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.

Stop Press - Satyam Update

More throw in the towel.
Yes. The list is much longer and more interesting.

• IBM ,
  
• i Gate
• KKR - yes the junk bond fame investment bankers.
• Texas Pacific Group.

Now the plot thickens. These are all just LoIs. So non-binding. And above all none of the bidder is officially confirmed by the Satyam board.
Wait. Wait. Don't start counting the chickens yet. There is approval , then due diligence and then proof of funds .... the list goes on and on and on.

By the time these hurdles are crossed there will be only 2/3 contenders.

But one thing is for sure. The scrip will reach its pristine levels in less than 24 months and a great bet if you are for the long haul. Well if your idea of long haul is anything beyond 24 months and not 24 hours. Volatile ups and downs and anxious moments are guaranteed. Good Luck till then

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.

Who better to investigate Insider Trading

Some things often are beyond my comprehension.

The AP police are making a mess of the Satyam investigation ( see my post Satyam Insider Trading dated 31 Jan 09 )

Its not clear to me if the cops are not fully aware of what Insider Trading is or are they just pretending to mislead the press and the public.

What is even more confounding is what the courts are not allowing SEBI the market regulator to interrogate the Rajus. This is a multi dimensional scam and every government agency has its needs and rights to investigate and prosecute.

Agreed that certain provisions of law does not permit a person under judicial custody to be investigated by all & sundry. But SEBI is not exactly all & sundry. They have a very important role of regulating the market and investigating and prosecuting offenders. This is precisely what they intent doing the Satyam and Raju. But then why .....

Lessons from Satyam for India Inc by Kiran Mazumdar Shaw

Ms Shaw has written a great essay on the fiasco. Well thought out and itemized. The essay is available here But nothing new there.
She has very thoughtfully listed the systems required and the procedure to be followed by the corporates for great governance. But then Satyam had that and more. I has consistently met or exceeded all compliance requirements. It was awarded the World Council of Corporate Governance Golden Peacock Award not once but twice. But then the truth is grossly different. The award was mentioned in all the media after the fraud was disclosed. The Council is not at fault. The award is given on the basis of self declarations given by the CEO , board of directors & other C-Suite occupants.
This is a fraud of grand scale. Executed to such perfection for many years and hand in glove with the top management teams in finance, accounts , marketing and above all with one of the top 5 audit firms in the world.
Just before the disclosure by Mr Ramalinga Raju did any body have a clue of the underlying problems in Satyam. Not on earth
When a gang of more than 2 dozen very senior executives could run this scandal over 4 years with nobody deduction how do you expect a London based non statutory body to investigate the fraud. ISO gives the standards and an independent ISO auditor certifies a certain company has all the systems procedures and controls to follow the standard. Neither ISO or the auditor is responsible for the end product. Same thing here.
Satyam was stripped of the awards on 7 th Jan 09 See Here
I would say to strip off the award means WCfCG.net accepts its error. Instead the award should have been expunges or its equivalent to absolve itself of its responsibility to such fraudulent practises. Now is WCfCG going to audit all the books of future awardees ? Practical ? Or is WCfCG competent to do this.

Well. Back to Kiran's essay

She writes about all the right things good corporate governance is about. Well that is exactly what Satyam said it did. The guidelines are about how to run a honest company. Here we have a team as a whole fraudulent by thought and action. No amount of guidelines going to help if a guy and his team are hell bent on cheating.

At best lessons India Inc can learn are not to commit fraud. And if committed don't pursue it till you get caught. Anything else you meant Kiran ?

Satyam Saga Part VI - What next !!!

With 2 class action suits ( aka Mass Tort ) nobody will touch Satyam even with a barge pole. The breath and depth of the damages of the litigation is unpredictable. Most of the assets of the company are intangible. Also nobody know the extend of damage caused by Raju and his criminal chums. The kind of cases registered on Raju covers the entire major crimes in the Indian CrPC including forgery and use of forged documents. ( these are 2 different but related crimes )
With Mass Tort the awards to the ADR holders may be a few thousand dollars or a few million dollars each. Depending on how the courts in US treat this case which may take at least 2 years to end will be a traumatising wait. Satyam cannot survive so long which is for sure. GoI will not pump in any funds into Satyam since its unprecedented in independent Indian history. So this option is ruled out. But the 52 K employees and the shareholders of Satyam cannot be ignored atleast in the present economic circumstances.
The only viable & unvercelly acceptable solution will be for GoI to offer sovereign indemnity to possible suitors from the Mass Tort in the US and do a thorough due diligence and get any other respectable auditors arrive at a reasonable valuation for the company and palm it off to L & T Infotech.
L & T will not be a willing acquirer but a reluctant one since with all the damage to Satyam's reputation retaining employees and customers will be major challenge for the new owners. L & T will not merge Satyam with itself but will retain Satyam as a seperate company but as a subsidiary for a long while to come. A US $ 2 billion company merged with L & T will bring down the market cap for the parent i.e. L & T which nobody wants now. The saga continues.

Why Confess ?

Satyam Saga Part III
So you confess to come out in the clean. And will give you immunity against prosecution. No way. But then in this case Mr Raju confessed not to emerge clean or to unburden his consciences as reported by the press.
Boy its simple. His stake in the company has been reduced to about 3%. A hostile or friendly take over of management control is imminent. With such an event round the corner a due diligence is the first thing to happen & every thing will spill out. This eventuality is dreadful to say the least.
So Raju had no choice but to admit his sins.
Raju certainly has no criminal image now. And the powers that be in the state admin are in no hurry to act on him. This is clear. He may get off lightly which is distinct possibility.
Now to brass tacks. What will happen to Satyam ?. The GoI for a change acted right. There were no contradictory statements from various quarters. In fact there was a erie silence. But when the GoI acted they acted swift & decisive. Quickly they dissolved the board. Cancelled the scheduled board meeting and announced that the centre will appoint a set of 10 government nominees to the board as interim directors. This was smart and quick without the usual political rhetoric. And the statement that " employees and stakeholders interests are primary " was another unusual but appropriate response.

Satyam Story

First it was an attempt to acquire 2 companies owned by his sons. Then it was share buy back and finally its number fudging. Have all the skeletons tumbled out of the cupboard ? Looks like yes.
Seems unrelated events but bad timing right ?
Wrong.
See the tumbling of the events from the reverse.
There was figure fudging going on for a while. Which Raju was aware of. He tried to acquire Maytas for all the cash in the company not for the love of his sons or the promise of the infra biz. But simply to conceal the missing cash. In real estate its possible to conceal or reveal any amount of cash if you have a so called Land Bank. We all know real estate is the ultimate black money sink which is bottomless pit if you so prefer.
It appeared simple to acquire Maytas so records for payment of non existent funds can be created and Raju will never get caught. This back fired since US $ 1.6 was the total cash available and surprisingly the amount involved in the deal. Smells rat right ?
Right or wrong many factors like sons company , all the cash & wrong timing to invest in infra company all added up to a fateful week for Raju.
His game plan was OK. To clean up the books and save Satyam and himself. Had he tried to acquire a friendly accommodative IT company overseas and did that in multiples of US $ 300 to 400 millions over the next few years he could have accomplished the mission in installments but successfully. After all the fudging has been going on for 7 years. The sins of 7 years cannot be - more importantly - should not be cleansed in 1 go. That is the only goof up.
Better luck next time Raju ( if there is one )