“Satyam Seeks to Build Future for Its Family”, screams a Motley fool headline. Berating Satyam for attempting to line it’s promoter’s family pockets with the hard-earned, interest-earning cash Satyam owns, Rich Duprey at Motley Fool calls it “ludicrous for Satyam to be purchasing the distressed assets of the chairmans sons’, even if Maytas Properties and Maytas Infra would de-risk the core business.”
But such deals are not uncommon, says Duprey.
Last year, for example, home decor outlet Bed Bath & Beyond (Nasdaq: BBBY) bought baby-goods retailer buybuy Baby from the sons of its co-chairman. They rationalized the purchase by saying that since women shop for home goods, selling pregnant women and new mothers baby stuff was a natural extension. Although the deal “only” cost $67 million, they might as well have opened an auto parts store since women drive cars, too.
Gap (NYSE: GPS) also doles out cash to family members, typically using the construction company of its founder’s brother to build its new stores. Maybe it’s the recession or a slowing of the number of new store openings, but Gap paid only $300,000 to the brother last year, down from $21 million in 2005. Quiksilver (NYSE: ZQK) is another example of a company that had to take big losses for its purchase of ski-maker Rossignol in a bid to help out a family friend.
An example in India was in Reliance Power Limited, where the Chota Ambani did some merger magic and ended up with about half the ownership of RPL for an investment of 1000 crores, the other half being owned by Reliance Energy (now called Reliance Infrastructure), a public company. The RPL IPO valued the company at 100,000 cr. which has now fallen to 30,000 cr. – and Reliance Energy, which obtained the 24,000 MW orders of power projects based on its experience and inexplicably handed them all over to Reliance Power, owns only 42% of it. The rest is shared by Anil Ambani’s personal company (42%) and the rest of the world (16%). The promoter’s ownership in RPL is worth Rs. 12,500 crores, for an investment of 1,000 cr., in about a year. Sweet, and only at the cost of Reliance Energy.
Meanwhile Reliance Energy, now called Reliance Infrastructure, has dropped in market price from 2500+ in Jan 08, to Rs. 620 today.
No one really cares because this stuff is common. And it seems to be so all over the world. Yet, once in a while, shareholder activism wins, and it’s a hope for a new wold.
