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SATYAM COMPUTER SERVICES LIMITED
MINUTES OF MEETING OF THE BOARD OF DIRECTORS OF THE COMPANY HELDON TUESDAY, DECEMBER 16, 2008 AT 4.00 P.M AT SATYAM INFOCITY, HITECH CITY,MADHAPUR, ~Y~ERABAD - 500 081
Directors present
Prof M. Rammohan Rao, Chairman of the meeting
Mr B. Ramalinga Raju, Chairman
Mr B. Rama Raju, Managing Director
Mr Ram Mynampati, Whole time director
Dr. (Mrs) Mangalam Srinivasan, Director
Mr T.R. Prasad, Director
Prof V.S. Raju, Director
Prof Krishna G. Palepu, Director (participated through audio conference)
Mr Vinod K Dham, Director (participated through audio conference)
In attendance
Mr V. Srinivas, Chief Financial Offrcer (CFO)
Mr G. Jayaraman, Company secretary
Invitees
Mr Srinivasu Satti, Head -- Mergers and Acquisitions
Election of Chairman for this meeting
Since, Mr B. Ramalinga Raju, Chairman is interested on one ofthe items to be considered in this meeting, members unanimously resolved toelect Prof M. Rammohan Rao as the chairman of this meeting. Accordingly, Prof M. Rammohan Rao chaired the meeting and conducted the proceedings.
1. Leave of absence
Prof Krishna G. Palepu and Mr Vinod K Dham participated in themeeting through audio conference. Leave of absence was granted to them in viewof the technical requirements.
2. Minutes of previous meeting
Minutes of previous meeting held on October 17, 2008 were postedon the Board room portal and intimated the directors vide email dated November3, 2008, for the information and review of members. The Board reviewed andconfirmed the same in the meeting.
3. Acquisition proposals
Disclosure of interest by Mr B. Ramalinga Raju, Chairman andB. Rama Raju, Managing Director:
Mr B. Ramalinga Raju, Chairrnan and B. Rama Raju, ManagingDirector being interested and concerned in these proposals, disclosed the sameand abstained from the discussions and voting on these proposals.
Prof M. Rammohan Rao, Chairman of the meeting has taken up theitem on the agenda relating to proposal for acquisition of Maytas lnfra Limitedand Maytas Properties Limited and requested Mr Ram Mynampati, Whole timedirector and other management personnel to explain the rationale for theseacquisitions with particular focus on diversification into different space andproposed valuations.
Mr Ram Mynampati explained to the members the present scenarioin IT markets and the need for diversification as given below.
1) Accelerated growth is very difficult under the currenteconomic situation, for next 2 years.
2) Pricing & margin pressures and continued volatility onForex.
3) 95% dependency on Developed markets, which are worst hit.
4) Certain discomfort around outsourcing views by US government.
5) Potential growth opportunities in emerging markets
Given the above, it has been felt that this is the time to adoptstrategies for de-risking by diversification into different segments havingpotential growth opportunities and Infra consisting transportation, energy andirrigation, has immense potential, he further explained.
Mr V Srinivas, Chief Financial Officer explained on theproposed valuations and informed the members that the evaluation for MaytasInfra has been based on the SEBI (Substantial Acquisition and Takeovers)Regulations, 1997 and for Maytas Properties based on the evaluation done byErnst & Young one of the Big four accounting firms and requested Mr Srinivasu Satti, Head M&A to make detailed presentation on the proposals.
Mr Srinivasu Satti commenced the presentation by explaining thereasons for diversification into different segment. He explained to the membersthe growth trajectory in revenues of the Company over next 5 years and thechallenging environment in IT space worldwide.
Mr Satti then presented on the trends and demerits in acquiringIT assets and inheritance of many problems such as not attractive customers andcompetencies, very restrictive captives and skill levels are not commensuratewith cost.
He continued his presentation on Emerging economies and role ofhard infrastructure. He explained to the members on China and India withparticular focus on infrastructure spend in China and India and immensepotential business opportunities in this space. He further presented to themembers that the Governments all across the globe are giving impetus toInfrastructure spending to ward off unemployment, to create spending cycles andto aid economic growth. It was informed to the members based on industry reportsthat India will spend $ 496 billion in the next 5 years and China will spend $730 billion in the next 3 years, just for Roads l Ports.
Members noted the following in respect of synergies andimperatives on infrastructure foray:
i) Leveraging on Brandof Satyam to become an eminent player in Infrastructure as well.
ii) Boot strapping a large verticalwith synergies across Engineering, procurement, BPO and Manufacturing andAutomobile Group.
iii) Tools, processes andtechnology can be leveraged by the new business.
iv) Evaluation of transformationalservices for testing ground in emerging markets.
v) Leveraging global footprint forinfrastructure business across countries.
Mr V. Srinivas, Chief Financial Officer added that we canestablish leadership in both segments and the acquisition facilitatesDifferentiated acceleration of growth.
The growth prospects of the entities at individual and combinedlevel in terms of revenues and profit after tax were presented to the members.
Mr V. Srinivas proposed to the members the price per share ofRs. 525 to the public shareholders to acquire 20% through open offer and Rs. 475per share to the promoters of the Maytas Infra for acquisition of 31%. Based onthis, the total consideration comes to Rs. 1,504.10 crores (US$ 306.95 mn), headded. He further explained that the price to public shareholders is subject tochange, depending on the movement in share price of Maytas Infra in the stockexchange between now and the date of public announcement.
Mr V. Srinivas then proposed, based on the evaluation done byErnst & Young that the consideration for acquisition of Maytas Properties asa wholly owned subsidiary as Rs. 6,410 crores (US $ 1,308.16 mn).
Members noted that the total consideration for the acquisitionof Maytas Infra and Maytas Properties as Rs. 7,914.10 crores (US$ 1,615.11 mn).
Mr Srinivasu Satti summarized his presentation by explaining tothe members the following:
i) Birth of large vertical to build domain competencies andhigher end services
ii) De-risking
iii) Synergies
iv) Access to emerging markets
v) Accelerated growth
Prof Rammohan Rao, Chairman of the meeting thanked Mr Ram Mynampati, Mr V Srinivas andMr Satti for the detailed presentation andexplanations and requested the Board members to offer their comments. Thepresentation forms part of these minutes.
Dr Mangalam Srinivasan, Director enquired if there are anyparticular reason either external or internal for this initiative and timing ofthe proposal. Mr Ram Mynampati informed about the current down turn andchallenging times in the market place. Given the opportunity with wellsynergies, it has been felt that this is the right time to de-risk.
Dr Mangalam Srinivasan suggested to involve the Board membersright from the beginning of the process to avoid the impression that the Boardis used as rubber stamp to affirm the consequent or decisions already reached.
Prof Rao asked if this would amount to dilution of corecompetency in IT business as the proposed acquisitions are in unrelatedbusinesses. It was informed that given the synergies and opportunities forentering into emerging markets as explained in the presentation, there would notbe any impact to the core IT business and in fact the new space would complementthe IT business growth. Prof Rao then wanted to know the risks involved in thisdiversifying strategy. It was mentioned that there may be some risk but it canonly be known from the market place.
Mr Vinod also enquired about the time of the event and Mr V.Srinivas informed that Year 2000 was defining moment and organizations respondedthrough enhancing value and now we wanted to respond by driving acrossindustries and verticals for diversification.
Mr T.R. Prasad stated that Indian economy is growth orientedand Infra is clearly seen as a definitive growth story.
It was further informed to the members that Hyderabad Metroproject is 4 to S times of Bangalore and Hyderabad Airports and largest BOT inthe country.
Regarding questions on price for the open offer, Mr Jayaraman,Company Secretary clarified that as per the SEBI regulations offer price shallbe highest of the following:
(a) the negotiated price under the agreement, if any.
(b) price paid by the Company or persons acting in concert withhim for acquisition, if any, including by way of allotment in a public or rightsor preferential issue during the twenty six week period prior to the date ofpublic announcement, whichever is higher;
(c) the average of the weekly high and low of the closing pricesof the shares of the target company as quoted on the stock exchange where theshares of the company are most frequently traded during the twenty six weeks orthe average of the daily high and low of the prices of the shares as quoted onthe stock exchange where the shares of the company are most frequently tradedduring the two weeks preceding the date of public announcement, whichever ishigher.
He further informed that in almost all the recent open offers,the negotiated price has been higher by more than 30%.
Since the transactions are among the related parties, the priceoffered to the promoters of Maytas Infra is lower than current market price ofabout Rs. 490- and is about 90% of price proposed for public under open offer, MrJayaraman further added.
Prof V.S. Raju and Mr T.R. Prasad commented that consideringthe existing market price, the pricing for public is generous.
On an enquiry by Prof Rao about the competitive bid, Mr Jayaraman, clarified that given requirement of SEBI regulations that theCompetitor has to bid from both promoters and public for which the possibilitiesare very distant.
Mr Vinod Dham opined that since the transactions are amongrelated parties, it is important to demonstrate as to how the acquisition wouldbenefit the shareholders of the Company and enhance their value.
Mr V Srinivas informed the members that as against theevaluation of Rs 6,523 crates done by E&Y for Maytas Properties, we haveconsidered only Rs 6,410 crores. It was further informed that the titlediligence was done by Luthra and Luthra, a Delhi based law firm.
In view of the non disclosure agreement with the valuer, we arenot able to disclose the name of the valuer to the public, Mr Srinivas furtherinformed.
Mr Srinivas further stated that Maytas Properties has land bankof 6,800 acres and can construct 245 mn sft. This is almost l/3 of DLF'sproperties but the valuation considered is 1/10 of DLF valuation, Mr Srinivasinformed.
Prof Krishna Palepu, Director, pointed out that it is importantto ensure that each of the organizations is able to excel in its own domain, andat the same time synergies are created between different entities. This is achallenge associated with the proposed acquisitions, and it needs to be managedwell. Mr Srinivas responded by explaining that by FY 2010, 25% of Revenues willcome from two entities.
Mr Srinivas further informed to the members that the market istalking about de-growth for IT industry and with this acquisition, US$ 800 mnout of US$ 3 billion will be from Infra segment and will go upto 33% by FY 2011.There will be a nominal dilution in EPS for FY 2010 and for FY 2011, it willshow 25% growth in EPS, he added.
At this stage Prof Rao invited the management of Maytas InfraLimited, Mr Teja Raju, Vice Chairman, Mr Mohan Gurunath, Head - StrategicBusiness and Mr WR Raju, Chief Financial Of ficer for the presentations anddiscussions.
Thereafter management of Maytas Infra Limited made apresentation, which forms part of these minutes, to the Board on the company.
For a question by members about effect of this transaction onthe Associates of Maytas Infra, Mr Mohan informed the members that there aremany similarities in SatyamWay and MaytasWay and hence integration culturally orotherwise will not pose any challenge.
When asked about debt-equity ratio of Maytas Infra, Mr VVR Rajuinformed it as I : 1.6.
Thereafter members deliberated and discussed various othermatters with the management of Maytas Infra and thanked them for theirpresentation and providing information and details.
Prof Rao then invited the management of Maytas Properties, Mr K. Thiagarajan, Chief Executive Officer andMr Badri, Chief Financial Officerfor the presentation and discussions.
Thereafter management of Maytas Properties made a presentation,which forms part of these minutes, to the Board on the company.
Mr K. Thiagarajan informed the members that Maytas Propertieshas not leveraged private equity despite huge land bank.
To a question of Dr. Mangalam Srinivasan on the nature ofguarantees given to banks, it was clarified that land and developments are givenas collateral securities.
Mr T.R. Prasad, Director asked about the number of acresmortgaged with Banks / Financial Institutions out of 6,800 acres and Mr Badriinformed that 110 acres have been mortgaged with Banks / Financial Institutions.
Prof Rao after enquiring that there are no further questionsfrom the members, thanked the management of Maytas Properties for theirpresentation and providing information and details.
Prof Rao commented that while the transaction would add valueto Satyam, there is a need to ensure that the valuation is up to date and it isdone comprehensively using different methods and consultants. He also mentionedthat there should be complete transparency and justification for the methodologyto be adopted. He further advised that since it involves related parties, thetransaction and its valuation should be communicated to all the concernedstakeholders. Prof Rao then enquired whether shareholder's approval is requiredfor these transactions. It was mentioned that in this case it was not required.
While Dr. Mangalam Srinivasan commented that this is encouraginggood news, suggested the management to take Board's guidance at appropriatestages for all acquisitions.
Mr V. Srinivas informed the members to the question on fundingthe acquisition that 75% o~f''t'he'a'cquisition would be funded through internalaccruals and the 25% will be funded through debt.
Mr T. R. Prasad further advised that valuation of MaytasProperties be done in three distinct categories namely,
(i) completed projects for which the valuation be based onactuals,
(ii) work-in progress for which valuation be brought inalignment with current market Realizations and
(iii) For lands awaiting development, valuation be based on thebasic market value notified by the state government for registration of sale ofsuch lands. .
He further added that if the final valuation of MaytasProperties is significantly higher than aggregate of the above three valuations,full and proper justification be provided for such higher valuation to thesatisfaction of the Board.
Prof Krishna Palepu, Director stated that the proposedacquisitions have two complicated aspects - unrelated diversification, andrelated party transactions. He further stated that the presentations made to theBoard articulate the strategic rationale for diversification. Management hasassured the board that steps have been taken to satisfactorily address potentialconcerns associated with the related party transaction, namely independentvaluation of Maytas Properties with conservative assumptions, and a price topromoters that is lower than the one being offered to public shareholders ofMaytas Infra.
Both these issues will be of significant concern to investorsand analysts, so it is very important that management makes the same compellingpresentation to the investors as well to make sure that they appreciate thesetransactions enhance Satyam's long-term shareholder value, Prof Palepu furtheradded.
Thereafter, members enquired about intimation to Stock Exchangesabout approval of the proposals and Mr Jayaraman clarified that as per thelisting agreement, the transaction is price sensitive and it should be intimatedto the stock exchanges immediately without delay. He further added, since themarkets in India are closed and markets in US are yet to open, it wouldfacilitate enough cooling period for the information to get properlydisseminated.
Prof Rao after enquiring that there are no further commentsfrom the members moved the following resolutions for approval of the proposalsas reviewed and recommended by the investment committee of the Company.
a) Acquisition of Maytas Infra Limited
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