Crisis at Satyam

The recent fracas about Satyam Computers is a really fascinating story. Satyam (a computer software firm) was about to buy two real estate companies: a listed company named Maytas Infra and an unlisted company named Maytas Properties. They were going to pay roughly $1.6 billion.

This was a troublesome transaction from so many points of view. First, it would deplete the firm of cash. Second, it would mean defocusing the firm away from software towards real estate. Even if diversification into real estate were the goal, there were better acquisition targets around like Unitech. The case for buying these two companies seems to have been influenced by the shares held in the two companies by managers of Satyam.

Sounds bad? The cynic would say corporations make a lot of murky decisions, fumbling thorugh a variety of conflicts of interest. Indeed, all of management seems to be about overcoming agency conflicts. These kinds of malpractices have taken place in India for a long time.

This time, something new happened. A firestorm of protest broke out amongst shareholders — particularly foreign shareholders — and the press. The share price of Satyam crashed and the transaction was aborted. Here’s the interesting media coverage:

I was reminded of Niall Ferguson’s characterisation of democracy and capitalism as two strands of a double helix; both come together to give us well functioning societies. A decade ago, the institutional shareholders would have been clubby PSUs. Without financial globalisation, foreign shareholders would have been missing. Without the free press that India has, the episode would have been buried in the back pages. In the event, India worked well, and Satyam was the cynosure of all attention on these days. On 16 December, there were just 36,000 trades worth Rs.49 crore for SATYAMCOMP on the spot market (i.e. “CM”) on NSE. On 17 December, this jumped massively to Rs.1,340 crore off 0.7 million trades.

I think the most interesting questions to ask in this fracas are:

  • What were they thinking?? Why did they do this?
  • Did share prices show some action before the event?
  • How much value was destroyed?
  • What happens next?

Why did they do this?

` One of the good approximations that’s found in India, to the modern dispersed-shareholding corporation, is Infosys. They have 16.5% promoter shareholding. By these standards, Satyam has a remarkably small promoter shareholding of 8.6%. They have 61.57% shareholding by institutions of which 46.86 is made up by FIIs. There is a large ADR with 19.4% of the company.

With such a power structure, why were the managers so brazen? Did they not know that they serve at the pleasure of investors, particularly institutional investors and most of all foreign institutional investors?

A few days ago, I wrote a blog post Goodbye great moderation, hello financial fraud?. In this I argued that we might see an upsurge of illegal / ethical activities when businessmen have their backs against the wall. This perspective gives us some insight into why the managers of Satyam behaved the way they did.

` What do we see in share price data?

` A careful examination of share price fluctuations, net of industry index movements, is a valuable tool to understand the information that is available to insiders (who routinely trade or leak information into the Indian equity market). A comparison of Maytas Infra against the CMIE stock market index for industrial construction companies is instructive. From roughly 23 September 2009, the industry index and the overall Cospi dropped quite a bit. But Maytas Infra held up well. Even though things were very bad for Cospi and even worse for the industry index, Maytas Infra stayed put. Perhaps the people trading Maytas Infra knew that they had a `Satyam Put’.

Here’s a summary of stock market returns on the products of interest:

image003_11.gif 16 December was the last happy day. But by 16th December, while the overall Cospi had gained 4.82% when compared with 31 October, Satyam had already lost 25.63% and Maytas Infra had gained 11.91%.

By 19 December, Satyam had lost another 28.18% and Maytas Infra had lost 48.87%.

Note that the broad market index, Cospi gained in both sub-periods: It went up by 4.82% in the first phase and 2.08% in the second, adding up to overall returns of +7%.

` How much value was destroyed? `

Let’s tote up the value destruction in the three days from 16 to 19 December. All values are in crore rupees.

image001_26.gif So in three days, the market value of Satyam dropped by Rs.4262 crore and if you add in the drop in market value of Maytas Infra, this comes to Rs.5,644 crore. But as argued based on the share prices above, the story probably runs deeper and share prices of both companies were in motion based on anticipation of these events prior to this. If we start at 31 October, the picture is:


So over a date range in which the broad market gained 7%, the mistakes made by the managers of Satyamcomp managed to destroy Rs.10,640 crore.

` What happens next?

` These recent events have already been a path-breaking experience. In India, it is rare for owners to rein in managers in this fashion. But I suspect the story is not over. A few more path-breaking elements of the story might be in store for us.

  • What would you do with a manager who lost Rs.9,560 crore? I suspect that in most well governed countries, the manager would get sacked. It would be interesting to see (a) What the institutional investors of Satyam think, and (b) How the Indian legal environment deals with this. P. Vaidyanathan Iyer’s article in Financial Express (linked above) is the first one to mention this possibility.
  • One of the consequences of doing an ADR is that the firm submits to US rules about investor protection. I am curious about the legal position of the managers of Satyam and how that aspect might unfold.
  • The firm is holding a remarkable amount of cash [statement]. Of a balance sheet size of Rs.8,800 crore, cash and bank balance is Rs.4,461 crore. The only reason for a company to keep retained earnings is if it will produce returns that are superior to the broad market index using this cash. If this is not the case, then the board of directors should insist that cash is paid out to shareholders who can atleast invest in an index fund and obtain the performance of the broad market index. It is better for investors to diversify rather than for firms to diversify.

Originally published at Ajay Shah’s blog and reproduced here with the author’s permission.

20 Responses to "Crisis at Satyam"

  1. Ramesh   December 26, 2008 at 11:32 am

    Hello,”A decade ago, the institutional shareholders would have been clubby PSUs. Without financial globalisation, foreign shareholders would have been missing. Without the free press that India has, the episode would have been buried in the back pages.”You seem to sound that India has its share of free press only after globalization. If so, it would be insulting for folks like Ramnath Goenka & Cho Ramaswamy, who were courageous enough to fight emergency. Remember – there is almost a zero possibility for a pressman in a “so-called free press country” of going to jail; not so in 1975-India. As recently as 1987-89 (just before the globalization), N.Ram, Arun Shourie and others led the charges of Bofors scandal.I guess you got my point!

  2. satrasal   December 26, 2008 at 12:09 pm

    Nice numbers…. but you might also want to look at trading after the news.Look at the options action. Look at the deliveries as a percentage of daily trades. Look at the types of stories the ‘free press’ bruited about in synch with taking the share price down. The ADR did not sell down on the nyse. It gapped down by roughly $5- the value of the deals- implying writing off the cash and new debt needed for the deals. On-balance volume shows the subsequent intraday sell-off as going to a negative 2.5 mil and closing the day just off .7 million shares. Over the next few days the price moved around, but on balance volume is positive by upwards of 5 million shares. On the NSE you have a possible accumulation of around 140 million non-adr shares from the 17-24th. Possibly 40% as much on the bse.Also ask yourself whether the deals really added shareholder value. They may have for all we know; but the people who took this down and are taking it up are not interested in shareholder value. They were interested in price movement and money to be made.Ask also why the IL&FS led consortium that has secured financing for Maytas sold 6 million shares at 120 rupees. Did they have a lot of puts? And do they now have a lot of calls going into the possible buyback. And really, if ILFS was just interested in selling out a stake in Satyam due to mismanagement, what are they doing financing Maytas?And ask what types of poorly reported inflammatory stories got spun by the press and analysts and what kind of collusion they may be in to manipulate the share price. And ask why on the the dec options expiry we started to see rumors of undervaluation, take-overs, etc. Too many coincidences abound.Ask what the legal system should be doing when they assume Satyam is the object of a lot of systemic manipulation. That seems to be one possibility that has entirely escape you. In short, your piece seems interested in delineating the relationships amongst various institutional players who have a ciminal in the dock. Assume innocence- and you might begin to uncover a different can of worms.

  3. Rimas   December 26, 2008 at 12:40 pm

    Satyam fundamentally still a sound company1.Satyam has Presence across the Globe (20 Industries ,65 Countries) more diverse than Wipro & INFY. This does happen by accident. This spread helps Satyam in tough economic conditions. Did you know outside India in Asia Pac Satyam revenue are more than any of the Top 3 Indian IT services firm. De-risked Geographic revenue distribution 21% Europe, 17% Asia Pac, 62% America’s. Best present to leverage emerging markets.2. Satyam has Mature Practices DWBI & ERP. HCL had to spend over 0.5 Bn to get the ERP skills which we already have. they just saved $ 0.5 Bn3.Revenues & Net Income have Grown Five-fold over last 5 years. This by sheer hard work by 50,000 people. Not by accident4.FY08 was the 5th successive year of >35% Growth in Net Income. Show’s how they have got profits year after year.5.32% revenue coming from New & Emerging vertical : Satyam has diversified and expanded is industry depth.5.Deepest Fortune 500 client penetration 185, Total 690 clients. Clients continue to support Satyam in spite of the issues that have surfaced in last 10 days. Company has as many clients as Infosys and strong fundamentals then why worry?6.Company has the largest cash reserve to revenue ratio in IT industry as a result of company employees under management direction … why question it now?7.Client delight index is a 4.5 out of 5, client retention is 98% – clients are an asset – do not loose sight of the fact and do not slight Satyam and management for just one aberration – we are an organization and not just a script on the BSE/ NYSE

    • Anonymous   December 27, 2008 at 1:03 am

      Dear Rimas, never love your co. but love your work because you never know when your co. stops loving you. You saying fundamentally sound…where were the fundamentals when the co. stopped the appraisal process for 4 months and released only after declaring the Q2 results, this year. Even after declaring the appraisal, it didnt gave any arrears…soon after declaring the appraisals, it started laying off its only loyal associates for silly reasons (dress code, Time, discrepancy in around 2 years Old bills)& you r saying fundamentally sound.Please check with your marketing team n satyam’s brand value vis-avis its Indian counterparts…you will get the clear picture.true it is very diverse but please comment if satyam has bagged any big deal…Infosys and TCS have few, if not many, under their sleeves. There is no comparison between them.You talking about client relationship…its not with satyam…its with the respective account managers…check the case of world bank, Upaid…and there must b many more which are still boiling.So my dear friend, satyam is not loyal to its Associates, Investors, Customers & Society…nothing is going in the right direction under the current leadership..time to change

  4. Guest=SWAMINATHAN PATTABHIRAMAN   December 26, 2008 at 12:53 pm

    THERE IS NONE WHO PHAVE PLAYED A FAIR ROLE – finally ordinary share holders lost about 5000 to 10000 cores in this deal.

  5. Tarbus   December 27, 2008 at 11:32 pm

    Satyam is a great company. It takes real guts and hard work to build such a company in just 20 years. Look at how much the company has paid back to the investors and the society, keeping aside the value delivered to its large customer base. This company has always operated within guidelines and to be best interest of its stake holders. I urge the Large investors and Media that are taking heavily on this company …. to think twice before what they say and what they do! Please remember, independent reactions in the media can impact very negatively the whole of Indian IT industry and hence the economy of India.

  6. Anonymous   December 28, 2008 at 1:01 am

    Ajay Shah…you are another krappy blogger trying to copy paste articles for an overnight publicity.Come to Satyam one day and see, what kind of impact your silly and one-sided blogs have in stored for u.No matter whatever happens, we as Satyamites stand strong with the ethics this company has always relied upon. And we know we will come out of this rough patch with a bang.

    • Anonymous   December 28, 2008 at 5:42 am

      Hahaha…all the best for the efforts but seriously it will not bear any fruit under the current leadership. it seems like you are with satyam for a long time and hence you dont want to see the truth…open your eyes and review the situation as a 3rd person. Ajay has analysed the current situation, beautifully. Nothing is positive with Satyam these days:- Upaid, World bank, terminating the hardworking associates, trying to spend $1 Bn for saving Raju’s family business (Dont go public if you want to take these kindaa decisions)…once you r publicly listed co. you have to keep your investors benefit while taking any decision…AICS (Associates, Investors, Clients, Society), so called 4 pillars on which satyam runs, are effected adversly in the past few months, because of poor corporate governance.

      • Guest   January 9, 2009 at 3:28 am

        U we never ever understand what is satyam and what it means to us as satyamites.Satyam will always exits and we are always there with satyam

  7. Guest   December 28, 2008 at 12:27 pm

    Satyam’s greatest asset and strength are a) Ability to take risk b) Empowering the associates/leaders c) Flexibility d)Strong Sensitiveness to Associates, Investors and Society. These are the basic fundamentals/ethos that have taken the company to such greater heights over the last 20+ years. A single decision taken at the highest level cannot or will not make the company bad. Success always come with Risk and Innovation and Satyam is the leader in this front. I strongly believe that the decision that has been taken at the highest level would have been very beneficial to the Investors and associates in the long runBe it as the first company in India to push for Outsourcing by setting up a dedicated link or the company which has started the ‘LIFE SAVING’ 108 service in India or the company which have started the ‘RURAL TRANSFORMATION’ by levraging IT or the company which have stated the ‘HMRI’ in A.P to provide the people below the poverty line access to medical facilties, Satyam is the leader of Innovation whether the so called yellow journalists / frenzy media like it or not. Till date Satyam has done more good to the investors and the COMMON MAN on the street than any of the other Corporates in India.Every company has its own strengths and Weakness and Satyam always plays to its core strengths and this is what the Customers like about Satyam. It doesn’t matter how many big deals we won but the fact is Revenues, Net Income and Associates have Grown Five-fold over last 5 years. Total 690 clients of which 35% of the Fortune 500 client are with Satyam. We have achieved this through dedication, hard work and strong leadership at all levels against strong competitionSatyam’s attrition rates are the lowest when compared with competition and the Company has the largest cash reserve to revenue ratio in IT industry to take care of the associates in tough economic times. This proves that the CORE associates are always with SATYAM and it is only the ‘FLOATING’ associates who are not able to take initiatives has an issue with SatyamToday’s SUCCESS MANTRA is ‘THINK OUT OF THE BOX’ and not CONVENTIONAL Way. Of late we all have seen this on the Cricket field where success is bestowed on teams/players (MSD, KP, Shewag, Yuvi) who had this approach to the game. For sure we would bounce back from this MEDIA LASH with VIGOUR and prove them wrong about SATYAM.Every day I get up and drive to my Satyam Office, I feel proud to be part of a team/group which is responsible of saving THOUSANDS OF LIVES/day ON THE STREET AT ZERO COST. Other than the Medical Community & Satyam Community which else community or corporate can have this opportunity to make a difference in the lives of the people ???

    • guest   January 9, 2009 at 3:11 am

      I fully suppport all your statements as a satyamite and assure that we all stand together in any situation

  8. Kiers   January 2, 2009 at 9:55 pm

    Satyam got it’s ass handed to it in a plate! Mgmt thought it could hoodwink the shareholders! NEXT STEP IS OBVIOUS: the current lot who pulled these cash depleting shenanigans HAVE TO GO! OOPS! TOO LATE NOW!

  9. us guest   January 7, 2009 at 8:43 am

    Guest,How do you feel after Mr. Raju confessed to his fraud? Do not believe all the BS blindly even if you are a CORE associate.Are his corrupt cronies like Jose, Ram, Hari, Srinivas, Raju, VA and Prabhat etc. going to jail?Lucky these morons live in India where they can bribe the officials and where they can continue to hoodwink gullible fools like you.

  10. ramachandran tGuest   January 8, 2009 at 11:28 am

    Dear Satyamites,If you are really proud as a satyamite,all the 53000 odd satyamites should surrender their one month salary for the company and show your emotional bond with the company and prove that satyam is like Phoenix,not going to perish but flourish under the new board of directors

    • Guest   January 9, 2009 at 3:18 am

      if such situation came we are also redy to do it.We should do any thing for our company

  11. Anonymous   January 8, 2009 at 11:48 am


  12. Guest   January 22, 2009 at 5:22 am

    hello,What happens to the share holders if satyam is sold out?