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?

Nimit adjusted the frequency and lowered the volume slightly. His Master’s Voice was exceptionally loud and clear today.

“Master”, he began expectantly, “I am tormented by the feeling of not being free. I supposedly have a good education, a job that pays me well, a car and a house. But I have this creepy feeling that I do not have control. I feel that it is not me, but somebody else who is in control. I cannot see this somebody, but I feel sure that he/it is there, and can someday pull a plug and bring me to ruin. Sometimes in my dreams I vaguely see this somebody shrouded in darkness, holding a sword that could snap off all the strings that I hold in my hand, in one fell swoop”

“The question I am grappling with”, Nimit continued, “is that in the longer term of things, what should I do and how, so that I become more free, and therefore feel happier and more powerful?”

The blue-green scope lit up as His Master’s Voice spoke from behind the starphone speaker.

“I understand your torment. In the years before my transformation I have grappled with the same question, and have arrived at practical and actionable ideas to deal with this problem.”

“Others of self-claimed wisdom, on hearing your predicament, would advise you that the reason for your misery is attachment. While this observation is not entirely untrue, it is not precise. The direct reason for your misery is not attachment, but fear, fear of losing what you have brought yourself to depend on (and are thus attached to)”

The Master went on.

“The others will tell you that the solution is to renounce all your material possessions. But this is a crude solution. An extreme reaction to an extreme situation. If you pull the ends of a string of rubber in opposite directions, it creates tension inside it. Now if you suddenly release the string, the tension will be resolved, but not before the string flies about violently and unpredictably.”

“My approach is to relax the string in a measured way. You do not have to let go of the string, as the professors of renunciation will have you believe”

Nimit smiled in appreciation. He found this analogy elegant and imaginative.

“Your goal should be to rid yourself not of your attachments, but your fear of losing what you are attached to. Eliminating this fear totally is not easy, but I assert total elimination is not even necessary. It is enough if you feel that you are always coming closer to this goal.”

“With every step that you take towards reducing this fear, you will feel your freedom and power increasing, and this will make you more happy. You do not have to renounce anything to do this. You only need to see things from a different perspective, and use certain strategies and their allied techniques. These I will surely teach you”

For the first time, the flow of His Master’s words was broken by a long pause.

Eagerly, Nimit said, “Wise One, I am ready to learn and unlearn, as You advise”

“I know. Otherwise I would not have spoken all that I have already spoken”, said the Master.

“Master, please teach me the strategies and techniques that you have spoken of”, Nimit pleaded, now somewhat excited.

“Soon, young one. But first, I want you to ponder over what I have already said. I also want you to think about the dark dream you told me about. The next time, we will probe that dream together. It will help you discover a few things and better appreciate that which I am going to teach you.”

Nimit felt a little disappointed; the time for this session had almost run out. Spurious lines began to flicker on the scope. Within less than a minute the link would be lost.

The Master’s voice came back on:

“As you can see we are going out of range. I will share more the next time. Until then I have an assignment for you.”

“What assignment, Master?”

“You must tell, not ask, but tell your boss that tomorrow you will not go to work. You will take your bicycle and guitar to the leafy hill in the adjacent town, find a pleasant spot and spend the night there with these instruments”

“Yes, Master”

“Good. You will see the point of this soon. I shall speak to you again the day you return from your assignment. Take care until then.”

With that, the link dropped. The scope stopped dancing, and a steady white line appeared.

Nimit reached out for his cellphone, and started dialing his boss’ number…

OK, so Oracle is a high-quality software product. Not much doubt there. But… err…. umm… $40K?

I wondered. So what does it take to build a production-grade bullet-proof database system? No precious stones, hardly any classified technology that the US military controls, and no scarce, non-renewable energy sources.

It’s simply a knowledge product. It’s the outcome of the effort invested by a finite number of computer scientists and software engineers for a finite period of time.

So, what’s the deal with the 40K? When I pay cash for an Oracle licence, I am actually paying for the time and effort of some US computer scientists/engineers. (I’ll avoid the temptation to say “sponsoring their criminally high standards of living”…. oops, i said it anyway)

This is unsettling. Something’s not right. There are computer scientists and engineers in India. Quite a lot of them in fact. Why is there no Indian company yet that has a *product* that can compete with someone like Oracle? Surely, if talented and motivated professionals here in India teamed up and built a similar product, they would do it at a fraction of the cost.

Somehow this doesn’t seem to bother our supposedly star-performing IT companies like Infosys, Satyam, Wipro…

Instead, we have companies here lining up for ISO certifications, and thumping their chests in triumph while showing off their newly acquired CMM level status.

I wonder what it is these companies feel so good about. The fact is that they are wasting the potential of their people. Take a look at the following financial figures:

(figures in rupees, for Sep 02 – Sep 03. Source: yahoo finance)

All of the above companies need the same input – human intellectual capital. And they produce the same kind of output: software. Yet, we see stark differences in the way a product company (like Oracle or Microsoft) is able to generate wealth, as opposed to a software “services” company (like Infosys or Satyam).

It is clear that there is a definite strategic advantage and wealth generation opportunity in the product approach. Yet we have more companies opening service shops. IT services, Call centers, BPO, support/maintenance contracts…

Why? Lack of financial capital? Unsupportive investment climate? Hot and humid climate?

Or is it a post-colonial Macaulayan educational system that stifles innovation, rewards blind conformance, and generally kills risk appetite?

- Ketan

www.indusvalue.com