January 14, 2009

 

Bailout

If there is a competition for one word which dominated the financial world in 2008, "bailout" will be at the top of the chart.

Looks like "Bailout" is the latest export from US to India. Indian govt is considering Rs 2000 cr bailout package for Satyam employees. This amount covers their salaries for next 3 months and some other expenses by the company. And this comes within a week of Govt saying "There is no question of Govt taking over Satyam."

Now, the question is what does govt get out of this transaction apart from the goodwill of Satyam employees?

How will this money be returned to govt? Will it get it from the revenues? Will investors allow that?

What happens after the current bailout package runs out after 3 months? A new package?

Is the govt setting a prcedent where promoters can run away leaving the employees to the mercy of govt bailout?

What happens to the those people who lost job due to bad economic situation? Are they any different? Clearly, they are not at fault for tough economic coditions.

What happens to all the investors who saw their investment dip by 70% in a day? Even they are not at fault. Will govt pay them as well?

There are a lot of "first"s waiting in the wings on this story.

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January 11, 2009

 

Government's involvement will hasten Satyam's fall

I am somewhat equivocal about Govt's decision to dismiss current board and put a new one.

Now, this action can be justified by the fact that the current management team declaring complete oblivion of the events at the company, which is difficult to believe, to put it mildly. And the marquee Independent directors on board have also washed off their hands from the issue. With the issue of this magnitude, Govt cannot sit on sidelines as a mute spectator as thousands of employees can potentially be severely affected. To put this in context, do recall Govt's involvement when the troubled Jet Airways tried to get rid of 1900 employees.

But Govt's involvement doesn't really help the situation. Now think about Satyam's customer who rely on Satyam to deliver on their critical work for continuity of THEIR own business. How confident will they be when they will know that the company is run by some representatives, I suppose they will be pretty good ones, who don't have idea about the customers. If Satyam's customers were wary after the incident came to light, I suppose, panic will be the the natural emotion now. And when customers run away, what business will there be?

A classic Zugzwang situation - no matter what you do, you lose.

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January 08, 2009

 

Satyam : India's Black Swan of 2009.

I know, I know, you have been reading too much about Satyam. And mostly you also know that I quote Taleb way too often here.

Satyam fits the bill of Taleb's Black Swan event.

It is highly improbable event. How many companies in India can boast annual revenues of 10,000 Cr? A couple of dozens may be out of thousands of listed entities. Now, when was the last time you heard about an Indian company's implosion on first page of pink paper? One could have never thought of a company of this size can implode so fast.

It is high impact event. There is a question mark on the future of 53,000 employees. The erosion of shareholders' value has been swift and huge. Even Unitech lost it's 90% of value over a year. But shareholders had multiple opportunities to exit. Here the events took place at such a rapid pace that big institutional investor exited at the bottom. And there is more to come.

It seems predictable in hindsight event. Now you will see people waxing eloquent about how Satyam's corporate governance or accounting practice had all the clues about this downfall.

OK. Now few more questions.

First, media need not get so righteous about whole incident. Lest we forget, this incident came to light by Raju's own confession. There was no media expose involved in this.
One famous TV anchor is master of making stock market investing look ridiculously simple. I clearly remember him saying that Infosys' profit growth rate is 15% YoY, hence a Price-to-Earning ratio of 18 is fair. Dude, if investing is all about growth rates and PE ratio, you should have been sipping martini at your sea-side villa after making truckload of money on Dalal Street. You may think media has no role to play in investor losing money. But, it is media (print, TV, electronic) which has been responsible for attracting people to stock markets without really informing them about the real risks. Unfortunately, people have to learn about risk the hardest way - by losing their money.

Two. Mr Raju said there was no money on the balance sheet at all. In 2007-08, Satyam paid Rs 5300 cr as salaries. Now, I don't think these are phantom numbers. They must have had few hundreds of crores expenses related to business - travel, office premises, utilities, hardware, software. All the vendors must have been paid too. Then how come there was no money?

Third. The big three - Infosys, TCS and Wipro - stand out shining from this entire episode. They had all that was needed to acquire Satyam. But, they stood on the sidelines watching the Mahindras and the L&Ts tyring to court Satyam. L&T which recently acquired some stake in Satyam must be licking their wounds. Surely, it talks about how the Big Three are really different.

This event is far from over.

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