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| Satyam Computer: Best avoided | |
| SPECIAL REPORT | | Dhiren Shah / Mumbai January 12, 2009, 0:43 IST | |
While the government's intervention offers hope, avoid fresh positions in the scrip and use any sharp upmoves to exit.
Satyam Computer Services’ tainted promoter, B Ramalinga Raju, unleashed on India last week, a form of financial terrorism, which can probably be compared to 26/11 in terms of its magnum and far-reaching effect. If the facts mentioned in his letter of confession are anything to go by, the beleaguered IT firm does not have enough cash to run its day-to-day operations, and the business is not viable anymore.
Besides, Satyam and its executives face lawsuits that may result in huge damages, and hence, become a deterrent for other companies to acquire Satyam. So, should existing shareholders press the ‘sell’ button at current levels? Or could the stock move up, now that the government has stepped in to salvage the situation? Read on to know what analysts and industry experts have to say.
Problems one too many
In a letter to Satyam’s board and stock exchanges, Raju admitted to have had inflated cash and debtors position by Rs 5,040 crore and Rs 490 crore respectively, existence of an undisclosed liability of Rs 1,230 crore (towards working capital) and false accrued interest amounting to Rs 376 crore.
If these numbers are to be adjusted for, the book value per share stands at Rs 18.6. Says an analyst from IIFL, “Typically though, the reality is much worse than initial revelations in such frauds, as liabilities tend to be understated while assets are overstated”.
While the real value of Satyam would be known only after further investigation takes place and the accounts are restated, the immediate issue that the company faces is to hold on to its employees and clients. The interim management had refrained from spelling out the current cash balance, which analysts estimate to be less than Rs 300 crore, and barely suffice salaries for 15-days at Satyam.
Raju’s revelations have shattered the confidence of employees and clients alike in the management of Satyam, and it will be a daunting task to retain, either of the stakeholders. Explains Apurva Shah, head of research, Prabudas Lilladher, “It is hard to believe that no one from the top management was aware of this fraud.
When the company’s margins are about 10 per cent of the industry average and utilisation rates are far lower than what is shown, how can the heads of the vertical not know about it? This could severely shake the confidence of the clients in the company.”
A major hurdle
Satyam desperately needs a white knight right now, in the form of another IT company or a private equity player, who could keep the company afloat and hopefully turn things around. “But, who would want to buy such an ailing company, which is facing litigation to the tune of millions of dollars,” wonders Harit Shah, analyst, Angel Broking. Already, half a dozen lawsuits have been filed against the promoter and the company in the US on behalf of the thousands of investors owning American Depository Receipt (ADR) of the Indian IT firm. When asked about the specific damages sought in the lawsuit, Vianale & Vianale LLP's lawyer Keneth J Vianale said, “We have not alleged a specific damages amount that we are seeking.
That will be a subject of expert testimony. But, it is safe to assume that the damages would be close to the amount by which, the share price of the ADR have been inflated, by material misrepresentations of facts”.
Triggers
* If it can be proved that $1billion was actually present on Satyam's books, which has been siphoned off. More importantly, recovery of the same
* A bid for Satyam from competitors
Stake bought by private equity players or venture capitalist
* If suitors agree to substantially negotiate the damages or if Satyam gets the Upaid case judgement in its favour
* Individual verticals spun off at good
valuations |
Risks
* Termination/Non-renewal of contracts and loss of key clients
* Upaid wins lawsuit of over $1billion, which could force liquidation
* Exodus of employees
* Higher liabilities than what is disclosed
* The Satyam ADR shareholders in the US win the lawsuits, which could force the company to liquidate
* Banks refusing to fund Satyam's working capital requirement |
There are 68.4 million ADRs outstanding, which represent 20 per cent of Satyam’s equity capital. And, with the ADR having made an all-time high of $30 (adjusted for split) on NYSE, the liability can swell to a staggering $2 billion. So, who exactly is liable to pay?
“The liability rests not only on the promoter, but also the directors and officers of the company,” confirms Anoop Narayanan, Partner, Majmudar & Co, a Mumbai-based law firm. “Apart from the insurance cover, which I believe is $75 million in this case, we will try to rope in as many responsible parties – third parties outside the company – to recover the damages.
If Price Waterhouse is found guilty, it might end up paying a substantial part of the damages,” says Keneth J Vianale. On restructuring though, he says that US laws cannot even stop American companies in a similar situation to be restructured, leave alone a foreign entity.
A ray of hope
Industry experts have welcomed the government’s move to take stock of the situation and its intent to expedite the proceedings. The government has decided to replace the current board with 10 nominee directors within the next seven days. Speed is of essence and the government along with the regulatory bodies needs to quickly investigate about the actual operations at Satyam and get the accounts re-casted, which could help arrive at the correct position at Satyam.
The authorities will also need to work out an arrangement with the possible bidders for Satyam and the suitors in US, which would reduce the quantum of damages to the minimum. Says Keneth J Vianale, “If some company comes forth to acquire Satyam, it would be a positive development for all the stakeholders. Renegotiation of damages is certainly a possibility.” For now, the government may have to request the concerned banks to provide credit facility for working capital needs, as it can ill afford, more than 50,000 employees of Satyam losing their jobs.
Conclusion
Analysts unanimously feel that while it doesn’t make sense for existing shareholders to sell their shares at such depressed levels, no new investment should be made in the counter. “Investors who have bought it at much higher levels have already lost 80-90 per cent. So, for the balance 10 per cent, they can take a chance, especially now that the government has decided to take charge of things. Value still remains in the company and there is an outer chance that a bidder emerges, which could result in the stock moving up,” opines Ajay Garg, managing director of Equirus Capital.
If it moves up substantially, these higher levels, where the selling pressure is bound to be felt, could be used to exit the stock. One thing is for sure, which is that there is lack of clarity and it could take weeks, even months before material facts come to surface. While it is difficult to take a call on Satyam’s fate, one thing is certain – premium for quality governance will only increase and vice versa.
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