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How Goldman Sachs sold a tiger

How Goldman Sachs sold a tiger
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First Published: Mon, Jan 04 2010. 09 33 PM IST

Updated: Mon, Jan 04 2010. 09 33 PM IST
On 7 January 2009, B. Ramalinga Raju, the founder and chairman of Satyam Computer Services Ltd, yanked the lid off a can of worms, admitting to India’s biggest corporate fraud. To defend years of financial manipulation, he wrote, “It was like riding a tiger, not knowing how to get off without being eaten.”
The fraud that threatened to wreck India’s corporate reputation came less than four months after the world had been plunged into a severe financial crisis, following the collapse of Lehman Brothers Holdings Inc. in September 2008.
The aftershocks were as much because of the fiasco as because of the individual associated with it. Raju, a brand image for the entrepreneurial prowess of India, was known for his exceptional managerial skills and quality leadership.
Raju’s confessions came early on a Wednesday. Amid the market crash and cries of outrage, the government, through the ministry of corporate affairs (MCA), immediately swung into action.
In contrast to the New York Stock Exchange, which had suspended trading in Satyam ADRs (American depository receipts) the previous day, Satyam shares were allowed to trade on the domestic bourses under the close scrutiny of the Indian regulators.
The government was clear that it would not want Satyam to perish like several other high-profile bankruptcies around the world. A failure would have significantly affected the perception on the Indian corporate sector, Satyam’s large employee base, shareholders and customers.
The first move
The ministry made its first move by setting up a government-appointed board of directors—including Deepak Parekh, then-executive chairman and chief executive of Housing Development Finance Corp. Ltd, or HDFC, Kiran Karnik, former president of Nasscom (National Association of Software and Services Companies), and C. Achuthan, director, National Stock Exchange—the country’s very best.
The following week, another set of action-oriented decision makers, including CII (Confederation of Indian Industry) mentor Tarun Das, eminent chartered accountant T.N. Manoharan and Life Insurance Corp. of India’s Suryakant Balkrishna Mainak, was on board.
The board had an unenviable task ahead. A suitor had to be found in the shortest period of time for a listed company enmeshed in a significant fraud, where the auditors had withdrawn their opinion on the accounts. Satyam being also a US-listed firm added to the complications. India was headed for a general election in a few months and all eyes were on how effectively the problem would be dealt with.
The board swung into action immediately. Apart from taking other critical decisions, the board summoned Goldman Sachs. Parekh called Goldman Sachs India chief Brooks Entwistle on 19 January. Entwistle had just completed the Mumbai Marathon. He quickly brought together a team from Mumbai and other Goldman offices.
We submitted our initial presentation the following Friday, worked over the weekend to structure our thoughts and, on Tuesday (27 January), were presented with the job of being the adviser for Satyam’s sale. Indeed, the board was moving with great speed and did not want to lose any time.
The job of saving Satyam was so sensitive that we knew failure was not an option. The media frenzy also ensured the process was going to be closely scrutinized and hotly debated by the nation’s media at every step of the way. In addition to the US class action lawsuits and the intellectual property rights tangle with Upaid Systems Ltd, everything on the books was suspect—finances, details on employees, and even the list of clients. Years of financial manipulation takes time to investigate and restate accounts. Time was not a luxury. In other words, the company had to be sold entirely on its past track record, public information and faith.
Our immediate task was to gauge buyer interests, put a transparent sale process in place, collate information and work through the regulatory framework. In parallel, the board was working overtime on the day-to-day operations of the company, including payment of employee salaries, as it was nearing the month-end, finding a new leadership, giving comfort to the customers and responding to various regulators’ and legal queries.
To ensure a streamlined flow of information, the board also appointed two very creditable individuals—Homi Khusrokhan and Partho Datta—as special advisers to the board. Both these individuals were a great support in the process.
The sale
The objective was to ensure a transparent sale process with limited available information, for infusion of funds into the company without disintegrating it.
For transparency, we drew precedence from previous disinvestments and sell-offs by the government of India to arrive at a bidding process for this transaction. Simply put, the highest bidder would be the winner, with clauses to enhance the valuation if the top two bidders are within a 10% range.
We ensured transparency in every step we took and painstakingly kept records of whatever we did. In addition, former chief justice of India S.P. Bharucha was invited to provide a third person’s view on the entire process and advise the board in the selection of a strategic investor from the bidders.
The entire process was approved by the regulators and disclosed in the public domain. The alacrity and professionalism in dealing with the situation at hand was commendable. The solution-oriented approach and quick decision-making across the government machinery and regulators was applaudable.
We decided to present the case to potential buyers with the information we had in hand, leave the judgement to them (as auditors were still investigating) and invite bids. Another idea struck us. As the numbers were absent, we decided to sell the management team to the buyers and the strategic importance of Satyam to their business.
Our pitch was: “You might not rely on the numbers, but you were able to trust the senior management team at Satyam. Also, we believe that Satyam can add significant value to your business and will eventually provide returns to enhance value to your stakeholders.”
There were initial concerns around possibly not getting reasonable bids and of distressed valuations for the company. These were mitigated by a collective mindset of everyone involved; we knew the business was robust, the management could run it, and there were buyers who wanted it.
There were extremely short deadlines, not just for us but the board too. On many occasions, we got on calls with the board in the middle of the night. There were so many people and all worked very closely together to get the job done that it would be unfair to single any one out.
Finally, after two months of deliberations, rounds of debates, discussions, brainstorming, head-banging and slogging, we arrived at a successful closure.
On 13 April, two days before the country went to the polls, Tech Mahindra Ltd and Satyam reached an agreement. Tech Mahindra would acquire 302.8 million shares of Satyam, representing 31% of its share capital, to infuse the beleaguered company with Rs1,756 crore.
The share prices of both the target and the acquirer had appreciated on announcement—a sign that it was a win-win transaction for both sides while shareholder value and market confidence were also being restored.
As for us, at Goldman Sachs, what mattered more than the kudos for accomplishing a complex transaction was that Satyam had found a home. And, of course, we also learnt how to sell a tiger.
Sunil Sanghai is managing director and co-head, investment banking, at Goldman Sachs (India) Securities Pvt. Ltd. Respond to this column at feedback@livemint.com
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First Published: Mon, Jan 04 2010. 09 33 PM IST