Rise and Fall of a Global Majaor -The story Untold

RISE and FALL of a Global Majaor

Back in the 1980s a young entrepreneur Ramalinga Raju started Satyam Spinning Mills. A keen observer of global markets, with a mind for new thinking, Raju read the growth potential of the information technology and the role India could play in it.

Without any background in IT but a strong belief that the 'spirit of entrepreneurship' is transferable across any field of endeavour Raju founded Satyam Computer Services on 24 June 1987. From 1987 till the damning revelation on 7 January 2008, the fairy tale, the saga continued along side the Indian IT growth story — complete with bagging the First Fortune 500 client, Deere & Co in 1991, listing on BSE, an IPO oversubscribed 17 times, later a NYSE listing, global accolades and awards.

The most prestigious being the now withdrawn, 'Golden Peacock Global Award for Excellence in Corporate Governance for 2008' from London based World Council For Corporate Governance, awarded as recently as 22 September 2008. And the company boasted contracts with such envious global customers like Microsoft, FIFA, GE, Nissan, Nestle,

But there were some indications of a fraud running even at least five years back. Many people who had worked or were invited to work for Satyam left in a short period of time. According to industry sources, a very senior consulting head was once offered a job as a CEO at one of the Satyam's subsidiaries. But the executive refused to join as he was not even being allowed to see the balance sheet of that subsidiary along with Satyam.

In another instance, a very senior executive in a finance role quit just within two months of joining Satyam. The executive is now working with a Mumbai based IT company.Says CFO of a top tier Indian IT company, "for competitive purposes when I used to analyse their balance sheet, large amount of money in current account did not make any sense. Perhaps it was being siphoned off to other businesses."

Similarly, in another instance a Kotak analyst had inquired in October, last year from Satyam CFO about the rationale behind keeping $500 million in current account from Satyam, which draws no interest. ETtoo had got a similar response in September, last year. A a senior executive who quit Satyam BPO who said that he had many a times asked Mr Raju to spend the excess cash assets to spend for attractive buyouts for the BPO, like Infosys and Wipro were doing, but it all fell on deaf ears.

Obviously Raju went from strength-to-strength revealing terrific quarter-on-quarter performance, often beating street expectations without anyone catching on to any wrongdoing.


Start of the Fall

Things peaked in August of 2008, when many top level officials of Satyam started resigning, rumoured to be on confrontation with Raju's vision for the company. For instance, the entire top team of Satyam BPO had resigned by October. Satyam executive management team also started getting rickety, with the resignations of top level officials like Shailesh Shah, head of strategy.

Inside sources say that many team members had confrontations with Mr Raju on missing attractive buyout propositions despite huge cash in hand. It was only later, that those individuals realised that the cash never existed. On December 16, 2008, around 6:30 pm, two hours post closing of the markets, then Satyam Chairman Raju announced a buyout of 100% stake in Maytas Properties and 51% in Maytas Infra, thus effectively making Satyam, a core real estate company from a core IT company overnight. The total outflow for both the acquisitions was a whopping $1.6 billion comprising of $1.3 billion for the 100% stake in Maytas Properties and $300 million for a 51% stake in Maytas Infra.

The buyout was met with severely negative reactions from the investors and shareholders, with many threatening to sell off entire stake in the company. This prompted a huge list of prospective buyers as share price of Satyam suddenly dropped. It's ADR on NYSE fell almost 54% the same day. Within 24 hours, Satyam made a U-turn. He said, "We have been surprised by the market reaction. In deference to the views expressed by many investors, we have decided to call off these acquisitions." The Rajus had lost Rs 3,400 crore in the day as share prices of Satyam plummeted.

THE FALL

The gameplan behind the takeover of Maytas was to fill the gap of cash reflected in the books but actually non-existent, by taking over his own company, with his sons running the show.

It back-fired. Board members Prof. Krishna G Palepu, non-executive director and Vinod K Dham, non-executive & independent director, Prof. Mendu Rammohan Rao, non-executive & independent director resigned from the Satyam board following the adverse public reactions to Raju's decision. The board members alleged that important facts were concealed from the board and thus they were misguided. Next came the confrontation, with the World Bank. On December 23, Satyam was barred from bagging or bidding for contracts with the World Bank for eight years for providing Bank staff with "improper benefits". The shares fell almost 14% to its lowest in four years.

Ramalinga Raju then spent his Christmas countering the allegations by World Bank. The company asked World Bank to immediately withdraw those statements and apologise to Satyam, which obviously the Bank never did. Meanwhile, Raju's share in the company fell from 8% to 5% making it an attractive bid target.


HOW THE LID WAS BLOWN?

Post the Maytas fiasco, DSP Merill Lynch was appointed to look into Satyam's books and possibly find it a suitor and soothe the shareholder outcry. On Tuesday, January 6, DSPML is reported to have met Sebi officials and told them about large scale accounting irregularities. It told the regulator that it was uncomfortable in handling the mandate.

It also submitted a letter to Sebi on the same. The night of January 6, was one of the most discomforting nights for Raju and his family. As day broke, at 9.45 am, before the opening of the markets, a letter was faxed to Sebi Chairman, the board of Satyam, BSE and NSE. Rest is history. In the letter Raju, admitted about an inflated (non-existent) cash and bank balance of Rs 5,040 crore, an over stated debtor position of Rs 490 crore (as against Rs 2651 reflected in the books) and a fake liability of Rs 1,230 crore.

Nasscom went into an immediate damage control due to the disclosures made by its past Chairman. Nasscom President Som Mittal said: "This is a stand-alone case of failure. We expressed shock at the disclosures made by Mr Ramalinga Raju."

Satyam was originally started as Satyam Constructions. In 1987, Ramalinga Raju with his botherin-law DVS Raju, founded Satyam Constructions. It was perhaps here that he inherited the construction and real industry balance sheet skills. Perhaps its Mr Raju's real estate genes that he tried to impregnate inside an IT setup that back fired.

Courtesy - The Economic Times