Satyam’s Founder B. Raju Resigns, Shares Plunge by 80%, The Resignation Letter Discussed

Shares of Satyam Computer Services plunged more than 80% in Mumbai Wednesday, after the founder and chairman B. Ramalinga Raju shocked every one by resigning. Satyam Computers is reportedly the fourth largest software company in India. Currently there was much speculation about Satyam’s credibility after World Bank snapped of their multi million dollar deal with Satyam. But no one thought that the founder himself will be resigning this way and that too for an issue where the balance sheet was the main questionable point.

If you look at the course of proceedings to every day happening inside Satyam, you will find some very doubtful parts. Lemme read them out for you.

Recent Key Events of Satyam

(Source: Reuters)

16 Dec.: Satyam announces plan to buy two building firms part-owned by the outsourcer’s founders for $1.6 billion. It does a rapid U-turn, killing the deal just 12 hours later following a 55% plunge in the company’s share price in hectic US trading
17 Dec.: Chairman B. Ramalinga Raju says the about-turn reflected negative investor reaction. Satyam shares continue to slide, falling by a third on concerns about corporate governance.
18 Dec.: Satyam board says will meet on 29 December to consider a share buyback in a
bid to restore confidence.
23 Dec: Satyam barred from business with the World Bank for eight years for providing Bank staff with “improper benefits”. Its shares fall another 14% to their lowest in more than 4-years.
24 Dec.: Satyam shares rally amid market talk the outsourcer may have become an attractive takeover prospect given the steep share price fall.
25 Dec.: Satyam says it asked the World Bank to withdraw “inappropriate” statements.
26 Dec.: Mangalam Srinivasan, an independent director, resigns.
28 Dec.: Satyam defers board meeting until 10 January to give itself time to consider options to shore up investor confidence.
29 Dec.: Three more directors quit, but Satyam shares rise on hopes for moves to improve shareholder value and corporate governance.
30 Dec.: Shares extend gains on talk of private equity interest and a management change. One of Satyam’s largest investors says it could sell its stake.
02 Jan.: Satyam says its founder’s stake fell by a third to 5.13%. Analysts say this means the company is a more attractive bid target.
05 Jan.: Satyam shares tumble 9% on concern that corporate governance issues could hit new business.
06 Jan.: Shares rise more than 7% on a newspaper report Satyam had been approached
by smaller rivals Tech Mahindra for an all-share merger.
07 Jan.: CEO and Founder B. Raju resigns with a strange resignation letter discussed below.

Share Graph of Satyam Computers

Resignation Letter Discussed

But that is only news for you. We have got a copy of the resignation letter too. And what appealed to me are the highlighted portions,

1. where the objectionable part of balance sheet not meeting the expenses is clearly stated

2. Where he clearly tries to explain that he is not at fault

Even at the end of the document he is found quoting

I am now prepared to subject myself to the laws of the land and face consequences thereof,..

Three Questions

There are more to it than it meets the eyes.

• How much is it gonna hit the Indian economy?
• How badly is it gonna hit the Indian IT industries and other top rated Indian companies like Infosys, Wipro or TCS? Is this by any chance going to damage any credibility of India to the world markert?
• How is it going to reverberate through the US recession period?

What are your reactions to these questions? When we asked the Change Management Consultant of Satyam, his reply is quote below

This is definately not the end of Satyam. Stock value does not mark the end of the company. Satyam has real projects and real revenue which is unaffected by the happenings today. The projects continue and do their job : of accruing revenue for he company. YES, there will be impacts on Satyam in terms of investor confidence as well as customer confidence. This will need to be handled by Satyam Senior Management by establishing direct contact with the investors adn clients and explaining to them, Yes other IT companies will also face some ‘trust‘ issues by foreign investors and customers.
Keep smiling and have a nice day …

Hemantkumar Jain

Change Mgmt Consultant,
Satyam Computer Services Ltd.

Read the Entire Letter from B. Raju Here

It is with deep regret and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:

1. The Balance Sheet carries as of September 30, 2008,

a) Inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in the books);

b) An accrued interest of Rs 376 crore, which is non-existent

c) An understated liability of Rs 1,230 crore on account of funds arranged by me;

d) An overstated debtors’ position of Rs 490 crore (as against Rs 2,651 reflected in the books);

2. For the September quarter(Q2) we reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore(24 per cent of revenue) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenues). This has resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone.

The gap in the balance sheet has arisen purely on account of inflated profits over several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance).

What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years.

It has attained unmanageable proportions as the size of the company operations grew significantly (annualised revenue run rate of Rs 11,276 crore in the September quarter, 2008, and official reserves of Rs 8,392 crore).

The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify a higher level of operations thereby significantly increasing the costs.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in the takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas’ investors were convinced that this is a good divestment opportunity and a strategic fit.

One Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed. But that was not to be. What followed in the last several days is common knowledge. I would like the board to know:

1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years - excepting for a small proportion declared and sold for philanthropic purposes.

2. That in the last two years a net amount of Rs 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances (statement enclosed only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged shares by the lenders on account of margin triggers.

3. That neither me nor the managing director took even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results.

4. None of the board members, past or present, had any knowledge of the situation in which the company is placed.

Even business leaders and senior executives in the company, such as, Ram Mynampati, Subu D, T R Anand, Keshab Panda, Virender Agarwal, A S Murthy, Hari T, S V Krishnan, Vijay Prasad, Manish Mehta, Murli V, Shriram Papani, Kiran Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or managing directors’ immediate or extended family members has any idea about these issues. Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the following steps:

1. A task force has been formed in the last few days to address the situation arising out of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam: Subu D, T.R. Anand, Keshab Panda and Virendra Agarwal, representing business functions, and A S Murthy, Hari T and Murali V representing support functions. I suggest that Ram Mynampati be made the chairman of this Task Force to immediately address some of the operational matters on hand. Ram can also act as an interim CEO reporting to the board.

2. Merrill Lynch can be entrusted with the task of quickly exploring some merger opportunities.

3. You may have a ‘restatement of accounts’ prepared by the auditors in light of the facts that I have placed before you.

I have promoted and have been associated with Satyam for well over 20 years now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries. Satyam has established an excellent leadership and competency base at all levels.

I sincerely apologise to all Satyamites and stakeholders, who have made Satyam a special organisation, for the current situation. I am confident they will stand by the company in this hour of crisis.

In light of the above, I fervently appeal to the board to hold together to take some important steps. Mr. T.R. Prasad is well placed to mobilize support from the government at this crucial time. With the hope that members of the Task Force and the financial advisor, Merrill Lynch (now Bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well.
Under the circumstances, I am tendering my resignation as the chairman of Satyarn and shall continue in this position only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible.

I am now prepared to subject myself to the laws of the land and face consequences thereof.

(B. Ramalinga Raju)