Satyam – Time for a real (early) Spring Cleaning

A Holiday Gift for Litigators?

Could this be the story of the year for 2009?

The news about Satyam in the last few days has been disconcerting, to say the least, and it has thrown a cloud of doubt on the Indian services market overall.

Wachovia Capital Markets, LLC analysts weighed in today with this jewel of a soundbite:

This falls under the category of "what were you thinking." Leading offshore IT/BPO service provider Satyam (SAY) proposed using its $1.3 billion in cash to acquire a construction and real estate company named Maytas (i.e. Satyam in reverse) that is controlled by the sons of SAY's CEO. Institutional investors reacted quickly driving the ADRs down over 50% leading SAY to pull the ill-conceived (in our view) deal.

Source: Wachovia's Weekly IT/BPO Service Monitor, December 19, 2008

The Motley Fool’s take on the matter was decidedly more pointed. They said:

The IT industry is facing some bleak prospects for the immediate future, and it seemed ludicrous for Satyam to be purchasing the distressed assets of the chairman's sons' even if Maytas Properties and Maytas Infra would "de-risk" Satyam's core business. Instead, it looked like a bailout of family members by overpaying for them (Maytas, by the way, is Satyam spelled backwards). The real estate business, for example, has a net worth of only $225 million, but Satyam was going to pay $1.3 billion for it. In fact, the entire deal would have wiped out all of the company's $1 billion cash position and substituted a net debt balance of $400 million.

MarketWatch added this perspective (although it wasn’t the only source who questioned governance of Satyam):

The move hit Maytas' fellow property firms as well. "It's an overall hit for market sentiment. It reflects poorly on corporate governance in Indian companies, and it's an issue that investors are now faced with," Nikunj Doshi, investment manager at Envision Capital, was quoted as saying in a Reuters report.

But as bad as all of the above indicates, the following excerpt from a Upaid press release is, in my opinion the most damning news item related to this story:

Satyam is facing suits in U.S. Federal and State Courts filed by Upaid claiming fraud, forgery and breach of contract, as a result of which Upaid has suffered damages to its business and prospects in excess of $1 billion. The Federal Court proceeding is currently scheduled for a Texas jury trial in June of 2009, and Satyam is facing the potential of a very sizable judgment against it. At present, Satyam has cash resources to pay a $1 billion plus judgment or the liquidity to support a supersedeas bond. However, on December 16, 2008, Satyam announced a plan to strip $1.6 billion of cash out of the company, an amount that exceeds its cash, in a transaction to acquire Maytas Properties and Maytas Infra, whereby the large majority of this cash would go to the family of Satyam's Chairman, Ramalinga Raju. That Satyam would proceed with a transaction that seems so clearly designed to deplete its assets in advance of a judgment, rightfully concerns Upaid that Satyam may be willing to engage in fraudulent transfers to avoid its legal obligations.

If you've got a few minutes, listen to the conference call replay on Satyam's site where they announced the proposed deal. Investors/Stock analysts had a real problem with this deal and they were quite vocal about it on the call. The best part of the call starts about 15 minutes into the call when investors and analysts questioned management. It's definitely must-hear material. (Hurry though as this replay is only good for one week from Dec. 16, 2008).

So, what can we learn about this? Not much yet as many facts about this deal may still surface and might change the landscape. However, several things immediately jump out to me for now:

1) SarbOx & Controls Don’t Stop Bad Business Decisions from Happening – Imagine that this was playing out in the U.S. Would Sarbanes-Oxley have prevented this deal from going down? Not a chance. SarbOx documents the daylights out of controls, processes and procedures. It does not and may never prevent fraud, business failures or bad business decisions. This plot involves families, wealth transfer and related parties transactions. If you want to prevent bad decisions from happening, you need independent boards, directors who are active and independent from the CEO and great leaders. Great leaders don’t build businesses at any cost or with any means possible. Great leaders are ethical, visionary and principled. They also possess values and qualities that some televangelists couldn’t live up to. When we learn more of this Satyam situation, I’ll bet we’ll hear some real juicy tidbits.

2) Business Deals that involve family members should be highly vetted in any company – Blood is thicker than water, remember? If you were a CEO, would you put your company’s interests ahead of the wealth accumulation interests of you and your family? If you said ‘yes’, you may be human but you may be a bad choice for CEO. Any deal involving family should be subject to considerable, additional scrutiny and not driven or approved by family members.

3) Litigators are going to be all over this – The Upaid request for depositions is likely to be the first in a salvo of litigation to come. Expect class-action shareholder suits to be filled against the principals of the company as aggrieved shareholders will seek redress for the plummeting value of their stock positions.

Satyam needs to do the following to regain credibility with its clients and the stock market: 1) dump the CEO 2) dump the board and bring in truly independent board members 3) forget the stock re-purchase – it won’t restore confidence until the governance matters are fixed

Satyam competitors may have a great opportunity here. Satyam’s stock is way down because of this. SAY shares on the NYSE closed today at $7 and change. They’ve been as high as $28-29 this year and have recently traded as low as $5.05/share. Satyam could be a hostile takeover target for a firm looking for a significant offshore play (e.g., HP comes to mind). Could someone take BearingPoint and Satyam and make a real player out of this?

source:Yahoo Finance