Satyam Computer - Open Offer

Investors who hold shares of Satyam Computer Services can reject the open offer made by Tech Mahindra. The offer price appears unattractive in the light of Satyam’s future prospects, with the recent financial disclosures showing the company’s financial position to be much better than expected.

The open offer price of Rs 58 is at a discount of 27 per cent over the current market prices of Rs 80 per share. The short-term capital gains tax that investors would incur while tendering their shares (as opposed to open market sales) also makes the offer unattractive.

At the offer price of Rs 58, the stock discounts its likely per share 2008-09 earnings by 8-9 times. This is at a steep discount to all other top tier IT companies (which trade at 14-16 times), which may have been justified if, as Mr Ramalinga Raju had claimed, Satyam were a company with an operating margin of just 3 per cent. But the financials declared for the December 2008 quarter and for January and February, which may not be final given that it is yet to be audited, show a margin of 12 per cent. The revenue size and the fact that the company is profitable at the net level in the December quarter as well as the months of January and February may necessitate a better valuation.
Encouraging financials

The provisional financials disclosed to the exchanges show that, contrary to expectations, Satyam Computer’s revenues for 2008-09, taking its monthly collections run-rate, could be $1.9 billion. That is only slightly less than HCL Technologies’ revenues.

These disclosures show that average monthly collections starting from April 2008 leading up to February 2009 have been Rs 811 crore. After Mr Raju’s confession early in January, the monthly run-rate of receivables has come down to Rs 670 crore levels. Even taking this to be a representative figure, Satyam would still be a $1.3-1.4 billion company.

The operating margin for the December quarter was 12.5 per cent, it dipped in January, but came back to that level in February. The net profit margins too, at around 8 per cent, though below the industry standards of 15-27 per cent, are better than expected. This could be partly ascribed to the fact that there may have been a large number of un-billed employees. To address this problem, Tech Mahindra has initiated a ‘virtual pool’ of employees who are unbilled.

Under this process, 7,000-10,000 employees will not work for the company but will be on its payrolls, with only their basic salaries (plus provident fund and medical insurance) being given for up to six months.

This move has the potential to bring down employee expenses drastically and take the net profit margin to over 11-12 per cent levels over the next year or so. That would make it again comparable to HCL Technologies in terms of its margin profile, especially after its acquisition of Axon. Incidentally, HCL Technologies trades at 15 times its trailing earnings.

Being an off-market transaction, the shares, if tendered, would suffer higher than usual short term capital gains (at 30 per cent), if the shares were held for less than a year or a long-term capital gain if held for over a year.

Over the next couple of years, Satyam investors can also look forward to reaping the synergy benefits from Tech Mahindra and revenue and margin improvements from a restructured organisation. The disclosed financials give a value of Rs 1,085 crore for the entire fixed assets owned by the company as of December 2008. This gives a value of Rs 11 per share for Satyam. The market value though may be much higher (Rs 1,700 crore levels) for the 125 acres of land that Satyam owns, as indicated by one of the Government appointed directors in April. One may have to factor in a loan of Rs 300 crore taken against this, though.

The lawsuits, including that of the Upaid case and claims from several companies (37 of them), together, have the potential to necessitate an outflow for Satyam to the tune of over $1.5 billion.

If this is taken out of Satyam’s cash flows, this may be the key downside for the company. The challenging outlook for the IT sector as a whole also presents a key risk. Given these uncertainties, risk-averse investors not willing to take a long-term view may consider selling the shares in the open market.

via BL

Satyam Computer Services Ltd. disclosed standalone unaudited financial results for the quarter ended December 31, 2008. The company’s Profit After Tax (PAT) for the October-December quarter stood at Rs1.81bn while the total income for the period was Rs22.06bn. Operating profit (excluding other income) for the third quarter of FY09 is Rs3.64bn, while the operating profit margin is 15.87%. The PBIDT for the quarter stood at Rs2.76bn while the PBIDT margin was 12.51%.

For January 2009, Satyam's standalone PAT was Rs400mn on total income of Rs6.47bn. Operating profit (excluding other income) for January was Rs610mn, while the operating profit margin was 8.96%. The PBIDT for the month stood at Rs270mn while the PBIDT margin stood at 4.17%.

The company's standalone PAT for February 2009 was Rs520mn and total income at Rs6.73bn. Operating profit (excluding other income) for February was Rs1.18bn, while the operating profit margin was 17.46%. The PBIDT for the month stood at Rs790mn while the PBIDT margin stood at 12.4%.

The company had total orders worth US$380mn between January and March 26 and has 41,622 employees as on March 28. The company said that it lost 23 clients worth contract US$70mn and 24 clients withdrew purchase orders worth US$91mn.

Satyam's stock hit upper circuit for three consecutive days before easing off on the last day of the week. The value of the Satyam share surging past the open offer price of Rs58 per share, raising concerns that investors may not tender shares at a discount to the current price. If the open offer doesn’t succeed it will be positive for Tech Mahindra. Satyam, in any case, has to make a preferential allotment for the shortfall in the open offer, at Rs58 per share, which could be at a substantial discount.

Separately, Satyam's Board announced that up to 10,000 employees, or about a fourth of the staff, will be allowed to join a "virtual pool" by taking time off from work on sharply reduced pay for up to six months starting next week. The plan is expected to save the Hyderabad-based company, which now has some 41,600 staff, Rs10mn every day. Satyam spent around Rs 5bn on salaries in February, and staff costs account for more than half of the company’s expenses.

Employees, who have not been part of revenue-earning assignments, at least, for the past three months, including support staff, will join the "virtual pool". Around 14,000 employees are counted among the company’s non-billable resources. A Satyam statement said the "virtual pool" is a one-time programme, suggesting that further drastic measures to trim staff costs may not be needed.

Satyam

Satyam

Satyam Computer Services

Satyam Computer Services

Satyam Disclosure, Implications

Satyam Disclosure, Implications

Satyam to downsize operations, close offices

A handful of the 105 offices and 30 delivery centres that Satyam Computer Services has worldwide may soon cease to exist.

The Hyderabad-based company, recently acquired by Tech Mahindra, is evaluating options to downsize operations at its overseas development centres and terminate lease contracts for offices and other properties.

By consolidating its offices and delivery infrastructure, Satyam will be able to up capacity utilisation and also reduce overhead costs, two persons in the knowledge of the development told Business Line.

“The concept of global delivery centres is good but all delivery centres and offices will be right-sized both in terms of people and physical infrastructure,” one of them said.
Resurrection Plan

This review of operations is part of Operation Phoenix, Tech Mahindra’s plan of resurrecting Satyam.

Satyam has seven development centres in China, Germany, Brazil, Egypt and Malaysia, which act as near-shore destinations for getting work done in the same time zone as places such as the US and the UK.

A spokesperson for Satyam refused to comment on the news.

In April, Satyamites on bench in the US were asked to quit and return to India.

Satyam has already pruned its sales force across the globe.

However, recent news reports indicate that it plans to increase the sales team by 20 per cent. This could not be verified independently.

Another official said that Satyam is likely to consolidate sales operations in the US as a section of customers based there has severed ties with the company. The company has 14 offices in the country.

Apart from its 10,000 excess employees, Satyam is believed to have 20,000 spare seats in India across the 23 delivery centres.

“We have identified several rented premises whose lease will be terminated to provide sizeable savings. This space is anyway in excess and was invested based on anticipated growth,” Mr A. S. Murthy, Chief Executive Officer of Satyam, told staff in a recent email.
High-profile exodus

Meanwhile, the exodus of high-profile officials from Satyam continues

Those who have quit include Mr Virender Agarwal, Business Head of India, the Middle-East and the Asia-Pacific regions; Mr Hetzel Folden, head of the strategic deals group; Mr Naresh Jhangiani, human resource head of business process outsourcing, and Mr Deepak Nangia, head of the Australian region.

Ms Archana Muthappa, India-based spokesperson for Satyam, too has put in her papers.
Last week, Mr Vineet Nayyar, CEO of Tech Mahindra, had said Satyam has excess staff of 10,000

via BL

Satyam may sack 7,500-8,000 non-billable staff from June

Satyam Computer is likely to sack most of its non-billable staff of up to 8,000 working in marketing, HR and administration wings

A Satyam official said there is no doubt that there will be large-scale sacking mostly of the support and non-billable staff (other than hardcore software engineers) once Tech Mahindra (the new owner of the company) directors come on board from June 1.

The surplus staff is about 10,000-12,000 and the 'least painful' ways of sacking is asking the bench, non-billable and support staff to go.

The company spokesperson, when contacted, said that at the moment these are mere speculations.

Sources also said the outsourcer may opt for "virtual pool" sacking method whereby the company would ask some of the staff to take 75 per cent of its salary and take one-year off and look for a job elsewhere with the fragile assurance that they would be recalled, if required.

Tech Mahindra CEO Vineet Nayyar, who will also come on board of Satyam from June after it acquired fraud hit company last month, had said last week that Satyam has about 10,000 surplus staff and "we are looking at the least painful ways to tackle the problem."

Satyam has already called back most of its onsite staff to avoid further costs and most of them may be asked to quit, said the official.

About 3,000 people are on the bench and there is a surplus manpower even in the R&D and engineering units, sources said.


Dwindling revenues are the primary reasons for Tech Mahindra to opt for such a cost-cutting measure, Tech Mahindra official said.

Kiran Karnik, chairman of Government-appointed board of Satyam, said revenues are falling and cost-cutting measures have to be taken up. But he had ruled out lay-offs.


via ET

L&T, Tech Mahindra lead race for Satyam

As expected, Larsen & Toubro (L&T), Tech Mahindra and Spice group submitted their registrations as potential bidders for the acquisition of a majority stake in scam-hit Satyam Computer Services Ltd. But, the Hinduja group, which was expected to be among the potential suitors, decided against bidding. Also, Capgemini, Europe's largest computer consultancy, said it has no interest in buying a stake in Satyam. Hewlett-Packard and Computer Sciences Corp. (CSC) are likely to have submitted a bid as well. Accenture and IBM too have reportedly not submitted an Expression of Interest (EOI).

Bidders were asked to register their interest by the end of March 12 to buy a 51% stake in Satyam. They will be asked to submit a detailed EOI and show availability of at least Rs15bn (US$290mn) by March 20. While potential suitors are expected to be attracted by Satyam's strong clientele and its large workforce, final bids will hinge a great deal on clarity on the company's finances and legal liabilities arising out of class-action lawsuits in the US. Satyam's board had appointed KPMG and Deloitte in January to restate accounts.

The Hyderabad-based IT major has been struggling for survival since founder and chairman B. Ramalinga Raju made a shocking confession in January, saying that he had manipulated Satyam's books of accounts for several years. The Government quickly moved to sack its Board and has appointed its own nominees on the Satyam board. Raju, the Managing Director and the chief financial officer have been arrested and are currently in jail.

Satyam announced that the process of registration of bidders has received adequate response from Indian and international bidders, including private equity (PE) firms. At its meeting on Friday, Satyam’s Board announced that it has taken steps to release the Request for Proposals (RFP) to all registered bidders. The Board has requested the former Chief Justice of India, S.P. Bharucha, to oversee and guide the Board throughout the selection process and he has kindly agreed. The Board met with Bharucha on March 11, in Mumbai and discussed the proposed process for the induction of a strategic investor.

Three suitors for Satyam

With the deadline for registering ending on Thursday, L&T, Tech Mahindra and Spice Corp have announced their intention to join the race to take a majority stake in Satyam Computer Services.

Though names such as IBM, HP, Oracle and Cognizant were doing the rounds, it was not clear whether they have registered with the company to express their willingness to take part in the bid process.

Markets were, however, not that enthused as the Satyam scrip fell by 3.18 per cent on the Bombay Stock Exchange (BSE) to close at Rs 47.20 on Thursday as against the previous close of Rs 48.75.

The market cap of the embattled IT major stood at Rs 3,162 crore.

Sources in the company told Business Line that investment bankers Goldman Sachs and Avendus would vet the formal requests.

The Satyam Board Chairman, Mr Kiran Karnik, said that the board would meet in Hyderabad on Friday.

He, however, remained tight-lipped on the agenda.

“I don’t know if we can even legally give out that information pertaining to the identity of the bidders or the number of bidders,” he said.

Mr Prasenjit Roy, Director (Marketing), Tech Mahindra Ltd, announced that the company had formally conveyed its interest in the process.

“We have registered our interest, in line with the process set out by the Satyam Board,” he said. “Once we receive the Request for Proposal and other information, we will evaluate and conclude on the next steps,” Mr Roy said.

An L&T spokesperson too confirmed that the company had sent the formal proposal.

On expected lines, SpiceCorp has registered its interest to bid for Satyam. “We are going solo,” its Chairman, Dr B.K. Modi, said.

But, the Hinduja group has backed out. “After careful consideration we have decided not to participate,” Mr Prabal Banerji, Chief Financial Officer, Hinduja Group, said.
Peers not in race

Major domestic IT companies have reiterated that they are not in the race.

When contacted, Mr V. Balakrishnan, Chief Financial Officer of Infosys, said the company did not register.

Recalling Mr Premji’s stand, a Wipro spokesperson made it clear that the company had no interest in taking over either Satyam or Maytas.

HCL Technologies also said it was not in the fray.

While IBM and CSC have declined to comment on “speculation”, HP said, “We do not comment on rumours and that all merger and acquisition activities are decided globally.”

Accenture spokespersons were not available for comment.

Satyam - Who will buy it ?

B K Modi

> Received Rs 2,191 cr from sale of Spice Communication

> Can bid at Rs 40 per share

> Will cost him Rs 1986 cr

Tech Mahindra

> Cash on books at Rs 4000 cr

> Can bid for Satyam till Rs 80 per share

> Will cost it Rs 3972 cr

L&T

> Cash on books at Rs 964 cr

> Investments in mutual funds at Rs 6800 cr

> Investable surplus of over Rs 7500 cr

> Can bid up to Rs 140 / share

> Will cost it Rs 6951 cr

> Total equity, post 31% offer at 97.36 cr shares

> Suitor will have to buy 51% ie 49.65 cr shares

Projected cost of acquisition

At Rs 40 Rs 1986.14

At Rs 50 Rs 2482.68

At Rs 60 Rs 2979.22

At Rs 70 Rs 3475.75

At Rs 75 Rs 3724.02

At Rs 80 Rs 3972.29

At Rs 140 Rs 6951.50

Who will buy it and why?

Tech Mahindra

Interest in Satyam driven by strategy to form a telecom industry focused IT firm to full-fledged IT service company

Only one client of Tech Mahindra contributes 60% of revenue

No overlap in biz vertical, Tech Mahindra get 100% revenue from telecom vertical

Report of BT planning to sale stake, assured revenue of $2 bn may be in trouble

L&T Infotech

Reverse merger or takeover will provide back door entry to the stock exchange

Reverse merger will bring down long and complex procedure of listing

During tough environment, globally, financially sound companies take the reverse merger route to list

For the last three years, L&T Infotech has been trying to list on the bourses

Will save 1-2% of IPO expenses

Operational synergies

Scale up business to almost four times the current size

Analysts say L&T will post revenues of Rs 2000 cr in FY2009

Post acquistion of Satyam, it will become $2.65 billion from the $400 million currently

Vertical Synergies

Consolidate its strength in manufacturing through Satyam’s ERP practice

L&T Infotech derives 34% of manufacturing vertical, Satyam nearly 24%

Forrester says Satyam frittered away advantage of SAP practice due to fraud

Nearly 42-43% of Satyam’s revenue derives from ERP practice

Satyam’s ERP practice and L&T’s manufacturing focus will increase billing rate significantly

Exposure to financial service vertical through Satyam. L&T has been striving this for long

Post scandal, Satyam employees in ERP verticals are the only ones in high demand

Expertise in ERP solution would be a useful springboard of growth

About L&T Infotech

Set up 1997, over 10,000 employees

Contributes nearly 6.3% to L&T’s consolidated profit and loss account

Caters to clients like Hitachi, Lafarge, Chevron and BPCL

via UTVi.com

Satyam to invite bids

Satyam Computer board plans to invite bids for a strategic investor in the next few days and expects to pump in healthy amount as investment into the company, according to company chairman Kiran Karnik.

We have worked out the modalities for inviting bids in the next few days, which now needs SEBI approval- Karnik said.

The funding from this investor will lend further financial stability to Satyam, Karnik added.

Satyam is expected to submit its proposal to market regulator Securities & Exchange Board of India (SEBI) very soon.

The SEBI Board is likely to give its clearance without many changes, given that Satyam is a `special case`, a senior official working with the regulator had said last week.

A few companies such as Larsen & Toubro, the Hinduja group and the B K Modi-led Spice group, have already expressed their intent to invest in Satyam.

The company was also confident that it can provide an idea about the estimated value of the company in terms of receivables, fixed income, order book and clientele, he said.

CLB approves Satyam capital expansion

Satyam Computer Services stake sale plan has been approved by the Company Law Board (CLB). It has also approved the expansion of its share capital base to Rs 2.8 billion. Satyam is expected to sell 26% to a strategic partner and will issue another 600 million shares at a face value of Rs 2.

The board has authorized an open competitive price bidding to instruct a strategic partner. It wants the process to be transparent. A retired Supreme Court judge has been inducted by the CLB to oversee the strategic partner induction.


The preferential allotment will be made either at par or at premium and have instructed that the share base should be increased under Section 17 and Sec 81 IA of the Company's Act, as per CLB.


Shares of the company declined Rs 2.3, or 4.74%, to settle at Rs 46.25. The total volume of shares traded was 7,938,382 at the BSE (Thursday).

Satyam CEO - Murty's Email to Employees

Dear Associates:

Over the last few days, I have been interacting with many of our customers – of differing size, representing different industries and locations. Almost without exception, they tell me the same thing, over and over: how our service remains excellent – even in the face of extreme difficulty – and how very impressed they are with your professionalism and dedication.

These inputs act as a reminder – not that one was needed – that Satyam is a very special place with very special people. I really do feel enormously privileged to serve you at this time.
Two things are very clear to me.

First, we can – and we will – rebuild this great company. Already, we are winning fresh orders from new customers. This is a very strong sign of renewed confidence in Satyam, and shows that we can eventually compensate the few loses we have seen to date. You will learn more about these wins later this week, in NewsToday.

Second, the global economic condition and outlook remain dismal, even as we begin our own financial recovery. This means our challenges are extraordinary, and meeting them will require extraordinary efforts. To do this, we must control costs and conserve cash; and the Taskforce has reviewed and recommended a few action points.

I am asking for your help to reduce, avoid or defer operational expenses wherever and whenever possible, beginning with the following items. I know this will mean personal sacrifices and inconveniences, but these should only be temporary, and will help us build a stronger and more competitive Satyam. Once our situation eases and conditions allow, we will revert to normal practices.

Onsite (high-cost countries):

· The current policy that provides for a maximum waiting period between projects of two weeks will continue. Compliance to this needs to be adhered to, totally

· As a policy, Pre-sales, Solution Architects, Delivery Support and Operations Support personnel will be located in low-cost countries. Exceptions to this rule will be rare, if at all, and considered on a case-by-case basis.


Travel:

· All units have been asked to sharply reduce non-billable domestic and international travel (by more than 60%). While unavoidable travel will continue (for consulate appearances, visa stamping, etc.), virtual meetings to be adopted wherever possible.

· Business class travel – where permitted – is suspended until further notice.

· Hotel stays are suspended for all associates in cities where Satyam has guest houses. As much as possible overnight stays to be based on absolute need. When guest houses are not available, hotel stays within eligible limits will be permitted. Requests for deviations from these limits are being completely discouraged.

· For associates at their base locations, the use of car services for intra-city conveyance is suspended. Associates are encouraged to use their personal transportation (and claim eligible reimbursement) or hire a 'call taxi'. For associates onsite, the use of public transit (tube trains and trams) is encouraged; limousine service is suspended.

· For local conveyance while visiting another location within India, only "small car" service is permitted, regardless of the Associate's level. The use of premium and luxury cars is suspended (except for visits by customers / dignitaries).

Communication
expenses are to be kept to the barest minimum and associate support sought to utilize low cost modes.


Marketing:

· Participation at events and conferences, and business entertainment activities are being suspended. In rare cases where exceptions are unavoidable, prior approval from the Group AIC (Associate-In-Charge) is required.

All Advertising and Marketing Collateral expenses are suspended


Training :

· External Training is suspended for the time being. We will maximize use of internal training facilities and instructors. In rare cases where exception cannot be avoided due to customer requirements, prior approval of Group AIC is necessary.
Infrastructure :

· We have identified several rented premises whose lease will be terminated to provide sizeable savings. This space is anyway in excess and was invested based on anticipated growth. We will also be requesting associates on Business Wait to operate in shifts to optimize available space.


Capex :

· All capex expenditures – unless required to meet customer deliveries – are being suspended till further notice. This includes time-bound renewal of laptops, office renovation etc
These measures are necessitated not just because of our financial situation, but are relevant given the larger economic slow-down.

Let us operate on the premise that every dollar has to be conserved so that our path to success is faster. All expenses that we incur should be questioned and when in doubt, it is preferable to seek clarifications than incur the same. Please be assured that these measures will not impede our ability - to keep our business running smoothly, and competing effectively in the market for new business.

We clearly recognize that these won't work without your help and cooperation. We are confident that we can count on your cooperation and goodwill – which you are already demonstrating in the most trying of circumstances – and for that we remain very grateful.

Warm regards,
ASM
(AS Murty)

Why did he do it ?

Why did B. Ramalinga Raju do it? No, we are not talking about why and how he fooled all of us for seven years by presenting blatantly false financials of his company, Satyam Computer Services. We are more concerned about the timing of his sensational confession. What really makes a fraudster listen to his conscience? Or did he do it under duress because of pressure from his family members, friends and professional colleagues? Did he just wake up on 7 January and decide that he wanted to become the honest gentleman that he was way back in the 1980s? Or is there a more sinister reason to explain the revelations?

There are several conspiracy theories to explain the origins of the letter that Raju wrote to the Satyam board, admitting his guilt. But we will try and separate the grain from the chaff. He did it for the 'larger good' of everyone he knew, including himself. In retrospect, it may turn out to be a master stroke. Thanks to his 7 January letter, Raju has possibly saved Satyam, the group firms managed by his sons, friends and colleagues, and the politicians who helped him in the past. In an ironical twist to the tale, he may have saved himself from a long term behind the bars.

The fact is that Satyam as a company was about to collapse under its own financial weight. With a 3% margin, as Raju claimed, almost non-existent cash balances, with no hope of a new pipeline after Raju had pledged most of his personal shares with institutions, which sold them off, huge liabilities and receivables, and highly inflated revenues and profits, the company didn't have the money even to pay salaries in January 2009. Kiran Karnik, one of the six government-appointed directors on Satyam's board, has publicly said that the company needs nearly Rs 2,000 crore cash over the next three months.

In fact, this is the reason why the failed merger with group firms, Maytas Infrastructure and Maytas Properties, for Rs 8,000 crore was critical for Raju's survival. In one stroke, it would have cleaned up Satyam's balance sheet. The deal, which was opposed by institutional shareholders as the two Maytas firms were controlled by Raju's sons and, therefore, smacked of conflict of interest, would have infused new assets and also ensured new revenue and profit streams. For example, Maytas Properties possesses a land bank of 6,800 acres, with the ability to construct 245 million sq ft of built-up space.

The Satyam Saga
1987	Company established
1991	IPO over-subscribed by 17 times; company gets its first Fortune 500 customer in John Deere & amp; Co.
1993	Awarded ISO 9001 certification. Signs joint venture with GE, another Fortune 500 company.
1999	Satyam Infoway (Sify) becomes the first Indian Internet firm listed on the Nasdaq.
2000	Company merged with Satyam Enterprise Solutions (SES) in a way that benefits Srini Raju of SES.
2001	Satyam Computer Services listed on the NYSE (SAY).
1999-2001	Its stock was one of the 10 that Ketan Parekh was rigging.
2002	The Dept of Co Affairs seeks clarification on alleged violation of the Companies Act.
2004	Acquires Citisoft and Knowledge Dynamics. Features in the Forbes Top Asian Companies.
2005	UK-based IT firm Upaid files case against Satyam for alleged fraud and forgery.
2006	Company says 'Revenue exceeds US$1 b'. Gets award from Institute of Internal Auditors, US.
2008	Announces acquisition of Maytas Prop and Maytas Infra. Deal shelved after outcry.
2009	Raju confesses to Rs 7,000-crore fraud; arrested. Satyam board reconstituted.

At the Satyam's board meeting on 16 December 2008 to discuss the merger, Ram Mynampati, a former director, disclosed that there was little future in infotech as accelerated growth was difficult in the current scenario, prices and margins were under pressure, and there was discomfort about anti-outsourcing voices emanating from the US, especially from the new President Barack Obama. Therefore, entry in construction and infrastructure seemed like an ideal de-risking strategy. If things had gone according to plan, Raju could have easily jumped off the Satyam tiger without being 'eaten up'.

When this strategy didn't work, Raju had no option. The only way to save Satyam was to come out in the open, confess to his crimes and hope that the government would act swiftly to save the future of Satyam's 53,000 employees as well as restrict the possible negative impact on the Indian IT story. This is exactly what happened. The future of Satyam, its employees and Indian IT seem much safer today. When we spoke to a few employees, they sounded a bit reticent, but confident. All of them said they were "optimistic that things would be back to normal soon".

Raju's sons were obviously angry. The father had practically destroyed their future. By not being able to go through with the merger, he had made sure that the Satyam scandal would become public knowledge. It could force several state governments, including that of Andhra Pradesh, to cancel the high-profile infrastructure contracts bagged by Maytas Infrastructure and Maytas Properties. At present, the two entities are working on projects worth Rs 30,000 crore, including the prestigious Hyderabad metro rail. Satyam's truth had the potential to severely tarnish the sons' image. And it did. However, the sons' anger could have weighed heavily on a desperate Raju, forcing him to reveal everything.

How Raju did it

The Rs 7,000-crore Satyam scam was the outcome of a series of accounting misdemeanours by B. Ramalinga Raju and his accomplices. Here's how he doctored Satyam's books and hoodwinked investors for seven years:

Inflated Profits: Over the last several years. For September quarter, revenues and operating margin overstated at Rs 2,700 cr and Rs 649 cr (24% of revenue) against actual of Rs 2,112 cr and Rs 61 cr (3% of revenue).

Overstated Cash & amp; Bank Balances: Of Satyam's reported cash and bank balances of Rs 5,361 cr on 30 Sept 2008, Rs 5,040 cr was non-existent. Even accrued interest of Rs 376 cr shown in books was non-existent.

Hid Liabilities: Debt on account of funds arranged by Raju by pledging shares was understated by Rs 1,230 cr. This was one of the triggers for Raju's confession after lenders sold these shares on margin triggers.

Inflated Receivables: Debtors' position was overstated by Rs 490 cr. Together, with this overstated debtors' position and understated liabilities, a staggering hole of Rs 7,136 cr arose in the balance sheet.

There's another angle to the family drama. Maybe there was a feeling that if Raju went down taking all the blame, there wouldn't be too much of an impact on the sons' businesses. It is probable that the nonexistent cash balances that Raju is talking about were monies that were siphoned out of Satyam to finance his sons' projects. It is possible that a part of the cash balances has gone into the personal accounts of family members. Or it could have been partially used to bribe officials in lieu of government projects awarded to the Maytas companies.

Now, consider what was going on in the minds of Raju's close colleagues before the founder's letter. They were scared. If Satyam went down, so would they. For no one would believe that Raju carried out this fraud for so long without the senior managers being aware of it. In return for their undying loyalty, they demanded Raju's head. He had to tell the truth and take the blame himself. This too seems to be panning out the right way as until now only the former CFO, Srinivas Vadlamani, has been arrested by government sleuths, who seem more worried about finding the extent of the damage.

As Raju got sucked into a financial tornado that he had created in the first place, he had to take care of the politicians, who had helped him throughout his entrepreneurial career. Yet again, it seemed like a perfect solution for Raju to confess after wiping out the tell-tale marks that could have pointed at a nexus between Satyam and the state's political leaders.

As of now, the media is speculating that former Andhra Pradesh chief minister N. Chandrababu Naidu of the Telugu Desam Party helped Raju wriggle out of income-tax cases earlier this decade. It is also being rumoured that the current Chief Minister, Y.S.R. Reddy of the Congress, helped Raju's sons bag the prestigious infrastructure projects in the state. Interestingly, both Reddy and Naidu are accusing each other of helping the Raju family.

Red Flags That Were Ignored

There were enough indications that something was wrong at Satyam, but nobody noticed these till it was too late.

Mismatch in balance sheet entries: Starting 2002-3, the company's reported cash and bank balance, including term deposits, continued to swell without matching the growth in cash flow. In fact, Satyam's free cash flow continued to wobble and was negative in two years.

Auditor fees shoots up: Auditor fees increased three times in the past couple of years though other IT companies continued to pay the same amount.

Non-payment of advance tax: Satyam did not pay advance tax in 2008-9. Payment of advance tax is an indicator of profitability and non-payment could imply that trouble has been brewing for some time.

Vanishing brass: In August 2008, many top officials left the company. This should have been a reason for further investigation.

Not using cash to acquire: It was puzzling that the company was proposing to invest $1.6 billion in real estate at a time when HCL was trying to expand its presence in the SAP market, essentially Satyam's turf.

Cash idling in current account: In Oct 2008, analyst Kawaljeet Saluja of Kotak Securities almost blew the lid off the scam when he questioned the rationale for keeping $550 million idle in a current account.

More political skeletons are likely to tumble out of Raju's cupboards, but they are likely to be mere limbs because the crucial evidence may have been carefully hidden, or simply made to vanish. Just like the thousands of crores of rupees in Satyam's bank accounts over the past seven years.

That leaves us with Raju. He had to chalk out his own survival too. After such a massive scam, possibly the biggest in the history of corporate India, he could languish in jail for the rest of his life. However, by admitting to cooking up the accounts, he may successfully divert attention from a far more serious crime siphoning off money from a public company. Some lawyers feel that his confession may get him some form of immunity. And he may be let off with minor penalties. Section 24(B) of the Sebi Act states that if a person has made "full and true disclosure of the alleged violation", he can be granted immunity from prosecution for some of the offences.

We hope this doesn't happen in this case. Raju's conviction has to act as a deterrent to other optimistic and over-confident owners, who may think that they too can get away with such frauds. Or else, India Inc. will witness the birth of more Rajus who, as detailed out in a recent study by Wharton School, would believe that their firms were experiencing "only a bad quarter or patch of bad luck" and that it was "in the interest of everyone involved... to cover up the problem". But when things don't improve, the promoter is forced to continue his "fraudulent behaviour and he has to do more" in the subsequent quarters.

Therefore, it is imperative for the government to financially reboot India Inc.

via Money Today

The Insider...Satyam names A.S. Murty as new CEO

Satyam Computer Services Ltd. announced that the Board of Directors has appointed A.S. Murty as the new Chief Executive Officer, effective immediately. Murty is a Satyam veteran of 15 years, who has been in its forefront since Jan 1994. The Board also appointed Homi Khusrokhan and Partho Datta as Special Advisors, to assist in Management and Finance areas, respectively. These decisions are aimed at quickly stabilizing the company, Satyam said in a statement. The organization has visibly increased its focus on business continuity for its customers and confidence building amongst its employees and vendors, it added.

Murty joined the company in 1994 and has worked across several businesses and functions. His immediate task is to address the concerns of its clients and retain employees. He said he will be working very closely with the Board, Advisors and all Satyamites, to restore the company to its well-deserved glory. "We will chart a precise and practical 30 - 60 - 90 day plan that will encompass and address the interests of all stakeholders," Murty said.

The board also confirmed receiving bank sanctions for a total sum of Rs6bn (US$130mn approximately) as a planned fund infusion towards working capital requirements. This funding, along with healthy collections, is expected to help the company tide over its financial challenges. Satyam also reaffirmed that January salaries (globally) and the fortnightly salary in February (for US based associates) have been met from its internal accruals. "Completing the complex financial restatement exercise including announcement of Q3 results and ensuring prudent financial operations will be the primary focus in the next few weeks," Datta said.

Separately, Kiran Karnik, the former president of India’s software industry body NASSCOM, was named chairman of Satyam, Company Affairs Minister Prem Chand Gupta said. He also said that the Government was probing 325 companies and 25 persons linked to the Satyam scam.

Meanwhile, iGate Global Solutions, one of the potential suitors for Satyam, has dropped out of the race to acquire the troubled software services company. iGate CEO Phaneesh Murthy said that his company was not interested in pursuing the deal in its current form where Satyam’s financial position is unclear and the government has not capped its liabilities.

Satyam gets new CEO

Scandal hit, Satyam Computer Services new board has appointed A.S Murty as its new chief executive officer (CEO) with immediate effect.

Deepak Parekh, member of the board said, `` Murty is a Satyam veteran of 15 year, who has been in its forefront since January 1994. He brings to play a deep understanding of the organization proven expertise in leading a business unit, overseeing global delivery, nurturing customer relationships and spearheading the entire gamut of the human resource function. He is well respected for his ability to effectively integrate the team and enable a collective decision making which will be critical as Satyam moves into its revival phase.``

It also disclosed the appointment of Homi Khusrokhan and Partho Datta as special advisors, to assist in it management and finance areas, respectively.The board has also affirmed that the company has received bank sanctions worth Rs 6 billion (USD 130 million) a planned fund infusion towards working capital requirements.

Alonside, it also confirmed that salaries of Jan.9,2009 (globally) and fortnightly had been met from its internal accruals.

Shares of the company declined Rs 3.85, or 7.68%, to settle at Rs 46.25. The total volume of shares traded was 18,867,759 at the BSE (Thursday).

Ways companies manipulate

The spotlight remains firmly on corporate governance issues two weeks after the founder of Satyam Computer Services Ltd, B. Ramalinga Raju, confessed to doctoring the company’s books to the tune of Rs7,136 crore in India’s biggest accounting scandal.

While investigating agencies try to unravel the fraud, Crisil Research, an arm of credit rating agency Crisil Ltd, the Indian associate of Standard and Poor’s, found there are at least a dozen ways a company can creatively cook the books.

Crisil Research came across these loopholes by studying the notes to account and footnotes in the annual reports of companies. While most of them would probably not amount to a violation of the law in letter, at least some are breaches of the law in spirit.

“To call them malpractices would be harsh. The companies are just exploiting the loopholes that exist in the law,” said a partner at a Mumbai-based firm of chartered accountants, who didn’t want to be identified.

Listed below are the ways companies exploit these loopholes, collated after discussions with Crisil Research and at least two company secretaries of Mumbai-based firms:

• Write-off expenses from reserves: Expenses towards research and development or money paid to employees or provision for taxes as part of a voluntary retirement scheme must reflect in the profit and loss (P&L) statement. Companies can show it as a one-time expense or amortize it over several quarters. In practice, many Indian firms take the easy way out by writing these off or deducting this amount from the reserves. This means expenses are understated in the P&L account and consequently, current profits look rosier than they are.
• Show previous year’s expenses as this year’s income: By writing off a one-time expense against reserves, a firm can inflate its profits. If for some reason, the company doesn’t have to incur the expense (in case of tax provisions), it writes this expense back into the books. But instead of adding it to the reserves from where this amount was originally deducted, the company can show it as income in the P&L account, thus increasing profit.
• In good time, firms can suppress profits by setting aside money for unforseeable expenses such as doubtful debts and possible liabilities on pending legal claims (court orders expected against the company) all of which have a high probability of happening.

Hence, the amount is shifted from the P&L account to the balance sheet. When the company faces turbulent times, the same provision is written back by reversing the entry and is recognized as income.

Essentially, this amounts to transferring income from one year to another. This could also result in tax planning by deferring taxes as the rate of tax in subsequent years could be lower.

• Revalue assets to write off losses/expenses: This works if a company has enough reserves in its balance sheet. If it doesn’t, it can “create” some reserves either through brand valuations (using professional valuers) or by “revaluing” their existing assets to inflate the reserves. So now, the company not only has an inflated profit and loss, it also has an inflated balance sheet without spending any money.

Revalue assets to write off transfer value: Imagine a company called Veritas, which has an associate or subsidiary called Satirev. Now, Veritas has three machines (assets) and wants to transfer one to Satirev without accepting any payment. In other words, it wants to gift away an asset.

How does it do it? After transferring one machine, Veritas will revalue the remaining two machines (increasing their value by 50% each) so that the balance sheet remains balanced. Alternatively, Veritas will revalue its holding in Satirev to make up for the value of the asset it transferred.

• Show loan waiver as income: One should look for this, especially in the books of companies that have accumulated losses and have got their outstanding debt restructured.

Very often, as part of this restructuring, debtors waive a part of the outstanding loans to help the company turn around sooner. Instead of showing this as part of the balance sheet, some companies book it as income for the year.

• Transfer loans to associates: Sometimes, companies transfer outstanding loans to associate companies. This helps them lower the debt-equity ratio—a measure of how leveraged a firm is.

A lower debt equity ratio helps firms borrow more. Still, since they have to repay the original loan, it is shown as a “contingent liability”, which is defined as an obligation that must be met, but where the probability of payment is minimal.

• Transfer fixed assets to current assets: Yet another way of revaluing assets. A corporate balance sheet typically has fixed assets (such as land, machinery) and current assets (cash, bank balances, receivables). Under the pretext of selling a piece of machinery, a company might transfer a por tion of its fixed assets to current assets. Now, fixed assets are often valued at book value or the price at which they were bought. When they are transferred to current assets, they can be done at market price. If market prices are more than the book value, the difference could be shown as income, which again boosts profit.
• Continue with dead projects: When a company starts a new project such as building a factory, it is allowed to capitalize expenses, which means whatever it spends on the project is shown as investment in the balance sheet.

During times of slowdown, the project may become unviable, yet the company might continue to show it “under implementation” so as not to add to the expenses in its P&L account.

• Inventory valuation: Often, the closing stock of goods for a manufacturing firm is valued at higher than the selling price.

This is against the law, both in letter and spirit. Firms desperate to show profits resort to such a practice, say experts.

• Inflate sales: Higher sales growth results in higher profits. This also eases working capital financing from banks.

At the end of each accounting period, the inflated sales are reversed as sales returned and rebooked with a lapse in time as sales to a different client and at revised prices, thereby further inflating the value of sales in subsequent years.

• Sale/lease back of assets: Firms sell utility assets such as diesel generator sets, boilers and office buildings to leasing and finance companies and get cash up front. The same asset is then leased back to the company which pays a monthly lease rental. The company benefits as such rental is a deductable expense for tax calculations.
• Change depreciation policies: This is done to postpone or advance taxes/profits as depreciation is an expense which is non-cash in nature and does not impact cash balance available for business operations but saves tax outflow.

The objectives behind all accounting adjustments range from boosting profits after tax to raising valuations, suppressing revenues for tax purposes and even getting higher bank financing.

Satyam says staff will get January salaries

The government-appointed Board of Satyam Computer Services announced that employees will get January salaries on time. The salaries would be paid as scheduled and that would be achieved from the company’s internal accruals and receivables. The Board has appointed the Boston Consulting Group as the management advisor to support the Directors and Satyam leadership team and Goldman Sachs and Avendus as investment bankers. The advisor and bankers have been entrusted with the task of identifying strategic investors, obtaining expressions of interest and ensuring a fair, transparent approach to the entire process. The Satyam board also said that it has received several proposals from corporate entities and private equity firms, but ruled out selling the company by unbundling it into different parts.

Meanwhile, Larsen & Toubro Ltd. (L&T) said that it may increase its stake in Satyam to 15% because it expects the value to increase. "There may be a counter-bid," L&T Chairman A.M. Naik told analysts on a conference call. On January 23, the engineering giant raised its holding in Satyam to 12% from 4% to have greater say in the software maker’s rescue. The average price of L&T's stake in Satyam has dipped to Rs80 a share from the Rs174 it paid, Naik said. L&T is looking to expand its software unit by trebling its stake in fraud-hit Satyam, Naik added.

Fidelity Investments raised its holding in Satyam to 6.79%. Fidelity, which held 3.17%, bought 3.62% on Jan. 28, Satyam said in a filing to the stock exchanges. Stock exchanges said late on Wednesday that two Fidelity funds had bought a 2.5% stake in Satyam in block deals worth US$18.7mn. Separately, the Hinduja group and B.K. Modi group thrown in their hats for buying the scam-tainted IT major. The Spice group said it is ready to invest about Rs20bn (US$408mn) in Satyam. Other suitors in the race for Satyam include Tech Mahindra, iGate Global and private equity firms.

In a related development, the regional officers of the Provident Fund Organisation lodged a complaint against the Rajus for not depositing Rs75mn which was the employees' share of PF for December. They also confirmed that Satyam's total headcount is 43,622, and not in excess of 52,000 as claimed by the promoters and even the government nominated board.

Also, the Company Law Board (CLB) passed an order providing immunity to six government appointed board members and other new directors of Satyam from all legal action relating to Rs70bn fraud. The CLB's order will help the new board take a decision on the appointment of a new chief executive officer and chief financial officer. "We will act like court officials discharging public service," said C Achutan, a member of the new Satyam board. Satyam is facing two class action law suits in the US. These were filed by two US-based law firms, Izard Nobel LLP and Vianale & Vianale LLP.

Reports also said that former MD of Tata Chemicals, Homi Khusrokhan and ex-group finance director of the Murugappa group, Partho S Datta could be named Satyam's CEO and CFO, respectively. The new board was likely to announce on Saturday the names of its new CEO and CFO. Among the other Satyam related news, General Electric (GE) and Bombardier said they will continue their business association with Satyam, while National Australia Bank said it was reviewing its outsourcing plans with Satyam. At the same time, reports said that Citigroup, Merrill Lynch, Novartis and GlaxoSmithKline may discontinue their deals with Satyam. T

Satyam - L&T analysis

CNBC has just flashed post 3.30 pm the news that L&T has asked SEBI for relaxation in the cut-off date for the open offer so that they can make the offer at Rs.30 (if 7th Jan'09 is agreed as cut-off) or at Rs.98 (if 16th Dec'08 is the cut-off) INSTEAD of Rs.275 (the last 6-month average).

Though SEBI has not give any verdict on the same, however, L&T's demand opens up a pandora's box.

1. It implies that L&T is "willing" to buy stake even at Rs.98. This means, for the open offer, the additional outflow required is ~Rs.1350 cr. (67.4 cr sh x 20% x Rs.98). At Rs.30, the outgo will be Rs.400 cr.

2. Can SEBI set a new precedent by giving a lee-way for faulty corporate decisions like this? Or is it "pre-decided"?

3. If SEBI does permit a lower open offer price, what about the small investors who must have ignorantly bought Satyam shares in the free fall from Rs.186 - only to repent later. Will SEBI give them "REFUND" for the difference? If not, isn't SEBI for the protection of "all investors" rather than the bigger ones? Will Mr.Kirit Somaiya not raise a 'foul' cry?

4. Even at Rs.98, some cross-bidding is not ruled out, which can take the open offer price cost a little higher for L&T. (At Rs.30, it will boomerang on SEBI/L&T as all IT cos would jump in the fray for the acquisition. Hence, this is ruled out).

5. A further CASH infusion in Satyam would be needed to ensure its smooth operations. The amount could be as high as Rs.1000 cr or Rs.500 cr on an optimistic note.

6. Upaid case liability is expected to be $1 bn. This will cost Rs.5000 cr. Even if we assume L&T can settle the same at half of that amount, it still means Rs.2500 in cash.

7. Further, there is a class-action suit filed by the US investors - the liability on this account cannot be quantified at present - but can be significant enough to dent Satyam's cashflows (if any, that is.)

8. Thus, L&T needs TOTAL cash of either Rs.8,650 cr (1300 + 1350 + 5000 + 1000) conservatively OR Rs.4,700 cr. (1300 + 400 + 2500 + 500) optimistically to gain a meaningful control over Satyam.

9. Rs.8650cr is = almost 3.5 year's likely cash flow of the company whereas Rs.4700 is over 2 year's cash flow of the company. No doubts that these will fully wipe-off the cash & cash-equivalents / investments of L&T.

10. Note that L&T has "other income" of Rs.794 crore in last 4 trailing quarters, implying a reduction in EPS of appx. Rs.13.5 pre tax or Rs.9.50 post-tax = Rs.76 if one give s a P/E of just 8x to its non-core income (instead of the current 14x).

11. It is quite probable that the acquisition, if possible, will not be EPS accretive.
12. Thus, a highly regarded corporate like L&T is now involved in a possible acquisition process, whose benefits can not be measured until the Upaid case is settled, the US class-action action is settled and also the other assets/liabilities of Satyam group of companies are identified. Do you think all these can be resolved in very short time?

13. The moot question is: what is the upside in terms of absolute gains in staying invested in L&T??? After what time-frame will there be a significant upside? (Of course, we are not debating on the core business & its' profitability of L&T.)

via Delhi Dreamer

Ramalinga Raju also fudged employee headcount

The fourth largest IT major inflated staff numbers by well over 10,000 people, Andhra Pradesh’s public prosecutor Ajay Kumar told a local Hyderabad court. What's more, the erstwhile promoters and management siphoned off money, at an average of Rs200mn a month as salaries to fictitious accounts, for at least five years. Enough evidence is also emerging on large scale fund diversion and fictitious bank deposits to the tune of Rs33.6bn. The possibility of insider trading by the promoters could not be ruled out either, Kumar told the court. Disgraced Satyam founder B. Ramalinga Raju also bought lands not only in India but in other countries also, prosecutors told the court. Kumar also said that former Satyam CFO, Srinivas Vadlamani, had confessed to the fraudulent activities. Raju’s lawyer, Bharat Kumar denied all allegations, saying that no written application of Raju’s and Vadlamani’s confessions was produced before the court.

A local court on Friday posted the hearing on bail petitions of Ramalinga Raju, and its ex-CFO, Vadlamani Srinivas, to January 27. The chief metropolitan magistrate posted the bail plea of B Rama Raju, brother of Ramalinga Raju and former MD of Satyam, to January 28. Separately, the Andhra Pradesh CID arrested Gopal Krishna Raju, general manager of SRSR Holding, through which Ramalinga Raju's family held a stake in the IT firm. SRSR Holding is owned by Ramalinga Raju's sibling, Suryanarayana Raju, whose house was also searched by the police with regard to the Rs78bn accounting fraud in the IT major. In related development, the Registrar of Companies (RoC) filed a caveat in the Andhra Pradesh High Court with regard to the Company Law Board orders restraining former whole-time directors, chairman, chief financial officer and company secretary of Satyam from selling or mortgaging their assets.

Tarun Das, one of the government nominees on Satyam board, and the Government admitted to receiving several approaches from potential suitors. Larsen & Toubro (L&T) increasingly emerged as a strong contender for buying Satyam, though the company denied any such move. L&T chairman A.M. Naik also met top government officials in New Delhi to discuss the Satyam issue. The engineer major also increased its stake in the Hyderabad-based company from 4% to 12%, claiming that it was doing so to protect its interest. Reports suggested that Tech Mahindra, Patni (along with PE firms), Essar group and iGate Global remained in the hunt for acquiring Satyam or parts of it. Separately, Infotech Enterprises said that some of Satyam's customers had approached it but refused to name any of them. Some clients notified Satyam that if uncertainty persists they could terminate their relations with the company.

The new board of Satyam said that additional funding arrangements and the appointment of the top management were in the final stages of being concluded. The board said that it had narrowed the shortlist of candidates for chief executive and chief financial officer to the final three and the decision would be made in the coming week. Existing customers continue to release new work orders and collections from receivables were robust, it said.