Selling Satyam: Here's How the Process Should Go

Prof Verma suggests that the Indian government needs to step in within the next 24 hrs. I agree. I also have an idea on how the sale process should be.

Satyam (SAY) is going to have huge legal liabilities going forward, and will be forced to fund costly litigation. It already has a dispute with Upaid, and yesterday's events will give Upaid lots of ammunition. Any buyer would need to take into account these legal bills to put a value on Satyam.

Most likely Satyam doesn't even have 53,000 employees. If the buyer puts too low a value on Satyam, shareholders will be unwilling to sell out. The process will drag out - in the meantime employees and customers will run away and the company's value will get drastically reduced. The longer this drags out, the worse it is - for all the stakeholders involved.

A better option would be: the government steps in, and runs an auction for only the employees and the customer contracts. Whatever value it receives + whatever assets Satyam has (buildings etc.) go into an escrow account, from which the legal bills are paid, and shareholders receive any money that is left (after two or three years). This is equivalent to taking Satyam into bankruptcy (like Lehman (LEHMQ.PK)) and selling its employee platform (to Nomura (NMR) or Barclays (BCS) in the case of Lehman). The stock can in the meantime continue trading, like stocks of bankrupt companies keep trading in the US (even WaMu (WAMUQ.PK) trades today), where investors can bet on the recovery value post the legal costs and other liabilities.

The alternative is, the government steps in and tries to run a sale, but that cannot happen till we have proper, audited accounts. An audit can take 2-3-4 weeks. In the meantime customers and employees start deserting. By the time a sale process starts, buyers are putting Rs 20 value on Satyam, shareholders are unwilling to sell, more employees and customers leave, and the company goes into a negative spiral.

Infosys (INFY) or Wipro (WIT) should approach the government with this proposal. There is tons of money to be made if the transaction is structured to isolate the legal risks.