Posted by: donmihaihai | January 11, 2009

Riding a tiger.

“When the tide goes out, you get to see who is naked”

Its look like we are on a nude beach. There are peoples who engaged in Ponzi scheme, high level management using plain fraud to get company going and the less sinful type is having business model that work only when tide was strong, water was high. Satyam Chairman fraud is not a surprise but his letter to board of directors is valuable regardless whether it is as what he claimed, he put it all together by himself.

1) For investor like me, we attended a lesson by the grand master of theft where he lay out how he did it.

That in the last two years a net amount of 12.30 billion rupees was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances (Statement enclosed, only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged share by the lenders on account of margin triggers

.

Shares are pledged for loans, significant dividend payments, acquisitions and capital expenditure. Here he has shown us the tools for manipulation or potential manipulation to achieve the desire results. Beside dividend payments, acquisitions and Capex, I would like to add publicity and share buyback. Never underestimate the power of these 2. For share pledging, does it sound similar? We have our own case here. For the rest, it is just old tricks being use over and over again. “The Aggressive Conservative Investor” Written by Martin J. Whitman and Martin Shubik about 30 years ago had pointed out many ways that company can do to achieve what they want. It is still relevant in today context as many current IPO, RTO and other small Caps looks like learning from him. By saying learning from him, I am not saying outright fraud. In fact, I believe most has no ponzi scheme in their mind when thing started. It is just… well unable to meet expectation, creating a gap and trying to eliminate the gap as it grow wider and wider.

Here, I have seem companies unable to pay high dividend(not just for a single year) but still continue to pay most of their profit out and with that, follow by high share price which being used as currency by the company for Capex or acquisition.

Another, there are companies who keep appearing in the news, for whatever reasons. Well, if they are being well accepted and with high share price, it achieves the same results as dividend payer.

And what about company with tight cashflow, hugh Capex coming but still keep buying back share? What the companies want? High share price perhaps.

These potential kinds of companies that manage in a way as they need the access to the market for capital. When the door to the market is being closed like now, problems start to surface. And they are the best candidate for aggressive accounting, those that potentially take the 1st step to create a small gap. Many management/owner like everyone, love high share price and it is not a sin. But looking around, company that has no need for access to the market, as in internal cash generation is > Capex, they usually don’t appear in the news so often.

The current trend is for company having IR function, highlighting how many meeting with fund managers, analysts, etc, etc per year. Some even answer to “all” minority shareholders calling in email, call, meet up. All these are being said as good corporate governance, IR, shareholder friendly, etc. But is it really the case? All these require time and effort not to say money. And not shareholders are being equally treated. Disclosure is the only way to treat everyone equal. The management is human too, just as we stressing work-life balance, why are we keep looking up for them, hoping that they can spare some time for us. I wish all their time are being spend on work and generating more cash and if all being done, they have their family.

Consider a recent RTO Oceanus which took a pro-active step to insure their abalones as it is the worries of investors and analysts. While I am not sure about farming abalones, insuring abalones is for the function of the company not for pleasing investors and analysts.

2) I wish all management/owner read and never get onto the back of the tiger in the 1st place but I won’t surprise if some already created the gap. Once started, it is very hard to close the gap and you will change from managing the company to managing the number. For many listed company, managed by owner-manager, it is your reputation.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

=========================================================================================

 

Following is the text of his letter, which was released by the Bombay Stock Exchange.

Note: references using Indian numerical system of crores and lakhs have been converted to Western system.

————————————————————-

To the Board of Directors

Satyam Computer Services Ltd.

From B. Ramalinga Raju

Chairman, Satyam Computer Services Ltd. January 7, 2009

Dear Board Members,

It is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:

1. The Balance Sheet carries as of September 30, 2008

a. Inflated (non-existent) cash and bank balances of 50.40 billion rupees ($1.04 billion) (as against 53.61 billion reflected in the books).

b. An accrued interest of 3.76 billion rupees which is non-existent.

c. An understated liability of 12.30 billion rupees on account of funds arranged by me.

d. An overstated debtors position of 4.90 billion rupees (as against 26.51 billion reflected in the books)

2. For the September quarter (Q2) we reported a revenue of 27.00 billion rupees and an operating margin of 6.49 billion rupees (24 pct of revenues) as against the actual revenues of 21.12 billion rupees and an actual operating margin of 610 million rupees (3 percent of revenues). This has resulted in artificial cash and bank balances going up by 5.88 billion rupees in Q2 alone.

The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualized revenue run rate of 112.76 billion rupees in the September quarter, 2008, and official reserves of 83.92 billion rupees). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations — thereby significantly increasing the costs.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas’ investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed. But that was not to be. What followed in the last several days is common knowledge. I would like the Board to know:

1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years — excepting for a small proportion declared and sold for philanthropic purposes.

2. That in the last two years a net amount of 12.30 billion rupees was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances (Statement enclosed, only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged share by the lenders on account of margin triggers.

3. That neither me, nor the Managing Director took even one rupee/dollar from the company and have not benefitted in financial terms on account of the inflated results.

4. None of the board members, past or present, had any knowledge of the situation in which the company is placed. Even business leaders and senior executives in the company, such as, Ram Mynampati, Subu D, T.R. Anand, Keshab Panda, Virender Agarwal, A.S. Murthy, Hari T, S.V. Krishnan, Vijay Prasad, Manish Mehta, Murali V, Sriram Papani, Kiran Kavale, Joe Lagiola, Ravindra Penumetsa; Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or Managing Director’s immediate or extended family members has any idea about these issues.

Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the following steps:

1. A Task Force has been formed in the last few days to address the situation arising out of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam:, Subu D, T.R. Anand, Keshab Panda and Virender Agarwal, representing business functions, and A.S. Murthy, Hari T and Murali V representing support functions. I suggest that Ram Mynampati be made the Chairman of this Task Force to immediately address some of the operational matters on hand. Ram can also act as an interim CEO reporting to the board.

2. Merrill Lynch can be entrusted with the task of quickly exploring some Merger opportunities.

3. You may have a restatement of accounts’ prepared by the auditors in light of the facts that I have placed before you.

I have promoted and have been associated with Satyam for well over twenty years now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries. Satyam has established an excellent leadership and competency base at all levels. I sincerely apologize to all Satyamites and stakeholders, who have made Satyam a special organization, for the current situation. I am confident they will stand by the company in this hour of crisis.

In light of the above, I fervently appeal to the board to hold together to take some important steps. Mr. T.R. Prasad is well placed to mobilize support from the government at this crucial time. With the hope that members of the Task Force and the financial advisor, Merrill Lynch (now Bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well.

Under the circumstances, I am tendering my resignation as the chairman of Satyam and shall continue in this position only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible.

l am now prepared to subject myself to the laws of the land and face consequences thereof.

(B. Ramalinga Raju)

Copies marked to:

1. Chairman SEBI

2. Stock Exchanges

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Responses

  1. you are good writer , It could be great if you can help me to write something about Asia business to my blog. I would like invite you to be one of blog writer.

    Regard,

  2. Hi Tunyalit,

    I am sorry as I am unable to take up your offer.


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