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In defence of Satyam
January 02, 2009
The recent troubles of Satyam [Get Quote] Computer have caused the chatterati to come out of the woodwork and cluck-cluck away disapprovingly. People have gone into paroxysms of outrage and moral indignation at the alleged lack of corporate governance at Satyam. So much so that the World Bank, that august body, has declared that it will not do business with Satyam for the next eight years. Surely, Satyam must hang its head in shame for being so wicked.
That would be the conventional wisdom. After all, Satyam did do something rather rash - at a time when the computer services industry is facing retrenchment and serious pain, the company was ill-advised to use up its cash to buy up Maytas Infra and Maytas Metro, real-estate and infrastructure firms. Especially given that Maytas is majority-owned by the sons of the founder and chairman of Satyam, Mr. Ramalinga Raju.
On the contrary, I would say it was unwise, but not necessarily wicked. I suggest that Satyam was ill-served by its M&A investment bankers and lawyers regarding the public-relations backlash such a move would cause. The fact of the matter is that there are mitigating circumstances. Satyam is sitting on a pile of cash, and in the current scenario of reduced prospects for IT services, it is rumored to be a takeover candidate. IBM has been mentioned as a suitor.
The using up of the excess cash to buy Maytas could well be positioned as a poison-pill defense that would deter unwanted predators from attempting a hostile takeover. This would be an entirely legitimate and appropriate fiduciary use of resources, assuming the current board and management do not wish to sell out to a corporate raider.
Furthermore, it is worth considering Maytas in more detail. So far as I can tell, Maytas has functioned entirely above-board as a real-estate firm. I have heard from several people that Maytas has a reputation for only dealing with "white", ie. legal and tax-paid money, as opposed to the normal practice in the industry of laundering large amounts of "black", ie. illegal, underground money.
Maytas has also won the very large contract for the Hyderabad Metro, and, like Satyam, is perhaps an exemplar of local Hyderabadi pride, as a favored native son.
My conjecture is that Maytas underbid for the Hyderabad Metro, in its eagerness to win the prestigious deal: they even cut a cheque for Rs 11 crore (Rs 110 million) to the AP government under the agreement. Let me note, in the interest of full disclosure, that I have no inside information about Satyam or Maytas, nor do I have any financial interest in the companies. My suspicion is that, given the severe liquidity crunch in the market, Maytas has been finding it difficult to raise the cash to move forward with the Metro project. Therefore, in a way, it made sense to use Satyam's surplus cash as working capital for Maytas.
Could Satyam's cash have been better used to buy up distressed IT services firms elsewhere, as other Indian majors have done, in an attempt to enhance its competitiveness? Perhaps. But we have to wait and see how the acquisitions made by Satyam's competitors pan out. Indeed, there is a good question as to whether the good times for the Indian IT services industry are over and that it is now becoming a sunset industry. The Indian stock market, after all, has been brutal on all IT majors in 2008.
There is no question, however, that infrastructure is a sunrise industry in India. The state of the roads, ports, airports, and general commercial and residential real estate in the country is simply pathetic. While real estate is a notoriously volatile sector - just ask American homeowners - it is evident that over time an enormous amount of infrastructure creation will happen in India, and we have already witnessed the massive wealth generated by big builders in the last bull market.
Therefore, in the long run, it is a good question as to whether Satyam's shareholders would actually have benefited from investing in Maytas. So it's not entirely clear that Satyam's bosses were the robber-barons they are being made out to be.
In the past I have met the Raju brothers, and I personally find it hard to believe that they were seeking to rape and pillage the company they had built up from scratch. Besides, Satyam has a solid history of corporate social responsibility, and I believe their 911-like emergency services are a big hit in Andhra Pradesh. Given all this, I think it was a matter of poor advice rather than villainy that has caused this ruckus.
After all, there are many companies in India where the promoters, with minuscule direct ownership, are able to manipulate the company, especially through opaque cross-holdings. If I am not mistaken, this is the norm rather than the exception. The entrepreneurs often act like the firm, even though publicly listed, is their personal fiefdom. And the external directors go along with the wishes of the promoters. If Satyam is to be crucified, then I suspect almost all of India's firms will need to be tarred by the same brush as well. There aren't too many saints in India's notoriously corrupt system, ranked way down by Transparency International.
Satyam could have followed the murky doings of other companies by routing funds to some offshore hedge fund or private equity fund and using dubious mechanisms similar to p-notes - favored by India's ruling class and its businessmen for siphoning money off into numbered Swiss accounts - to bring the money back. The fact that Satyam didn't do so is where they erred. The blame must go to the investment bankers, lawyers, consultants and corporate finance people who did the due diligence.
Other actors have not covered themselves with glory, either. The high-powered independent directors at Satyam who resigned after that fact should have asked some penetrating questions when the deal was being discussed. The World Council for Corporate Governance which had given Satyam its 2008 Golden Peacock Award for excellence is talking of taking the award back, and looks rather foolish now (Council to rethink Satyam's Award, Livemint.com, Jan 2, 2009).
The high dudgeon with which the World Bank greeted this affair is especially entertaining: hypocrisy is hardly the word for it. If you remember l'affaire Wolfowitz, (Arrogance and Cupidity, The Pioneer, May 3, 2007) it had to fire its head Paul Wolfowitz in 2007 because of nepotism towards his girlfriend, whom he had hired for a $193,000-a-year position at the Bank. His defense was that there were a thousand others at the World Bank who made that much money. Yes, a thousand too many. The World Bank, among others, was skewered in the 1989 book "Lords of Poverty" for the lavishness and waste with which the "poverty industry" spends 80% of its budget not on the poor, but on first-class travel, fine dining, and hefty "consultancy fees".
The New York Times (At Siemens, Bribery was Just a Line Item Dec 21, 2008) reported that the venerable German corporation, Siemens, was hit with a $1.6 billion fine for foreign corrupt practices. How come the World Bank did not see fit to suspend business with Siemens? Not that Siemens is a particularly venal company - I speak from experience because I used to work for them - but why does the bank punish Satyam but not Siemens?
Similarly, how about Enron? Tyco? Lehman Brothers? Bear Stearns? The Bernard Madoff scandal, wherein $50 billion vanished in the mother of all Ponzi schemes? Has the World Bank ceased to do business with American firms, and are they leaving America because of all the financial malfeasance there? Have they stopped doing business with Citigroup, JP Morgan Chase, Bank of America, Goldman Sachs, et al, all tarnished by the $1 trillion-dollar sub-prime crisis? I await a circular any day from the World Bank that they will not work with any of these major financial firms, and that they are moving to Switzerland. After all, the Bank has its sterling, snow-white reputation to protect.
I believe Satyam is being crucified for a minor trespass. I wish the Indian media and all the others baying for Satyam's blood would spend a fraction of this energy on investigating how politician Amar Singh ended up on the list of people paying more than a million dollars to Bill Clinton's foundation (Amar Singh makes huge donation to Clinton foundation, Times of India, 19 Dec 2008)
India is known for epic, endemic and epidemic corruption all the way from top to bottom. To pinpoint a minor transgression, a misdemeanor really, and to try and destroy Satyam and its promoters is inappropriate and unfair, especially when hypocritical foreigners join the chorus. I think India Inc. should close ranks behind Satyam Computer and defend it, lest it be sold at a fire-sale prices to some predator.
Comments welcome at my blog at http://rajeev2007.wordpress.com
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