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.

Secretive & Misleading

While transparency has been the buzzword in the Satyam resale efforts there has been quite some discretion in the past 2 weeks. With the bidding process on and the effervescent Mr Modi engaging the media 27X7 and all others including Tech Mahendra and L & T quietly doing the due diligence what really is happening and why is the board so quiet.
There are conflicting media reports about the total number of bidders in the ring and even the close date.

Satyam Story - What if ?

All that the present credible board of Satyam is planning about the new is in the right direction.
But...
What is the junk bond fame twice convicted KKR doing there ?

Mr Ponzi

As expected yesterday in NY Madoff pleaded guilty on all the 11 counts and went to jail. Yesterday was his last day in his opulent $ 7 million penthouse apartment in downtown Manhattan over looking the Central Park.

He could be convicted for up to 150 years in his new but less opulent home-the prison cell.

Well. There was jubilation outside the court house by a large gathering of his investors. Most of them HNIs who invested millions of their dollars with Madoff without checking the status of their investment. They are too busy spending their huge returns Madoff was paying off before law caught up with him. What are they jubilant about ? That Madoff is off to the prison or they have all kissed goodbye to $ 56 billion of their personal wealth ? Putting him in prison will not get back their money. Simple.

" This is a fools paradise " said the icnoclastic George Bernard Shaw. As long as there are celebrity fund managers and stupid investors who blindly hand over millions to such celebs more Madoffs will be in the making. God Bless Investor Knowledge.

Upbeat !!!!

This is incredible. More than hundred offers for Satyam and counting.

As of Friday 13 Mar there are over a hundred offers for the Mega Fraud Behemoth. Well to be precise its not an offer much less a binding offer but just LoI - Letter of Intent. This is nothing more than a passing interest and 90 % of them will not be in the final race

The LoI gives the prospective suitors a right to inspect the books of Satyam and make an offer. And then there is screening, due diligence , financial bid, political power plays etc. Also the number is just media speculation. The new board has neither confirmed nor denied the number. Still seems plausible given the low valuation and all the statutory exemptions given.

The biggest beneficiaries for the overwhelming response are the employees and then the equity shareholders of Satyam. Closing date for offers will be 20 Mar Friday. Judging by the initial response the number will exceed 300 offers.

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.

Madoff

Madoff is expected to plead guilty today in NY. Dignity in criminality.

Finally

Finally somebody put a price to the litigation in US. Said be & $ 440- $ 840 m US
"We have received a report from our legal advisers Gibson, Dunn & Crutcher LLP and they said the liabilities could range between $440-$840 million. We have to factor this in," Spice Group Chairman B K Modi as saying. Full report here This could be authentic and the actual liability will be anywhere between the spread. So now the bidders have a number to factor their offer. So far so good.

The mysterious cap

Mr SK Modi is in the news lately. Satyam of course. Rs 2000 crores is a lot of money and more so if is sloshing around with no investment in sight. Mr Modi is akin to our homegrown Sivasankaran of the Siva PC later DsihNet and then AirCel. He rode every boom and when the going got too hot to handle he quickly cashed out. He never really built any enterprise to excellence not did anything innovative and not know for excellance in any field of activity. So much about Siva.

Same applies to Modi. He sold Spice Telecom and has this much cash in his top drawer. Given his turbulent and unsavoury experience with Modi Xerox etc he is not the types for great corporate governance or excellence. But he can't hold a candle before the Rajus.

Satyam is not in the right hands under Modi.

Lemme sign off with the simple question : Why is Mr Modi seen with a cowboy hat ? That too indoors ?