Satyam Theory
As mayhem gripped the stock market on Jan 7 after Satyam chairman B. R. Raju resigned admitting massive accounting fraud in the company, I was initially confused and awestruck.
After a while, thinking about the whole fiasco with a cool head, I felt there is probably more to this drama than meets the eye. Some of the stated facts just don’t make sense and pieces dont seem to fit.
Here is my theory of what *might* be playing behind the visible scene. Of course, this is just my own speculation. The real facts will come out soon enough (or will they?)
The bottomline of my theory is: the current situation has been engineered by Raju to take revenge on institutional investors (mainly FII’s) by forcing them to liquidate their shareholding at a heavy loss. In his letter, he may have deliberately exaggerated the level of accounting fraud to create extreme panic and force a massive selloff. He may (or may not) have a game plan to rescue Satyam once the FIIs are out and the dust settles.
Raju has a lot of reason to be sore with the FIIs. Let’s cut back a few weeks. Raju’s attempt to acquire Maytas was thwarted by the FIIs. It seems the big investors were really upset at the way Raju tried to use Satyam’s assets to acquire a family business, and they almost took it personally.
We know that the acquisition bid was aborted, but it looks like the FIIs had decided to teach Raju a lesson and show him what they were capable of. They orchestrated a selloff in the market and caused Satyam shares to drop more than 30% in a day. Raju had pledged all his holdings in Satyam with lenders and borrowed heavily against them. Now with the sudden price drop, he was unable to meet margin calls and the lender sold off all his shares as expected.
So, in a matter of weeks, Raju was stripped of his holdings and the promoter holding came down from 8.6% to 2.3%.
Meanwhile, the institutional investors were looking around for merger/acquisition opportunities for Satyam. The plan seemed to be that once Satyam was acquired, Raju would be summarily kicked out of the picture. That should teach him a lesson.
Now, it probably never occurred to them that if Raju is stripped of his stake and is staring at losing management control too, he has nothing much left to lose. He becomes all the more likely to think of taking drastic steps to hit back.
By admitting massive fraud and causing a shock, Raju essentially forced the same institutional investors to exit with potentially enormous losses. By doing this he gets even with them.
Now, the investigation may find that Raju’s disclosures about fraud are actually exaggerated. The financial situation may not be really that bad. Sure, some unethical diversions of funds will be found, but with Raju’s “co-operation”, these could be set right and a decent amount (if not all) of Satyam’s cash might be recovered.
Raju claims in his letter that 5,040 crore bank balance simply never existed in Satyam. This is hard to believe. It is more likely that the money existed, but was siphoned off to his son’s company Maytas. The acquisition of Maytas would then “adjust” the situation by bringing Maytas’ assets into Satyam’s books. It is like Satyam had paid in advance for acquiring Maytas, and the actual acquisition was happening later.
His assertion of 3% profit margin is strange. The IT industry in India routinely has 20-25% profit margin. How could Satyam’s margin be so way off the industry average? Either the 3% figure is wrong (in which case cash/reserves should be closer to the balance sheet values), or the 3% margin is due to cooked-up expense payments as a way to divert money to Maytas. Either way, the money was there and it should be possible to recover it to an extent eventually.
Why would Raju make a disclosure like this knowing that it will definitely lead to legal action against him? He figured that since Satyam was eventually going to be acquired, its books would anyway be scrutinized before the acquisition, and the Maytas connection would inevitably come out. When the FIIs had discovered this, they would first have tried to quietly sell their holdings and take their money out, then they would have exposed Raju’s unethical practices and gone after him again. He would anyway have faced charges, but his situation could be possibly worse in this scenario.
By doing what he has done, Raju pre-empted the institutional investors, caught them unawares, made them lose tons of money, and got his revenge.
Any takers for this theory?
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