Satyam's six deadly sins
What he revealed was not just that there was no cash in the balance sheet of the company but that revenues were overstated (apparently to show higher profits and better valuation). With a fiction to the tune of over Rs 7,000 crore on account of fraud in terms of the overstatement of revenue, profit, and cash on hand, the Satyam fiasco is now being seen as the largest scandal in the history of corporate India. Prior to making this public, as is apparent below, he had enraged his investors and shareholders with an aborted attempt to acquire two unrelated companies, which, he now justifies as ``the last attempt to fill the fictitious assets with real ones.''
The government has now superceeded the Satyam board and there is no board meeting on Saturday, January 10. The government will now nominate 10 directors and apparently within one week the new board will hold its meeting. Do watch this space and we will keep you updated.
1.Proposing a selfish, high-risk acquisition
On December 16, Raju announced the board’s approval for two proposed acquisitions: “To acquire 100 per cent shareholding in Maytas Properties and a 51 per cent controlling stake in Maytas Infra... The two companies being acquired in the challenging market offer potential for significant upside in the future,” is how the board apparently saw it.
Unfortunately, investors didn’t see the proposed acquisitions the same way, and duly beat the stock to pulp. Foreign institutional investors (FIIs), mutual funds and insurance companies own a little over 60 per cent of the company. They were quick to protest what they interpreted as sheer brazenness of the promoters to push through non-synergistic acquisitions of family-promoted companies, ostensibly to transfer money from a cash-rich company (Satyam) to the other family-owned ones. The Raju family owned (till the news came of pledged shares having been sold) barely 8.6 per cent of the company but over 30 per cent in the two infrastructure companies. The $1.6 billion (Rs 8,000 crore) proposed acquisitions of Maytas Properties and 51 per cent in Maytas Infra would have used up the company’s entire cash. Evidently, the company’s rationale of this being a diversification and growth opportunity found few takers and the stock prices of all three companies went into a free fall.
2.Overvaluing the proposed acquisition
Even if you buy the argument that the acquisitions made strategic sense, what analysts consider dishonest is the price the cash-rich Satyam was willing to pay for the two Maytas firms. Consider Maytas Properties, for which Raju was willing to pay $1.3 billion (Rs 6,500 crore). Some brokerage firms estimate the net worth of the company to be $225 million (Rs 1,125 crore). On what basis was the price tag for the buyout reached? The deal translates into a valuation of Rs 1 crore per acre. This, Satyam CFO Srinivas Vadlamani thinks, is reasonable. His reasoning: DLF has got a land bank of 10,000 acres and the valuation of DLF is roughly Rs 60,000 crore! The mystery shrouding the valuation only intensified the feeling that Raju was trying to suck money out of Satyam and bail out firms promoted by his sons. Neither Raju nor his family members were available for comment.
A fortnight that undid 21 years of endeavour |
3.Promoters pledging their entire holdings
On December 29, after reports surfaced that the Satyam promoters had pledged their shares, the company issued a press release that stated: “The promoters informed Satyam that all their shares in the company were pledged with institutional lenders, and that some lenders may exercise or may have exercised their option to liquidate shares at their discretion to cover margin calls.” Following this belated disclosure, three independent directors, Vinod Dham, Krishna Palepu and M. Rammohan Rao, resigned. This raises the question: Were these directors kept in the dark about the pledging of these shares? Surely, some may want to debate whether it is mandatory or not for Indian promoters to disclose to the board whenever they pledge shares. However, one of the independent directors on the board of another leading company says it is important that such matters be disclosed; according to him this is a clear breach of corporate governance. The other question being raised is: For what purpose had Raju pledged their shares—could it be that he was keen to use the proceeds to fund nonrelated businesses?
On December 25, nine days after Satyam announced its aborted acquisition bid, Dr Mangalam Srinivasan, 69, took the lead and quit the board of the company. Srinivasan had been on the board of Satyam since July 1991 as an independent director. Later, three more independent directors quit, leaving Satyam with just five directors. The bigger question, however, is should the management itself have resigned, given the huge breach of corporate governance at the company? After all, shareholder wealth has been depleted, credibility damaged, employee morale punctured and a cloud of seemingly enduring disrepute hovers over the company. “This will continue to hound Satyam for quite sometime and put a lot of competitive pressures and pricing pressures from clients,” says Sudin Apte, Senior Analyst and Country Head, Forrester Research. Raju, however, is in no mood to resign. In a note to employees last fortnight, he pleaded: “Please be assured that the board and the leadership team are doing everything possible to get Satyam back on track.” Can the employees believe him now?
5.Not being able to utilise cash effectively
The surprising bit about the acquisitions announced by Satyam was that the promoters were keen to deploy money in unrelated businesses at a time when liquidity is scarce and conserving cash is the mantra globally. As of the half year ended September 2008, Satyam had cash of Rs 5,300 crore on its balance sheet, which it did not seem to be utilising as effectively as some of its competitors were doing. Take the case of HCL. Says Apte: “Interestingly, the announcement of Satyam’s plan happened within 24 hours of the formal finalisation of the largest acquisition so far by any Indian IT company—HCL buying Axon. The stark contrast between the two players’ approaches highlights Satyam’s mistake—HCL is raising debt to strengthen its IT services business through a stronger SAP capability, and incumbent SAP services leader Satyam wanted to spend its mountain of cash to diversify out of the IT services business.”
6.Messing up a sound company
Most analysts feel Satyam is still financially sound. For instance, according to Angel Broking: “Satyam’s business is characterised by strong cash flow generation, low capex intensity, high return ratios and a good percentage of repeat business...” But there are problems on the horizon. Viju George, Senior IT Analyst and VP, Edelweiss Research, says: “Satyam is still fundamentally sound but its business is getting impacted more by weakness in SAP and vendor rationalisation in favour of the larger players. Fiscal 2010 is going to be a more difficult year for Satyam than it will be for its larger Indian peers.” Yet Satyam is India’s fourth-largest IT services exporter with revenues of $2.14 billion (Rs 10,700 crore) and 51,217 people (for the year ended March 2008). It has some 690 clients and 28 development centres around the world. That’s nothing to be sneezed at. It’s a pity somebody did.
Raju’s options
There aren’t really that many of them.
Possibility: Low, as investors will be appeased only if the management is ejected.
Possibility: Unlikely, unless the PE major imposes a change in management. Also, if an acquirer picks up 15 per cent or over, an open offer will be triggered. According to SEBI’s formula, the open offer price will have to be the six-month average price of Rs 330 per share, which is almost a 100 per cent premium to the market price.
Possibility: Likely, as it is the most practical and investor-friendly option.
Possibility: Low, as the minimum open offer price of Rs 330 comes into play. But it can’t be ruled out as MNCs have been known to be interested in Satyam. Yet, Upaid’s demands for about $1 billion (Rs 5,000 crore) in damages could prove a disincentive for an incoming investor.
Source: Based on a report by Viju George, Senior IT Analyst and Vice President, Edelweiss Research
