Satyam Saga – How Not To Run A Company

Satyam is was one of the big 6 Indian IT companies (Wipro, Infosys, TCS, Cognizant, HCL or switch as few analysts call them).

The story started on Dec 16 2008 when Satyam (promoted by Mr. Ramalinga Raju) said that they are going to acquire Maytas companies (Maytas Infra and Maytas Properties – both promoted by Mr. Raju’s sons). Everything was fine about the acquisition except two things. One, Maytas companies are real estate players and Satyam being an IT company has no business to acquire a real estate company. Second, the Maytas companies were promoted by Satyam promoter’s immediate family and clearly violated ethical code of conduct.

When this acquisition news was made public, people were of the opinion that Mr. Raju was stealing money (Satyam reportedly had about 1.6 bn of free cash that was being used to finance this acquisition) from Satyam (and Satyam shareholders) and rewarding himself and his family (as a part of the deal, the promoters of Maytas were to receive cash component against their shareholding). Eye brows were raised because apparently Mr. Raju owned just about 8% of Satyam and he did not have complete ownership over the free cash flow.

The stock analysts did not like the deal. Here is the confrence call transcript.

The stock obviously took a beating and as WEB says, there is seldom just one cockroach in the kitchen, this acquisition news opened a can of worms for Satyam. Suddenly everyone was analysing Satyam’s books and all this additional scrutiny revealed that promoter holding in Satyam is less than 8% (promoters had pledged their shares against cash flow to meet Satyam’s opex). And then the World Bank 8 year ban for data theft became public. And then there were all sorts of other rumors on the street.

It was still all ok till today (Jan 07, 2009), but when Mr. Raju resigned from the board and wrote this letter to SEBI and board members of Satyam stating

It is with deep regret, at tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:

The Balance Sheet carries as of September 30, 2008

Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as against Rs. 5361 crore reflected in the books)

An accrued interest of Rs. 376 crore which is non-existent

An understated liability of Rs. 1,230 crore on account of funds arranged by me

An over stated debtors position of Rs. 490 crore (as against Rs. 2651 [cr.] reflected in the books)

For the September quarter (02) we reported a revenue of Rs.2,700 crore and an operating margin of Rs. 649 crore (24% Of revenues) as against the actual revenues of Rs. 2,112 crore and an actual operating margin of Rs. 61 Crore ( 3% of revenues). This has resulted in artificial, cash and bank balances going up by Rs. 588 crore in Q2 alone.

The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualized revenue run rate of Rs. 11,276 crore in the September quarter, 2008 and official reserves of Rs. 8,392 crore). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations — thereby significantly increasing the costs.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over; thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas’ investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed. But that was not to be. What followed in the last several days is common knowledge.

And this nudged the stampede on Satyam’s stock price (as since Satyam is a large part of sensex, eventually the sensex fell by 7% or 700 odd points). Here is a chart that indicates both the Maytas deal and Raju’s resignation from the board.

This is a perfect example of how not to run a company.

I cant even imagine the spread of its impact. Apart from impacting the India story, more than 50, 000 careers are in jeopardy. Creditors (and banks) stand to loose their investments and money. The suppliers of Satyam would be hit. Most importantly the customer would be left in lurch. Not to mention the shareholders who have invested in Satyam.  

Anyways, what’s done is done. Questions that we need to find an answer to now, are …

• What were auditors and chartered accountants doing when the books were being cooked? How could they sign the quarterly reports?
• What is the point of having a board of directors in place if they cant detect these things and bring them to the notice of shareholders?
• What can SEBI and other industry associations do to salvage corporate India’s reputation?