The Hindu : Front Page : Ramalinga Raju’s plans were well laid out

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Ramalinga Raju’s plans were well laid out

S. Nagesh Kumar

Wanted empire divided equally between IT and infrastructure

He believed infrastructure will be “a significant growth area”
Shareholders were in the dark about an important fact

HYDERABAD: Exactly two months after he fudged the account books of Satyam Computer Services for the quarter ended September 2008, B. Ramalinga Raju, who has since resigned as chairman, decided that his large empire should be divided equally between information technology and infrastructure.

“These are two bullocks that would draw the cart,” Mr. Raju informed indignant shareholders and analysts, who raised the banner of revolt against the Board of Directors’ decision to acquire 100 per cent shareholding in Maytas Properties and 51 per cent in Maytas Infra, a listed company.

“Now, in the next 4 to 5 years, we expect the combined entity to have a balanced proportion of something like 50 per cent in the IT services, and about 50 per cent in the infrastructure space,” he declared.

Mr. Raju was taking a conference call with investors in a last-ditch attempt to justify the twin acquisitions on December 16 — 60 days after the fudged accounts for the second quarter of 2008 were approved by Satyam’s Audit Committee on October 17.

Satyam’s ex-boss reasoned that the IT companies had downgraded their guidance for the year and his confidence for the next one or two years was “much lower” than earlier. Infrastructure, on the other hand, had shown consistent growth and he believed it would be “a significant growth area.”

His plans were apparently well laid out. He wanted to present a rosy picture of the Satyam brand after inflating the cash and bank balances, acquire family-run infrastructure companies in the name of “compelling synergy” and thereby dilute the share of the IT company.

But, the shareholders were in the dark about an important fact — until Mr. Raju’s confession on January 7 — that Satyam had no money to fund the acquisition.

A similar fear, though about dilution of margins, was actually expressed by Joseph Foresi of Janney Montgomery Scott, a brokerage firm. But the former Chief Financial Officer, Srinivas Vadlamani, who assisted Mr. Raju, admitted that earnings per share would be diluted in the first year as the profit after tax for Maytas Infra was 7 per cent and for Maytas Properties 20-25 per cent (the same as falsely claimed for Satyam).

Transcripts of the call show that other participants too were unimpressed. Rukshad Shroff from JF Asset Management said, “I am shocked by this transaction. Could you please explain how many independent directors are on the board and how they voted at the meeting to approve this transaction?”

Mr. Vadlamani replied that it was a unanimous decision though not put to vote. “These are right decision[s], rather than using this money to acquire another IT asset.”

This was the right time to buy since Maytas infra was sitting on a $2.5-billion order book, apart from the Hyderabad Metro Rail project of $3.2 billion.

“The overall spend in infrastructure [in India] is over US $400 billion and there is a lot of thirst from the government on the infrastructure side,” he said.

The CFO dug in his heels to avoid naming the company that had valued Maytas Properties (Rs.6,410 crore), which he claimed was sitting on a 6,800-acre land bank, except that it was “assisted by a Big Four firm” (a reference to PricewaterhouseCoopers, Deloitte, Ernst & Young and KPMG).

After thorough grilling by the analysts about the “inter-linking family relationships” between Satyam and Maytas, Mr. Raju said that while the IT company was started in 1987, Satyam Constructions began even earlier. Its name was later changed to Maytas. Maytas Properties was headed by his younger son, Rama Raju and Maytas Infra by the elder one, Teja Raju, both U.S. educated.

He agreed that the 100 per cent acquisition of Maytas Properties meant that a sum of Rs.6,410 crore would go to its promoters.

Towards the end of this tough questioning, Rod Bourgeois of Bernstein asked whether the acquisition decision was reversible considering that Satyam’s stock was trading 50 per cent down.

Mr. Raju said he could not comment on the reversibility as other parties were involved. Within the next few hours, he abandoned the acquisition move and the rest is corporate history.

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