Money can be made in buying “Satyam Computers” Call Option on Wednesday!!!

Yet another opportunity to make money!!!!
Country's fourth largest software exporter Satyam Computers on Tuesday announced that it will acquire infrastructure firm Maytas Properties and the majority stake in Maytas Infra for a total of $1.6 billion.

The Board of Directors has approved the proposal to acquire 100 per cent stake in Maytas Properties for $1.3 billion and 51 per cent in Maytas Infra for $300 million, Satyam said.

The price proposed to be paid to promoters is Rs 475 per share, while the price for the open offer has been approved to be Rs 525 per share and is subject to change in line with SEBI regulations.

Satyam loses $2 bn in m-cap on NYSE on Tuesday, its ADR were down 50% in just 1 day. One can expect lots of activities in Indian markets too especially in Satyam Future & Option trade.

The Satyam ADR listed on the New York Stock Exchange fell 54% on early trade on Tuesday at the Wall Street, as the markets refused to realize the significance behind the deal. Amongst all the action, investor wealth in Satyam - India's fourth-largest software-services provider - lost over $2 billion in 60 minutes as the American Depositary Receipts (ADRs) were sold heavily on New York Stock Exchange. After closing at $12.55 on Monday, Satyam ADRs opened 50% down at $6.21. It was trading at $5.79 as over 16 million shares were traded against an average volume of 1.3 million on the NYSE.

"This is not diversification. It is waste of shareholders' money. We are reviewing our rating and are likely to give a sell. This a major corporate governance issue and is a major blow to the credibility of the Satyam management," an IT analyst at a foreign brokerage said.

Satyam had cash and cash equivalents of nearly $1.15 billion at the end of September 30, which many feel could have been better used by giving back to shareholders, rather go for this "unrelated acquisition". "Satyam has a Weightage of 2.05% in Sensex and 1.07% in Nifty. Though the Indian benchmarks may not be affected to that extent, the BSE IT index may not be able to thwart off investor wrath since Satyam has 14.8% Weightage there.

How can one make money from this situation?

• It’s simple, 50% fall in the Satyam share price in a day is going to re-gain at least 20% in next 2-3 days because such pessimism are un-warranted; Yes we do understand that they could have used their cash reserve in better ways but one must not forget that Satyam Computer's promoters who belongs to royal (zamindar) family are the one who are having huge land bank and their IT business doesn’t need much capex (what an IT guys does is they get the project, complete it and get the payment back. It is intellect business hence keeping huge cash reserve for a debt free IT company is not at all required).
• Why people reacting so much is because promoters are going to get the cash after this deal and shareholders of Satyam feel that why promoters are making themself rich & why company is venturing into un-related business, but we would say it is always better to change with economy else you will be obsolete just like HLL (It was the king in 1997-98 time & look at now). Down the line 5 years do you think people are going to see any craze in IT folks, we don’t think so?

Strategies:-

1. Buy Jan’09 Call Option of Satyam Computers tomorrow (fresh calls will be written, one can see lots of activity here just like we saw in Orchid Chemical long time back), in next one month people will forget everything and we will be back to normal.
2. Buying Dec’08 Call might not be good option now. We are left with only few days for expiry, so go for Jan'09 Call Options only if there are some call writers who writes such calls else no option but to have a small position in Dec'08 Call options.
3. In case if SEBI comes in between this deal and Satyam decides to take off the deal which is also a probability, then you will be get good returns in your call options.

- Sandeep Jain, Associate, HBJ Capital
Note: Pls read the disclaimer on this site. Investors/ traders should do their due diligence before taking any action based on our analysis.