The government and the interim board of directors at Satyam Computer Services deserve to be congratulated for quickly resolving the crisis at what has been India’s fourth largest IT services company. While the financial health of the company remains a grey area because reliable, up-to-date accounts are still being prepared, and the criminal prosecution of Ramalinga Raju and others for fraud will take time (a charge-sheet has been filed, along with extensive documentation), Satyam itself has been saved. It has a credible owner after an auction in which reputed companies had bid, it has survived the last three months without much loss of business or desertion by staff, it has coped with a severe cash crunch, and a national asset can now be re-built into an IT services powerhouse. There are question-marks over the extent of the liabilities that could arise on account of law-suits in the United States, but Tech Mahindra has taken a calculated risk, braved the prospect of a credit downgrade, and grabbed the chance to take control of a company that has the potential to create much more value than its asking price on Monday. This happy denouement is particularly noteworthy after the initial confusion following Mr Raju’s confession of fraud, when ministers had spoken initially of a government bail-out for the company and when there were suspicions that political skullduggery was going on behind the scenes.
The key decision by the government was to make an example of the guilty men at Satyam, to serve as a warning to others, and to protect the company. Towards this latter objective, the government moved with a speed and wisdom that it rarely displays, in selecting an outstanding new board of directors, who worked pro bono to put the company in safe hands. Interim management advisers were appointed, a sort of pro tem CEO was put in place, key customers were talked to, and employee concerns were addressed. The business of finding a new owner then became the focus of much of the action.
One potential bidder made allegations of lack of transparency, but with a former Chief Justice supervising the process, these allegations never gained traction. Indeed the bidding rules themselves seemed to have been framed to ensure a good price and at the same time prevent the winner’s curse through repeated rounds of competitive bidding that could take the price to unrealistic heights. The difference between Tech Mahindra’s winning bid and Larsen & Toubro’s was about 20 per cent, but Mahindra will know that it did not pay too much because it managed to prevent L&T from getting a chance to re-bid (which would have been the case if the gap was only 10 per cent). Satyam, with its strength in ERP (or enterprise resource planning) work, is a good fit for Tech Mahindra, which so far has focused on the telecom sector.
The obvious question that comes to mind is why such an approach should not be tried out in other areas. There is no shortage of “sick” firms going through the mill at the Board for Industrial and Financial Reconstruction. Might they benefit from an approach that looks to finding new promoters, rather than looking for concessions from lenders and other stakeholders?