Valuing Satyam

An innocuous SMS prompted me to this post. The SMS pointed to this article & I could not resist this post. Thank you Ravi for the SMS
Well. How do you value a troubled company in the midst of a major scam perpetuated by the founders themselves. Adding to the complication is the family members including sons , brother and to top it all the Andra Pradesh politico.
Well Again
As discussed in the article the true assets of the company is its IP viz its highly skilled staff and its ongoing engagement with its customers In other words the company is per se in great shape. I would hurry to add that GoI which has a major say in the matter rather than the state govt. has been handling the issue with great elan and very importantly no rhetoric not has politicised the issue. This will be the real clincher for the discerning investor. If the GoI is keen on getting rid of the case quickly with minimum or no caveats - well - you cant ask for more.

Now comes the crutial question - How do you value Satyam ?

Simple. On pure free cash flow basis.

If the new owners quickly bring back morale to Satyam, act decisively to consolildate the customer base and build on it and prevent any rot in the core then you have a winner for a pittance. Just the internal cash generation in the next 36 months can fully clean up Satyam's balance sheet and pay off the aquisition cost. That is One Hundred Percent RoI in 36 months.
Boy - what more can you ask for !!!!

But that is not all.

May be my ignorance or over obession with the litigation in US. I add high weightage to this. Can the bidder seek GoI immunity againt this ? Will GoI agree ? 52000 employees and other considerations in a election year.

What I could glean from the media reports is

• Satyam was is and will be a profit making company.
• Raju's first statement that he overstated revenues is false.
• The founders have siphoned out funds to Maytas which legitimately belongs to Satyam
• If GoI continues its laisse-faire approach these thousand of crores of rupees which legitimately belongs to Satyam can be brought back into Satyam though this will be need 4 to 5 years of hard work political manoeuvring and protracted litigation
• These inflows can more than offset the potential mass tort liabilities in US

In the right hands Satyam can be restored to its past glory and financial stability in 3 to 4 years by a competent new management the rider being the netas and babus keeping away.
And the present share price and the SEBI , CLB waivers are a bonanza. ( see my earlier post - Satyam for a song. )
The current boards priority should be to hand over Satyam to a new competent suitor who will stabilize Satyam and make a packet for himself.

Win - Win.
Naik & Anand are aware of this.

The Suitors

The list is short.

1. L & T
2. The noisy dude BK Modi
3. Tech Mahendra

You know that right. Yes I can hear you. Not this post is not about the list but about who is here for what.
L & T : Mr Naik is trying to play the average cost stock game. He had invested in 8 % if the paid up capital of Satyam well before Raju blew the whistle at around Rs 300 a pop. And when Raju let the cat out of the bag the share was Rs 35. The precipitous fall for L & T running into a few hundred crores. So Naik went and bought another 4 % at around Rs 35 to bring down his average share cost. He had to stop at 12 % because if he crosses the threshold 15% a open offer to the general public is triggered and the price has to be average of last 6 months share price. This will be disastrous. So L & T stopped on its tracks and waited for some clarity on SEBI & CLB revised guidelines.
Came the guidelines along with the rider that there will be transparent and open bidding process to find the true value of Satyam. L & T had no choice but to wait. A agonising wait.
L & T has a small presence in the IT space with L & T Infotech. Looking to expand. The earlier investment was a so called strategic alliance what ever it means. If L & T gets to land Satyam it will be a windfall and a biggest coup for Naik. But the catch is the FI reps in the board. These directors have clearly mandated Naik not to go beyond Rs 50 per share. A real constrain in dicey situations like this. But Naik with his reputation & clout can wriggle his way around this.

Mr BK Modi of the erstwhile Spice Telecom. Rs 2000 itch. This man in the cowboy hat has no clue on how to run a IT or ITeS behemoth. A gaint in real trouble with scandals, negative cash balance, huge litigation in US and top honchos bolting by the dozens. But Modi is not for the long haul. His immediate interest is spin off BPO and other non core divisions so he can raise cash and get his investment back into Satyam. Once this is done he will bring in - well a strategic investor and liquidate his holding and exit with a windfall. He is neither competent nor keen in long term. His longest term vision will not be beyond 36/48 months at best.

Tech Mahendra : Anand Mahendra is looking for all growth opportunities. Highly focused and pragmatic Anand is capable of turning around Satyam to its past glory is cash rich and given his presence in the IT industry specifically in the telecom space of IT has the manpower resources too. Shrewd deal maker and will come out with innovative ways of financing and leveraging Satyam's strengths - or whatever is left of it.

The most likely winner will be L & T followed by Tech Mahendra. Modi will be voted out by present FI shareholder.