In defence of Satyam

January 3, 2009

Oops, I was a little slow in posting this, and Rediff put it up on their Business pages rather sooner than I expected.

http://www.rediff.com/money/2009/jan/02guest-in-defence-of-satyam.htm

I generally find hypocrisy quite entertaining. When everybody is dumping on poor Satyam — ignoring the business about “let he who hath not sinned cast the first stone” — I do believe it is only fair to provide an alternative perspective.

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18 Responses to “In defence of Satyam”

  1. srini2909 Says:

    The entire Satyam wrangle assumes that management knows better than the shareholders and hence will decide what do with the excess cash. Its a basic flaw in defending Satyam that you ignore:

    1. In the first place, Why should the management hold on to excess cash if it cannot deploy it profitably? Does a party holding just about 8% stake decide whats good for the rest of 92%?
    2. If at all Satyam decides to diversify to reduce risk and get balanced cash flows (both are deemed to be the most specious reasons for diversification) the assumption the management is holding is it has a better knowledge of diversification options than the investors and it can do it at a lesser cost. A cardinal violation of investor well being.

    I am very sure there are a lot of other culprits but that does not give you a reason to let Satyam off the hook. The move may have been well intended if Raju held a controlling stake, unfortunately Mr. Raju wanted to bake his son’s bread on the funeral pyre of the rest of the shareholders. By no stretch of imagination can this move be defended. I am sure your argument too would change if you were an institutional investor or some one who deployed his hard earned money into the firm.

  2. rajeev2007 Says:

    hi, you generally have to assume management knows better what to do with finances, being insiders, rather than shareholders. no company lets shareholders dictate what do with cash. at best, the board decides to declare a dividend to be nice to shareholders.

    the board is supposed to have fiduciary responsibility to the entire shareholder base. so why did the independent directors go along with the plan brought in by the mgmt with its 8% stake? is it any different in any other major company?

    come on, portfolio diversification is a basic rule in corporate planning exercises. you have to give mgmt credit for knowing what’s good for all stakeholders, and if you don’t think they do, you vote them out. if you can’t vote them out, you are stuck with them.

    the drop in satyam’s stock price was engineered by investors in the US exchanges hammering the ADR down by 50%. so american stockholders know better what’s good for satyam than a) its mgmt, b) its board, c) its indian stockholders? if you want to blame somebody, blame american stockholders.

  3. rohit06 Says:

    Hi , I want to make two points …

    1. The ban imposed by world bank has nothing to do with current crisis , the ban is imposed due to alleged data thefts done by Satyam employees in past few years .

    2. Even if one claims that decision to put money in real estate would have helped in long run , the valuation of two companies was totally cooked up. According to ET the valuation was done @ 1crore per acre land these companies own , which is perhaps 10 times the ongoing prices prevailing there . And even a layman economist can predict that it is the worst time to put money in real estate .

    And why should one try to justify some wrong decision citing simliar examples elsewhere in world .

  4. vr2009 Says:

    Rajeev,

    You are right in assuming that the mgmt of Satyam knows best and probably better than its other shareholders about Satyam. You could even stretch this to include Indian IT industry, and at the most, the global IT industry. Beyond that, we have no proof if Mr. Raju is a better investor than any other shareholder. Especially so, since most of the company is held by institutional investors, who are professional capital investors, with their own diversification strategies in place and didnt need any help with the same, presumably.

    Thank god for the american investors, whose reaction stopped the deal.

    The fundamental rule still remains that if the mgmt thinks they cant invest the money to yield a return higher than their cost of capital, they should distribute the same in dividends. By investing, i mean, organically, or inorganically within their / related sectors.

    And here, they were moving from a cash based, zero debt IT model into a highly cash-guzzling, debt-ridden sectors like Infrastructure and Real Estate (which is, by the way, facing a huge downturn just now, to counter your infra is the sunrise sector argument. And lets not forget that most of the cash and the valuation was given to Properties).

    Add to that the related party angle and lack of transparency about the valuation, or who did the same, this enters the boundaries of a major disaster.

    To seal the deal, this money was not even being invested in the companies, it was being used to buyout the promoter stake in the companies. So only the Raju family gets the money, not Maytas Infra or Maytas Properties. Presumanly, the cash crunch in the two companies would be met by debt taken on and cash drained from satyam into these subsidiaries on a regular basis hereon for many years to come.

    Where i do agee with you is that the advisors might be to blame for being too eager to pocket the fees because Satyam was well within its legal rights to carry this through.

    More importantly, this exposes a major flaw in the indian companies act, which gives the mgmt discretionary right to invest upto 75% (or some such high %) of cash. Lets hope for the sake of the retail investors, that this gets rectified soon.

  5. frednixon Says:

    http://indtechview.wordpress.com/2009/01/05/the-satyam-fiasco/

    I have written about your column in rediff.

    Thanks
    Fred

  6. rajeev2007 Says:

    to rohit

    1. the world bank has found its former CIO (mohammed mohsin?) guilty of corruption in the award of contracts and has banned him from any dealings with the bank. i think satyam was one of the companies whose contracts he is supposed to have taken money for. this is the basis of the bank action, the other stuff is probably smoke and mirrors.

    2. the valuation was comparable to the valuation for properties owned by dlf and higher than the valuation for ultratech, according to articles in the business standard. however, valuation is an inexact science and is based on comparables and people can quibble about them.

    3. when real estate appears to be going to hell in a handbasket, that might well be the right to buy. famous investors like warren buffet have been contrarians. incidentally, several major it companies have been accused of being land barons, getting huge amounts of land at far below market value by influencing state governments. is that real estate speculation? is it legal? ethical?

    4. we live in an imperfect world. nothing is black and white. standards of business ethics and behavior are based on “generally accepted” behavior by peers.

  7. rajeev2007 Says:

    to vr2009:

    i don’t dispute that the satyam folks goofed. they have done this before, too, when they went out and spent an enormous amount of money (400 crores?) on an internet property (indiaworld) that was worth far less. but my contention is that this was a genuine mis-step, and not some deep, dark conspiracy. the baying-for-blood and sanctimoniousness being exhibited by all sorts of others like the brainless english language media is what irritates me.

    i disagree with your contention that the management of any company should simply give dividends to shareholders if they don’t believe they can exceed the cost of capital. this is not part of any corporate finance axiom, nor is it practical. no management — even in a besieged company like general motors — will admit that they have no idea how to run the business. in effect you are saying companies should voluntarily dissolve themselves when their businesses are going south. that would be a novel concept, and i am pretty sure this is not standard corporate policy anywhere on earth.

    as for institutional investors, i wouldn’t weep for them. their hot money tends to be unscrupulous, and, yes, they would be quite happy if companies liquidated themselves. retail small investors are far more loyal to the companies they invest in. so i wouldn’t be very bothered about the diversification needs of institutional investors.

    infra is a long-run play, and it is highly volatile. but then, it is often the contrarians who make the big returns when the conventional wisdom suggests a certain path and they go totally against that.

    satyam has probably not violated any rules, they have just acted in a not very sensible manner. regulation can only go so far. even with onerous sarbanes oxley, see what the americans have been able to achieve. the singular example of bernie madoff shows how frauds will happen whatever the regulators try. a big problem in india is opaqueness.

    the more i think about it, the more i am appalled at the independent directors — the dean of the isb, krishna palepu, vinod dham, et al. i am sure the promoter-directors recused themselves based on conflict of interest when the maytas investment came up for a vote. how on earth did the independent directors actually approve it? it was a serious error in judgment on their part, as on the part of the rajus.

  8. rajeev2007 Says:

    why, thank you. i am grateful.

  9. siddhu75 Says:

    Rajiv

    Are you least bit embarassed about your un abashed advocacy of Satyam?

    What has come out today raised questions, at worst, about your motivation; and at best, about your judgement

  10. dhara Says:

    Rediff board was littered with disagreements…Though usually I ignore it, there were some good objections…

    Now it is all settled …seems like… and I get a chance to appreciate this brilliant article !!!

    The stock price could very well be triggered by issues related to books, not in a stupid decision to invest in real estate The rule of gods that an IT company would go morally bankrupt by buying into infrastructure was pseudo logic. We needed a rebuttal of that logic. While it is appropriate that this suspicious anamoly of investment in Mayta is highlighted, may be it was not enough to create the turbulence. Rajeev’s article was about this much…You couldn’t hopelessly swing to the other extreme to justify the crash for an investment in real estate.

    As we know, the real problems are much deeper, mostly these serious problems caused the crash.

    frednixon article above is very well framed. But please check the rebuttal on Mayta valuation on one of the posts above, with that most important objection is gone. one remaining complain which shows less than perfect practice is of course objection on world bank…

    But lets see what people ignored…these crashes could be due to more serious problems, and none of the people managed to think that. They all found the supposed reason in an investment decision and jumped to the bandwagon of good mgmt practices, when the real problem was black and white – that Satyam records have been cooked up.

    Rajeev is the first one to say that a decision involving Mayta’s deal itself is not the reason to beatup satyam . That he told against immense pressure. Great job Rajeev. Imagine a person with actually 1 billion in cash. Of course with actual 1 billion cash in Hand, Raju mightn’t have invested in Maytas. But if he did…People would have looked to Maytas.

    I can only sympathize with these morons who cooked the books, I never had satyam stock..I didn’t like that company, there were stories of mistreating employees by lay off…but I sympathize with their foolishness…Hope the new mgmt saves the situation to some extent.

  11. lalchandran Says:

    Hi Rajiv,

    >>4. we live in an imperfect world. nothing is black and white. standards of business ethics and behavior are based on “generally accepted” behavior by peers.

    While I do think you have been hasty on drawing conclusions on Satyam, I must say you have touched a very interesting aspect of corporate governance. I fully agree that the board of directors and senior management at Satyam are equal parties to this fiasco. If the American investors haven’t raised the alarm, the whole episode could well been a management success story in corporate India and be awarded another crown for the marvellous crisis management skills in difficult times. It might well be these skills (to take extreme risks) that have made Satyam what it is today (or Reliance or Infy or any successful Indian company). Successes do have many envious enemies and successful leaders certainly deserve many jewels; unlike the mediocre (read independent board directors).

    Other the other hand: We, as common men, don’t know the real truth and can only draw conclusions based on scenarios presented by journalists and other sources. Hence, as in a responsible journalism, it is important to research the situation a bit deeper to provide us common men/women will a more credible information.

    Hi Siddu75, I am unsure if Rajeev need to be embarrassed. He has written his views based on the available information then.

    Regards, -Lal

  12. rajeev2007 Says:

    siddhu75, yes, i am embarrassed at being taken in by this scandal. but then, i am in great company: the dean of the ISB, harvard business school professor, guru from intel, all the institutional investors, the retail investors, SEBI etc. all of us have to be embarrassed for having trusted satyam and ramalinga raju.

    but, until yesterday, nobody knew that the books were falsified to such an extent. i had no inside information, i was merely looking at it from outside. if i had a crystal ball, i would surely have shorted satyam stock. so would you. i was defending what seemed to be not-unreasonable investment in maytas (and i did assume maytas’ books were not cooked).

    1/7’s revelations are a different kettle of fish. this is massive fraud. nobody can justify it.

    as for my motivation, i guess it’s pretty obvious that satyam had far bigger fish to fry than to bribe me to plant an article supporting them. i am offended by the suggestion that i took money from satyam to write this. yes, i do generally get paid by rediff to write columns, and i expect i’ll get paid for this one also. but that’s about it.

    as for judgment, yes, i am guilty of not having seen through the biggest fraud in india in the last 25 years. so sue me. and be careful to sue everybody else too.

    dhara, thanks for the kind support.

    lal, i don’t think any journalist had the inside scoop on satyam. and yes, i had nothing but public information available to me. i said, and i still maintain, that the maytas investment would not have been all that bad, if satyam had a pile of cash and was looking to diversify. i also think the world bank and others are not as pure as driven snow. that’s a defensible argument. of course, massive fraud is not defensible.

  13. siddhu75 Says:

    Rajeev

    As I said it just could be an error in judgement! And the directors whose company you refer to did not come out in defense of Satyam – on the contrary they resigned (as questionable the circumstances of their resignation might be). ISB dean was forced to resign from all his positions on Govt selection committees. All this before the revelations of yesterday – so even before Wednesday the ranks of those willing to argue for Satyam in public had really thinned – not sure if you had great company there either in numbers or standing of people

    In fact there were enough number of stories in investment banking circles speculating about the cash on Satyam’s books being real – this was even before your article was published. No reason to believe such speculations, but when you are making a passionate argument for Satyam in some kind of a contrarion way it may have been prudent to factor in that as well – at least refer to in the passing. There are enough loopholes in Darwinism, but the burden of proof is strongly on the shoulders of those who propound the alternative theory – they need to bring out enough evidence in defense of their theory – not sure if you enough fatcs on hand to take this contrarion stand.

    A Fund Manager friend of mine wrote me with great candor “people thought the discount to infosys was unfair…i am at a discount to Buffet, is that unfair?? havent i lost 60% of clients money last year..” While yesterday’s revelations couldnt have been foreseen, there are enough people who had doubts about Satyam which were reinforced after the Maytas fiasco even before ‘The Wednesday’

  14. amishra71 Says:

    Hi Rajeev,

    What is your response now in defence of Satyam (After Raju’s disclosure).
    I was highly surprised to see your article. I don’t know why you were ignorant about Satyam. The fact is this company has looted its stock holders many time.

    I like your articles. Keep posting.

  15. nsrajan Says:

    Rajeev,

    I read your article and accepted the logic put forth. Then Raju stumped all of us with his letter. A thorough and an objective probe by SEBI should help identify all possible cause for such frauds, the state and non-state actors of it. We should make all the amends as required to look forward to a better system.

    I wonder how many other companies have done something like this.

    Wish this is just one-off case.

    Rajeev- Continue to enlighten us with your views on the air around us.

    thanks
    Sundar

  16. rajeev2007 Says:

    nsrajan, there are many actors in this scam. it is simply not possible for something of this magnitude to be perpetrated by 2 or 3 people.

    in purchasing power terms, $1 billion in india is equal to at least $4-$5 billion. so this is a huge deal, much bigger in real terms, for instance, than enron, which was only about $1 billion. but all this pales before bernie madoff’s $50 billion or the sub-prime $1 trillion.

    i am pretty certain a lot of other companies — if not most other companies — in india indulge in hanky-panky.

  17. rajeev2007 Says:

    amishra71, my response is in the next article posted above.

    i don’t believe satyam has looted its stockholders many times before. there was the business of buying indiaworld for 400 crores — i thought that was a genuine mistake, fueled by the internet “eyeballs are gold” hype of the time.

  18. rajeev2007 Says:

    siddhu75, the directors *knew* a great deal about the company, for heavens sake. if they didn’t, what were they doing as directors?

    rammohan rao *chaired* the meeting approving the maytas buy, and i believe vinod dham and krishna palepu were present. the rajus recused themselves because of conflict of interest. then it is hard for the independent directors to claim they were not party to the maytas purchase scam. so yes, they are good company for me in terms of not seeing the big scandal, and they have far fewer excuses for not seeing it. obviously i had no inside information.

    well, all these smart investment bankers were also taken in, weren’t they? none of them figured it out earlier, did they? and all the smart fund managers from fidelity and aberdeen and icici and so forth took a bath on these shares, didn’t they? so nobody really had a clue as to the magnitude of the scam. all they were whining about was, “satyam tried to pull a fast one on us, instead of diversifying into maytas they should have given the cash as dividends”. pretty weak.

    the entire investment community was totally foxed by this. and since these fund managers are paid to figure out these things, they should be sued, along with the audior, price waterhouse. there was criminal negligence on their part.


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