Column : The end, almost

Written by Rajesh Chakrabarti | Updated: Apr 16 2009, 04:12am hrs
Stocks
All said and done, the Satyam fiasco has been managed exceptionally well from the point of view of the company and, to the extent possible, for its shareholders. The prognosis less than three months ago was quite dire, with collapse and eventual unwinding looming in the horizon. Credit must go primarily to the government-appointed board that handled the matter deftly and with remarkable transparency.

How is it that Satyam as a company survived the worst corporate scandal in Indias history The answer lies, at least in part, in three different facts. First, the containment of the fraud to the accounting side as separate from the operating side. In spite of the stunning audacity of the fraud pulled off by the Rajus and their top aides, Satyam was by and large doing well on the operating side, delivering to its clients in terms of its product quality. The operating side of the company, as opposed to its financial side, was based on solid foundations. One is tempted to give the devil its due, and clearly Ramalinga Raju deserves admiration for having built up the company over two decades, the mega fraud notwithstanding, but one must not be overgenerous with praise. The product-side efficiency of Satyam is a result as much, if not more, of the nature of the industry in which it operatedtruly global, highly competitive, and with easily observable product characteristics. One may be able to take the auditors for a ride, but it is much harder to do the same to a group of cost-conscious, cash-focused, quality-obsessed global clients well aware of their alternatives. Questionable sales practices were attempted there as well, as the World Bank ban of Satyam indicated, but these were borderline unethical and paled in comparison to the accounting fraud. The result has been a much slower erosion of Satyams client base than was initially feared, which was ultimately the biggest concern in the wake of the confidence-shattering disclosure.

Equally propitious was the timing of the scandal. Three years ago, even a giant like Satyam would have probably lost 75% of its primary assetsemployeeswithin a matter of weeks of the uncovering of the accounting scandal. Even today, every info tech related opening in major Indian companies is clogged with double-digit resumes from Satyam employees, but the number of such openings itself is minuscule. That is bad news for Satyam employees and other job seekers but excellent for a company in distress. Satyam employees have very few outside options today. Some front-end Satyam executives have tried to work out deals with existing clients about shifting the contract to their own new start-ups, with occasional success, but the company has been largely successful in containing such melt-away of business.

Finally, credit must be given to the handling of the situation by Messrs Karnik and his fellow directors and indeed the government itself. The swiftness with which the government stepped in, replacing the discredited board with its own team, the quality of the people it convinced to get on board in its rescue mission and the professionalism and transparency with which this team then went about stemming the rot and instilling confidence of all stakeholders, are all worthy of high praise. Here is indeed light-touch government intervention at its best, aimed at accomplishing turn-around rather than asserting control. The fact that the turnaround team came from industrywith impeccable managerial and ethical reputationsrather than government, contributed handsomely to the badly-needed confidence they inspired in the initial weeks.

But all is, sadly, far from over in the Satyam story. Whether Satyam proves to be a gem of a pick for Tech Mahindra or an albatross around its neck would largely be determined by the outcome of the bevy of lawsuits against the company filed in US courts. In many ways, these cases will chart unknown waters as far as the Indian corporate sector is concerned, and mark new legal areas for cross-border business in general. Tech Mahindras relatively high quote, though cheered by the markets, raises the spectre of a winners curse for the acquirer. How it handles employee issues at Satyam would lie at the heart of Mahindra realising Satyams implied valuation. Interests of Satyam employees and those of its acquirers are likely to be in conflict there.

Currently it appears that apart from the accounting fraud, the tunneling of funds from Satyam to other Raju companies was not significant. More clarity about this will probably emerge in the months to come, but as for now, Satyam seems to have turned an important corner and avoided the fate of several other corporate giants that witnessed similarly spectacular corporate governance and accounting failures. That, certainly, is worth celebrating.

The author teaches finance at the Indian School of Business, Hyderabad