L&T's Satyam gamble

26 Jan 2009, ET Bureau


Faced with capital losses, many investors tend to start buying more and more of the same stock or stocks, the justification being it would bring down the average cost of acquisition. And there would be a neat pile at the other end when prices rally.

Engineering and construction major Larsen & Toubro (L&T) seems to be doing the same with its investments in fraud-hit Satyam Computer Services. As Satyam’s share has tanked after the accounting/funds-siphoning fraud came to light, L&T’s investment in the company has risen, from 4% to about 12%. According to estimates, L&T’s average acquisition cost is down from Rs 157 a share to about Rs 80 now.

Against that, the Satyam stock closed at Rs 39 last week. The investments could well fetch a bonanza later, but as of now it raises some questions. When retail investors average down their acquisition costs in face of losses they are putting own money at risk.

In contrast, increased investment in Satyam by L&T board is tantamount to committing shareholder money. Since L&T is a professionally managed company, one would like to know what the minority shareholders think of such heavy investment in Satyam which may even go into liquidation. Sure, L&T would have taken its large investors into confidence, but the non-institutional shareholders that have a near 50% ownership in it need some explanations.


Besides averaging down acquisition cost, L&T’s intent is to acquire a significant ownership in Satyam to be able to have a say in its management. That is a justifiable action, but should L&T not have waited a while, at least till a better picture of the state of affairs at Satyam was available? L&T’s shareholders would also like to know if the management has asked some of Satyam’s large clients whether they would stay with the company if it were acquired by someone else.

For, as things stand, Satyam’s clients would themselves be answerable to their respective stakeholders. Therefore, L&T could simply be throwing good money after bad. Of course, there is also a reasonable chance it could turn out to be a master stroke. The point is that L&T needs to take its shareholders along in such decisions. It should at least publicise the facts so that those who do not agree with the management can exit.