Phaneesh Murthy of iGATE says his company is open to buying Satyam Computers Services Ltd. Phaneesh Murthy was the global head sales and marketing at Infosys. He was based in the US and was one of Infosys' highest paid employees and tipped to lead the IT giant. But a sexual harassment case cut his Infosys career short. He was accused of sexual harassment by Reka Maximovitch, a former executive assistant at Infosys in June 2002. The case was settled out of court for $3 million. Phaneesh then joined iGate Corporation.
"We would value Satyam on the basis of its assets and customer base. However, we will be on a wait and watch mode till the board comes out with a decision," Phaneesh Murthy said in an exclusive interview with CNBC-TV18.
CNBC-TV18: Do you think the CEO would be an insider from Satyam or an outsider from the IT world?
Phaneesh Murthy: I think it is pretty clear that it is unlikely to be an insider because from multiple perspectives there are so many people, from Satyam presumably, who have been involved in trading and so on. Even if they didn’t know exactly what was happening on the financials, presumably, they may not have a CEO of a troubled company at this point of time. So, I do believe that it will be an outsider from the industry.
CNBC-TV18: And when that CEO is appointed, do you think he should or he would try to salvage Satyam and see if it can be carried forward as a business, as it was, or do you think he will cut to the chase and try to do the seemingly easier job of trying to sell it off to another party minus the liabilities?
Phaneesh Murthy: I would assume that if it is a CEO who is appointed he would try and salvage the company. His job depends on salvaging the company to some extent, otherwise the board would, or probably the CEO, would just split the company up and sell it right now––then the company doesn’t really need a CEO. If a CEO is being appointed it is to the intention of trying to salvage as much as the company as possible, I would believe.
CNBC-TV18: Some press reports indicated that you said iGate might be interested in buying Satyam or parts of Satyam. Is that true?
Phaneesh Murthy: Absolutely. In spite of all of the problems of Satyam there are good assets in Satyam. They have good customers that they are working with. There are good employees who are working on many of these projects and many of these accounts. So those are the real tangible assets of Satyam. In addition to the fact that there is some land and so on, that’s also a real tangible asset but the primary assets as an IT company that we look for are the accounts and the people who are working on this.
So my argument is that Satyam might have two–three paths presumably available to it. One could be to split the company up, auction of certain accounts and raise enough capital to keep the company going because it is clear that raising capital right now with the unknown liabilities is quite difficult. So they might be forced to do this in the interim short-run to raise enough capital to keep the rest of the company going.
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Second option is to sell the whole company, for that of course it’s going to be a slightly longer-time story because until somebody understands what the financials are, of course, there is a question of unknown liabilities. However, I do believe in this case, it’s also a question of unknown revenues because nobody knows what the revenues of this company are. So that’s going to be a longer-term story because the auditors have to get into to some significant amount of work, etc.
Third, even if they go down their path one still needs to have access to fair amount of capital to make this work in a reasonable manner. So I would say that there are options available and the board is probably going to come out with their strategic evaluation and decide what’s going to happen.
Therefore, at the moment we are just waiting and watching and seeing when they come out with their evaluation and direction then based on the direction that they set we would probably either dive in or stay on the sidelines based on the direction that they come out with.
CNBC-TV18: If you are interested in buying the company, how would you go about valuing it––in terms of clients, deals––we don’t know how many will stay on in terms of employees because the company has no hard assets? We learn now that the numbers was grossly inflated. If I were to ask you to value Satyam, where would you peg it at?
Phaneesh Murthy: I think it is difficult to do the valuation as a whole, like you said it is lot more complex. but it is easy to value the assets. If we take 40–50 of the largest accounts of Satyam and value that as an asset with the employees, who are working on it that is fairly easy to come up with a value for that. That is not necessarily the value for the whole company, and that is why I said that if Satyam tries to be sold as a whole company––think it is going to be a fairly long time story there.
However, if you take 40–50 major accounts and try and value those based on the revenues and confirmation from the customers that is a fairly quick process one can do. And we all have been in the story where in the last 15–16 years of the industry accounts have been auctioned-off by companies based on the financial troubles they were in. So that is no different.
Let’s assume that there is a book of business of $50 million with some customers and as long as the customer signs the confirmation saying that the business will continue or whatever it is. That is a pretty tangible asset to take on and say that if the employees are transferring over there is no disruption of services, or there is minimal disruption of service and effectively the customers are satisfied. The buyer of that asset is not buying any liabilities, essentially, he just buying the assets––they are happy. The employees find a new home, a safer home, so they will be happy. The customer gets out of his complete uncertainty mode, and it could be a good win-win for all parties.
CNBC-TV18: When typically such a deal is done, say an auction of a particular account, would the client only transition for the time being because it’s not very easy for him to switch away to another client and then look for another more stable client in the future. Or do you think he would honour a long-term commitment if such an account is auctioned-off?
Phaneesh Murthy: I think typically what happens is that in those models the client feels comfortable with the vendor who is buying it. So the vendor who is buying it will not normally buy unless there is a client confidence which is expressed in that vendor. Thus, that’s the way it would happen. Earlier, in the days of SeraNova Silverline and all of those things, there was talk about the Amex (travel services arm American Express) account, if I am not mistaken Cognizant or somebody bought that business.
The fact is that there is an expression of confidence by the customer in the new vendor, and therefore, keeping that book of business alive, and subsequently, treating it just like any other running contract and not as a short-term transition because neither the vendor would be interest in the short-term transition thing nor in all aspects should the customer be. So I think this is kind of a deal where you value it, you do it, but it has to be completely blessed by the customer.
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CNBC-TV18: Do you expect this kind of a move splitting up the company into accounts and trying to auction some of them may face any resistance from Satyam’s shareholders who may consider it a diminution of value of their core residual business of auctioning accounts if they are holding on to the stock in the hope of the business being salvaged at some point? Do you think there could be litigation against it?
Phaneesh Murthy: I do not think so because the accounts as well as the assets will be valued. So, basically, what happens is if an asset moves out another asset comes in which is cash and right now the company needs cash for its survival. Right now, the company needs cash to do anything in the future. This is a stage, unfortunately, where the company, where employees are loosing credit cards, where employees not being able to a lot of things and that’s pretty hardship for employees. In a sense, for a company to prosper one need to be able to get into a system where the employees feel comfortable and so on. So for that, one has to put sufficient cash in the balance sheets and this is, in-effect, replacing an account with the cash.
So, I do not see a problem from a shareholder perspective because presumably those accounts would be fairly valued because from an account perspective there maybe enough vendors who are interested in acquiring each of these accounts because those are the real tangible assets like I said.
CNBC-TV18: If the Board is keen on finding a suitor for the business as a whole, just one clarification on technicality is the new CEO, CFO and indeed the new buyer also liable to all the lawsuits that Satyam might be facing?
Phaneesh Murthy: I am assuming that whoever is going to join as a new CEO or CFO would work out a structure or a deal, which ring fences him or her from those liabilities and that is pretty common. The new management, which is come in to do these things and anything in the past is responsibility of somebody else and anything in the future. If they take certain steps, which shareholders have problem with, then that is a different set of issues. But I would assume that they would come in and structures a contract for themselves, which will ring fence them from the past liabilities.
CNBC-TV18: Candidly, if there can be a painless enough transition how many clients do you think will stay on with Satyam?
Phaneesh Murthy: I think there maybe some clients, who have been working with them for a number of years like maybe 10–15. I think they will be last to transition. However, clients who have been working for less than 2–3 years, my sense is that they will be the first to depart because the relationship have not gone deep enough, there will be too much of concerns, etc.
So, I think until I understand the mix of how long customers have been with them, how close of a partnership they have actually developed and how close of a relationship they have developed, it is difficult to comment.
However, this is a kind of a scenario, where one expects a lot of the clients to leave because of the fact that it creates a lot of uncertainty in today’s world. If I just go back little, take one step higher, and look at what is happening in the IT trends of this industry, we have highly fluctuating and volatile environment, we have a situation where budgets are being reviewed on a monthly and quarterly basis. We have a situation where budgets have been cut. The problem in this kind of an environment becomes that people tend to move to the conservative side, and say okay, there is somebody who is able to give me a cost neutral transition or a pain-free transition and will rebadge in some sense the employees and takeover their SLAs, etc. Let me do it sooner rather than later, when there is nobody left to do cost neutral transition or whatever it is, because right now there are enough vendors and I am assuming quite hungry enough to be able to do some of those things and as time goes by. It is a question of whether the vendors will be hungry enough to do it or not.
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CNBC-TV18: The other big question is, if indeed this is the way out that accounts are going to be auctioned-off, what is the likelihood, this is something which a lot of people interested in, Satyam’s accounts would be pontificating about today that because the management or the promoters or let me say the board did not have any interest to show real numbers? They were actually getting clients so clients may have been real but they were working at bill rates which were far at a discount or at a big discount to industry levels which means that the margins from many of those projects were pretty thin. Do you think that’s a possibility (a) and (b) if that is the shown up as the truth would those accounts be auctioned off quite so easily?
Phaneesh Murthy: Clearly, this is one of the options available to the board and I am sure the board has got enough senior people to, maybe, come up with multiple more options to solve their immediate crises. However, let’s go back to the scenario, since this is a very viable option, if you go back to the scenario if indeed the bill rates are low those are the kinds of things which will make the client’s decision happen sooner or later.
I have read some rumours that there are some clients where Satyam is billing at $10–11 an hour––I do not know that for a fact. But I would have to bet that none of the IT services companies right now in today’s market will be jumping at those accounts and saying lets buy those accounts or even if somebody is buying those accounts they will buy it at such a throwaway price where in effect they have to come up with a strategy to improve margins, raise the value point of services they are offering and so on.
So, the economics will sort those kinds of things out that the amount of bidders for those kinds of accounts will drive the economics, in a way, by the money paid for those accounts, if at all, will be very low. From the client’s perspective, the first order of the day for them, particularly, in today’s environment in 2009, where spending any more money for doing the same thing is not going to be possible. Its that they will look at as close to cost neutral or has to be completely cost neutral transition otherwise it will be difficult for them to even think about it.
If indeed the work is at $10–11 an hour and none of the vendors come forward then the client will just stay with those people and my sense is that I would assume that their plan be or their contingency plan would be to try and come with a model where they can hire those people directly or something like that. It could potentially be an option because I do not see the prospect of a client who is paying $10–11 an hour standing up and saying––I understand that this didn’t happen or whatever, and consequently, I am not willing to pay $20–25 an hour. I do not see that happening in 2009.
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CNBC-TV18: What do you think will happen––you think a CEO joins and Satyam’s image is resurrected to the point that people forget about this incident and it can continue to attract new business and carry on or in real life––that is a very unlikely option. The likely option is the one which you laid out auction of the accounts, let other IT companies buy it, get some cash and that is the best deal possible. What do you think?
Phaneesh Murthy: It may be a combination of two also because of the fact that depending on the profile of the CEO, as long as the CEO has sufficient capability to generate comfort and confidence, both in the market and in the clients, the business will not grow greatly but can sustain itself. If it can weather the storm for a year or two, it can then get back on a growth path.
So, it is a very viable thing. It all depends on the choice of the CEO candidate and who is leading it and what kind of confidence he or she is able to generate. Particularly, there may be some old clients of Satyam, and therefore, that partnership may actually see them through. However, they will need some cash, so I believe that it is not just an ‘either or’, it could be an ‘and’ strategy rather than an ‘either or’ strategy.
CNBC-TV18: The other day we were talking about Obama taking over as President and saying “the man was equal for the job but maybe the job was too big for a man.” In your eye who would be suitable for the tag of CEO to resurrect or even cleanup the company?
Phaneesh Murthy: It’s a difficult thing but I can only conjecture a profile. Whoever, it is, clearly has to have two important factors. The ability to bring significant confidence in clients and an ability to bring significant confidence in employees because right now the employees are going out in droves and the clients are going out at a faster pace than the decisions are being made here and anybody who has to be hired has to have these two key ingredients right up there otherwise it is going to be difficult for the company to survive in anyway.
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