Salvaging Satyam

There was a palpable sense of urgency in Goel’s conversation with Karnik on salvaging the situation. No sooner did Karnik in principle accept the ‘responsibility’ than Goel asked him if he could fly to Hyderabad the same day. This was really pushing the envelope. Though taken aback,Karnik volunteered to check flight availability and revert to him. For a change,the government was in overdrive. The Ministry quickly booked the flight and also arranged for Karnik’s accommodation in Hyderabad. Karnik was impressed. The government worked on Sundays.

•Monday,April 20: Anand Mahindra,Chairman,Tech Mahindra,the new owner of Satyam,will address the first board meeting of the company post the Rs 2,890-crore takeover,giving hope and future to Satyam’s 45,000-50,000 employees. A moment of truth for Satyam and a victory for the government and the regulators.

“The takeover by Tech Mahindra,a much smaller company,did not come about without its share of anxieties. But this is a classic case of a public-private partnership that worked well. Not just in India,but anywhere in the world. The proactive role played by the government was really amazing,” says Karnik,who like others on the board,including Deepak Parekh and Tarun Das,are working pro bono on this project.

GETTING IT RIGHT

‘Satyam is India’s Enron’,screamed newspapers and television channels when on January 7,Raju said he cooked the company’s accounts more than three months ago. Investor confidence was shattered. Satyam’s share price tanked from Rs 179 to near Rs 10 the very next day and the company appeared to be collapsing.

But the government stepped in swiftly and took control. Prime Minister Manmohan Singh got personally involved at the very start by publicly stating that Satyam was too big to fail and that its rescue must not get embroiled in inquiries being undertaken by agencies such as the Serious Frauds Investigation Office,the state police and the Securities and Exchange Board of India (SEBI).

Cabinet Secretary K.M. Chandrasekhar kept him informed of the progress through the three months. The Ministry of Corporate Affairs was designated as the nodal agency for stabilising the company’s operations. The Ministry wanted the new board to set things in order and stay on,if not forever,for at least for the next six-12 months. The six-member board,however,had different ideas—of evolving a permanent solution that was only possible with a new owner.

This,however,met with stiff resistance from a section in the government that could not fathom the urgency for a takeover or a merger with another company. But that’s where the collective wisdom of Deepak Parekh,Tarun Das and Kiran Karnik helped. “Unlike the old days,when most companies were in the manufacturing sector with tangible assets such as land and building which would only appreciate in value,Satyam was an IT company,its assets were its human resources and intellectual property. The best analogy I could give the government was that of fruits and vegetables—how with time and little care and nurturing,they perish and carry no value,” said a board member who did not wish to be quoted. The Ministry finally saw merit.

Satyam was not to be an Enron. Karnik,Deepak Parekh,Tarun Das,T.N. Manoharan,S. Mainak and C. Achutan brought in by the government proved the Cassandras wrong. Operation ‘Salvage Satyam’ was swift,systematic and benign on employees. This distinguishes India from the US or Europe where market pundits would have argued for the company’s extinction. Enron met such a fate in the US.

The new professional board worked out a plan and meticulously executed it,making it a watershed case of salvaging a company—the fourth largest technology company and one of the flag bearers of India’s advancement in the sunrise tech sector—from the brink of collapse. Its action plan spread over the entire gamut of Satyam’s operations—from getting working capital funds,paying monthly wages,retaining customers and employees and ensuring transparency while working out the bidding process for a new owner.

The new board inherited a mess. Bank balances were bad. The whole process took three months—which many stalwarts in India Inc feel is a record of sorts at a time when many public and private sector companies are waiting for decades for a rehabilitation plan. But the three months had several anxious moments. For example,it seemed difficult to raise the Rs 600 crore needed to pay the January salaries to employees. The board did not run to the government for a bailout; it identified land that can be used as collateral for raising funds at commercial rates from a bank. But a large tract of land given to the company by the Andhra Pradesh government had a clause stating Satyam had to provide employment to 6,000 people by 2012. The bank,taking abundant precaution,asked the board to get a no objection certificate from the state. “Andhra Pradesh either got jittery or was deliberately dragging its feet … so some crucial days were lost. But,finally,it gave the NOC,” said a board member.

After arranging the funds,two advisers,former Tata Chemicals MD Homi Khusrokhan and former Murugappa Finance director Partho Datta,were appointed to assist the board. Lawyers from Amarchand Mangaldas went through the legal aspects of each move. Retired justice S.P. Bharucha was roped in to monitor the bidding process. The six new directors met week after week in Hyderabad,Mumbai and Delhi to finalise the sale process. Tarun Das,with his phenomenal clout in the government,helped move files quickly.

The board adopted a two-pronged strategy while meeting in Hyderabad every week. On the one hand,they would be in touch with Satyam’s clients to improve strained relations and confidence; on the other,they would be in touch with employees and the management. The day after the new board took charge,it got a jolt when one of Satyam’s Top 10 clients cancelled its order. The new board members leveraged their personal contacts,spent hours talking to clients daily,at times even asking clients to talk to the Satyam team for boosting confidence.

The appointment of A.S. Murthy as the new CEO of Satyam on February 5 was also a tricky call. The board deliberately did not opt for a charismatic and flamboyant CEO from outside because it sensed a new owner might want to appoint his own candidate at the helm. After interacting with the leadership team at the company,the board was convinced of Murthy’s integrity.

A SMOOTH TAKEOVER

The takeover process was made smoother with the help of capital market regulator SEBI,the Company Law Board (CLB) and the Corporate Affairs Ministry. Before the board led by Karnik started its operations,the government had already prepared the groundwork. The CLB approved the ministry’s proposal to supersede the board and appoint new directors in January. It allowed the government and the board to identify a buyer.

SEBI,led by chairman C.B. Bhave,also chipped in and changed the tough rules governing takeovers. It took just a day to do it. Significantly,the amended rules disallow open offers from rival bidders if an acquirer has already made an open offer. It allowed the Satyam board to work out a plan which provides for transparent,open and competitive process for the continued operation of the company in the interest of all stakeholders and does not favour a particular acquirer. All this happened in eight weeks. The Satyam board made it clear that the acquirer will not be permitted to sell any equity shares for three years from the date of the acquisition. The company opted for a global competitive bidding process in which qualified investors with net assets in excess of $150 million (around Rs 750 crore) were allowed to bid.

The government can take its share of credit in the Satyam rescue. It was none other than a distressed Prime Minister Manmohan Singh who made the first call to get a private sector high-profile board in. Even after he went in for his heart surgery,he asked External Affairs Minister Pranab Mukherjee to extend all help. “Mr Mukherjee actually ensured senior government secretaries called up some key clients who did not want to work with a tainted company. Except for one client,all others stuck on to Satyam and a large part of the credit goes to Mr Mukherjee’s deft handling of the situation,” said Tarun Das.

When the new board was scraping the bottom of the barrel,the Cabinet Secretary stepped in to arrange the first loan of Rs 600 crore from IDBI Bank and Bank of Baroda. “In my 45 years of working with the government for the industry,I have not seen such close involvement of the government,” Das said. “It is a good development. It was an uphill task which we took up. We have been able to bring it to a logical conclusion. We have maintained complete transparency in the process,” said Corporate Affairs Minister Premchand Gupta after the takeover announcement.

TYING UP THE ENDS

By April 13,the new board had completed three months. It was the day when potential acquirers were to submit the technical and financial bids and the board would scrutinise the bids before declaring the winner. When the board met in Mumbai on that Monday,it was not clear how many bidders would submit the bids. To their relief,three bidders—Larsen & Toubro,Tech Mahindra and Wilbur Ross—came in. Cognizant,which was in the race till the last lap,did not submit the financial bid. The board first went through the technical bids of all bidders—all of them cleared that hurdle. Then the financial bids were scrutinised with the assistance of Justice Bharucha.

Tech Mahindra quoted Rs 58,L&T Rs 45.90 and Wilbur Ross Rs 20. If sources are to be believed,the Tech Mahindra bid was above the Satyam board’s expectations. The board was unsure whether they will get a bid above Rs 50 as the market price was around Rs 45. The board members were able to declare the winner before they dispersed for lunch.

“We will work to restore the reputation of Satyam,” said a confident Anand Mahindra,chairman of Tech Mahindra,soon after the board declared the company as the winner of the bidding process. The board is now relieved. “We are happy that Satyam is back on its feet with a new buyer and confident that Tech Mahindra will take it forward. We are also thankful to the government for the tremendous support it has shown in saving Satyam,” said Satyam Chairman Kiran Karnik after the takeover announcement.

The board had the unviable task of managing a smooth transition. Tech Mahindra has just 23,000 employees and revenues of about $1 billion. Six clients account for 85 per cent of its turnover. It has taken over a company with 50,000 employees that till yesterday was the country’s fourth largest IT company. “So,there are concerns,” said a board member. The board members will move over the next month or so once Tech Mahindra takes charge. The process begins Monday.

–With Sreenivas Janyala & Johnson T.A.