Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
General

Save Satyam? Or Start Afresh?

Capitalism is built to reward good companies. And that necessarily punishes bad companies. When a fraud is committed, and a company is no longer solvent, it makes little or no sense to keep it afloat, regardless of the implications in the short term. This may seem very illogical to Hank Paulson and indeed, most of the US congress and Senate, but this is how it works.

When you reward or even rescue the bad guys you screw up in two ways. One, you introduce moral hazard. That is, if there’s no punishment for doing anything bad, then why not do it?

When the US government bailed out JP Morgan by ensuring it would buy Bear Stearns, it set a precedent, and later paved the way for rescues of AIG, Citi, Goldman Sachs and then, the auto majors. There’s no need to be profitable, because if you’re not, the government will come in and help.

Second, the allocation of capital is highly inefficient. That GM or Ford will continue to exist will halt the flow of capital to new, innovative entrepreneurs in the industry. That Citi exists today or that AIG not only takes capital towards them (and away from newer folks) but also ensures that no one could salvage the broken up CITI or AIG; something that may have been far better, and is likely to be even now.

This argument applies to Satyam too. We should let it die. The good folks there can go out and set up smaller companies, and execute the contracts. The rest will look for jobs anyhow. Satyam’s resources get auctioned, at prices that make the newer companies viable. A new set of companies emerge, untarnished by Raju, some of whom will become the Infosyses, Wipros and Cognizants of tomorrow.

This will mean pain in the short term, for everyone involved. But a government interference cannot have a short term goal anyhow. In a few years, it will all even out and even better opportunities will be available to those that are currently drawing their paychecks from Satyam.

But if we rescue Satyam the moral hazard of frauding a company will exist, for others who have low ethical standards; and there are enough of those. And we’ll end up sadding disgruntled employees with distrusted customers, a suspicious market and a financial industry unwilling to lend. Indeed, a better approach is to have it go bankrupt, cut it up into small pieces and auction each piece to the person that will pay the most – and we’ll encourage a better set up for tomorrow.

Piped dreams, surely. I only expect more drama. For nothing.

  • Shrini Kulkarni says:

    >Deepak,

    >>>There's no need to be profitable, because if you're not, the government will come in and help.

    This government help might come at a cost – govt will take over, board loses control to run the company, it might be sold to a rival at throw away price. There is a price to be paid .. but mostly by the investor, ordinary employees of the company. The person or persons, will be OK to hand over the company to government after committing fraud and reaping whatever they can.

    >>> But if we rescue Satyam the moral hazard of frauding a company will exist, for others who have low ethical standards;

    I think we need to somehow separate the sinner and system in which the sin is committed. We are equating 50,000 odd employees to Raju and other executive board who apparently committed the fraud.
    I am not suggesting that government should be soft on the issues in view of affected mass.

    I think, we should seperate Raju and the erstwhile satyam board and 50K employees of the company.

    Let law takes it own course, investigation should be as impartial and complete as possible – depending upon the final assessment, as per the law of the land the guilty should be punished.

    While government does this, we need to treat satyam as a company minus Raju with his tainted board with care and sympathy. The company with good track record of delivery, IT talent and clientele should not be allowed to go bust just because that will give chance to new companies to emerge.

    Government should assess the true value of the company, find a suitor for it and make sure Satyam as a company stays (minus those select few who cooked the books).

    Right now, I am pained to see that employees of satyam are themselves treated like thieves…. that is bad. Statements from Infy … makes matter worse for bealeagured employees of satyam.

    There could be another fallout of letting satyam go bust… In view of US and rest of the world economic situations, all IT companies in india, appear to be struggling with their bench and unutilized employees who are not billable. So, hiring is a all time low… add 50K people to this troubled water … what will happen? more unemployment, more fraudes else where (credit card, house loan defaults etc) that will further hit economy of india that is struggling to cope up with global and internal issues (Terrorist attack, possible clash with Pak) …

    Given the constraints, this shocking from Satyam has come at a very bad time and Govt should stop the downslide of IT somehow.

    If this had occured 2-3 years ago when IT/economy was booming – absorbing 50K people would have been a problem … now… it is.

    What do you think?

    Shrini Kulkarni
    Software Testing consultant

  • Siddharth says:

    >Much expected out of Indian Corporate Governance. SO the willpower to do this has to come from Politicians in Power (Or forced by those in opposition).

    Now what you have written is logical for long term perfection. Which is not today’s politics appreciates. Because the politicians and their parties have their ‘own’ Goals to aim for and achieve. Wonder if its long term foresight for the common citizen!

    When the political system is corrupt it is hard to see any kind of strong benchmark punishment for all. Possibly some parties have their hands wet in these dealings.

    To expect more out of corporate governance without ‘cleaner’ political governance is not going to help.

    Just my opinion.
    And on the other note this will not be some mill or mfg factory closing due which so much labour coming to streets(large vote bank). In which all parties would have good game to play with, where as al the obs at Satyam are white collar jobs and in any case I woder if politicians even bother for this vote bank!

    good luck for all.

  • The Green Man says:

    >Totally agree with your arguments. It is human to feel for all those 53000 satyam employees. But thats life. I am sure if I would have said this if I was one among those 53k.

    But I dont know what authority the Govt has to bail out such company using my tax money.

    When Ramalinga raju was setting up company I dont know how much the govt was involved in it. Also I dont know How much the govt was involved in the running of the company. But now that the company is in gutter the govt comes as the shiny white knight and saves the day.

    How long can the govts around the world afford to save shitty companies? Whats the proof that these govt elected board members will salvage the company? Aren’t the govt companies supposed to be shitty in the first place and was the premise for the rise of the private companies?

    I strongly feel that the tax paying people in india should protest against this satyam bailout.

  • Nilesh says:

    >Shrini, problem here is once top management is corrupt, it pervades to rest of company as well. I have heard lot of issues about the company. unqualified people getting job after paying money to HR, company very unfriendly towards employee etc. since 2000/01, out of all IT companies, I had least respect for Satyam.

    I do not say that close down the company and fire all employees. but it should be merged with some other company and have change of management at all levels. and also now with name Satyam, it will not get any new business (it is already blacklisted by some organizations) so anyhow it will go down.

  • iamyuva says:

    >I would agree this argument for satyam because workforce is skilled and paid-well urban crowd (and will have little/no impact on election results).

    but if tata motors (low-wage workforce) were to go under then my suggestion might be different.

  • Saahil says:

    >I don’t know when Satyam will stabilize again. In absence of CEO, CFO comapny operations have been affected and clients are observing the situation very carefully.

    And above that, Satyamites are facing new Hyderabad. http://ienvisage.blogspot.com/