Amidst an unprecedented hue and cry, Satyam Computer Services' founder and chairman B Ramalinga Raju has retracted his bid to buy out two group firms engaged in the ailing infrastructure and construction business (See: Satyam Computer to buy out founders' property firms for Rs7,680 crore).

Shareholders have opposed the deal on several grounds. The corporate sector has labelled it as 'unethical' and 'against the interests of the small investor'.

Analysts said the deal was overpriced as it valued the company almost on a par with Unitech, the country's second-largest real estate developer.

Templeton MF, which has always been an active shareholder has come out in the open with its opposition and said that  it will go to any length to prevent the deal.

The amount of money Satyam would pay for this acquisition, would nearly wipe out the balance sheet of Satyam and add on new debt. It has close to $1.3 billion of cash in its books.

According to Indian law, the free reserves of a company up to 100 per cent can be used for acquisitions without shareholder approval.  So while the deal may be legally permissible, it raises serious corporate governance issue.

''We're taken aback by the reaction of investors today," Vadlamani Srinivas, chief financial officer, Satyam Computer Services told The Economic Times, "We did look at a couple of options including acquisition of an IT company before firming up on this acquisition. "

Srinivas aded, "Investors are not looking at the value proposition in this acquisition, which is meant purely at diversifying our business. At this point, we do not have a plan B in place, if you are saying that institutional investors could block the deal. But we are clear that the board has full powers to approve the deal''

The story so far
Software services major Satyam Computer Services Ltd had decided  to acquire majority stake in Maytas Infra and buy out Maytas Properties for a total of around Rs7,680 crore ($1.6 billion).

The two property firms are founded by the families of chairman B Ramalinga Raju, members of whose family sit on the boards of the companies.

Rama Raju Jr is one of the key promoters of Maytas Properties, which undertakes urban infrastructure projects, and has been on its board since 2005.

B Teja Raju, Ramalinga Raju's elder son is the vice chairman of Maytas Infra, which is engaged in infrastructure construction and asset development.

It employs over 3,000 people ande registered a net profit of Rs17 crore on a turnover of Rs354 crore for the second quarter ended 30 September.

Satyam wold have acquired a 100-per cent stake of Maytas Properties for Rs6,240 crore (around $1.3 billion) and Rs1,440 crore (around $0.3 billion) for the 51-per cent stake in Maytas Infra.

It has cash reserves and equivalents of Rs5,500 crore (around$1.15 billion)  and had proposed to acquire 31 per cent in Maytas Infra from the promoters at Rs475 a share before making the mandatory open offer for an additional 20 per cent since the company is listed on the domestic stock exchanges.

The open offer had been approved at Rs525 a share and is subject to change in line with SEBI guidance.