, Ramalinga Raju told television channel CNBC TV-18.
Still, Satyam said it would retain its emphasis on information technology and related services.
No. 3 Indian software services exporter Wipro WIPR.BO is diversified with interests in computer hardware, consumer products and lighting. Its software business accounts for the bulk of revenue.
Shares in Satyam fell $6.85, or 55 percent, to $5.70, after touching a low of $5.05. It was the biggest percentage decliner on the New York Stock Exchange on a day when the Dow Jones industrial average .DJI rose 4.2 percent as the Federal Reserve slashed borrowing costs to a record low.
The deal was announced after the Indian stock market had closed, and traders expected the stock to fall sharply in India on Wednesday. (Additional reporting by Jim Finkle in Boston. Editing by Andrew Macdonald and Bernard Orr)
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