THY NAME IS MUD

A PRESENTATION ON THE IMPACT OF CRISIS SITUATIONS FACED BY THE COMPANIES -MOHIT SHARMA

CASE1-SATYAM
Satyam was founded in 1987 by B Ramalinga Raju. The company offers consulting and information technology(IT) services spanning various sectors, and is listed on the New York Stock Exchange, the National Stock Exchange (India) and Bombay Stock Exchange. On 7 January 2009, company Chairman Ramalinga Raju resigned after notifying board members and the Securities and Exchange Board of India (SEBI) that Satyam's accounts had been falsified . Raju confessed that Satyam's balance sheet of 30 September 2008 contained: inflated figures for cash and bank balances of Rs5,040 crore (US$ 1.09 billion) as against Rs5,361 crore (US$ 1.16 billion) crore reflected in the books. an accrued interest of Rs. 376 crore (US$ 81.59 million) which was non-existent. an understated liability of Rs. 1,230 crore (US$266.91 million) on account of funds was arranged by himself. an overstated debtors' position of Rs.490 crore (US$106.33 million) (as against Rs.2,651 crore (US$575.27 million) in the books).

What exactly happened?

That stellar image--and the confidence of international investors--

was dented when the management of one of the top IT firms in the country, Satyam Computer Services, attempted to use the firm's cash stockpile of $1.6 billion to acquire equity in two businesses owned by the family of its promoter-CEO, B. Ramalinga Raju. To add to Satyam woes, there was news that the World Bank had barred Satyam from contracts on charges of bribery and theft of information. This statement was denied by satyam. Although the management tried to portray the acquisitions as an attempt to diversify Satyam away from software and into infrastructure, not many were willing to buy the story. Institutional investors, analysts and the media saw the move as a brazen attempt to transfer cash out of Satyam to Raju and his family.

What RAJU said?

What started as a marginal gap between actual operating profit and

the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualised revenue run rate of Rs11,276 crore (US$ 2.45 billion) in the September quarter of 2008 and official reserves of Rs 8,392 crore (US$ 1.82 billion)). As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. It was like riding a tiger, not knowing how to get off without being eaten.

The Aftermath
Satyam's stock fell 55% in the American Depositary Receipt market as

foreign investors showed their disapproval by exiting their holdings. Eventhough the move was called off ahead of the opening of the Indian stock market the next morning, but the damage to the firm's credibility had been done. There was a sense of disbelief that a leading firm in one of India's most admired sectors could have contemplated such a move. Raju had appointed a task force to address the Maytas situation in the last few days before revealing the news of the accounting fraud. After the scandal broke, the then-board members elected Ram Mynampati to be Satyam's interim CEO. Mynampati's statement on Satyam's website said: "We are obviously shocked by the contents of the letter. The senior leaders of Satyam stand united in their commitment to customers, associates, suppliers and all shareholders. We have gathered together at Hyderabad to strategize the way forward in light of this startling revelation."

The Aftermath cont.

On 10 January 2009, the Company Law Board decided to bar the

current board of Satyam from functioning and appoint 10 nominal directors. "The current board has failed to do what they are supposed to do. The credibility of the IT industry should not be allowed to suffer." said Corporate Affairs Minister Prem Chand Gupta. Chartered accountants regulator ICAI issued show-cause notice to Satyam's auditor PricewaterhouseCoopers(PwC) on the accounts fudging. "We have asked PwC to reply within 21 days," ICAI President Ved Jain said. On 11 January 2009, the government nominated noted banker Deepak Parekh, former NASSCOM chief Kiran Karnik and former SEBI member C Achuthan to Satyam's board.

The Aftermath cont.

Immediately following the news, Merrill Lynch now a part of Bank

of America and State Farm Insurance terminated its engagement with the company. Also, Credit Suisse suspended its coverage of Satyam. It was also reported that Satyam's auditing firm PricewaterhouseCoopers will be scrutinized for complicity in this scandal. SEBI, the stock market regulator, also said that, if found guilty, its license to work in India may be revoked. Satyam was the 2008 winner of the coveted Golden Peacock Award for Corporate Governance under Risk Management and Compliance Issues, which was stripped from them. The New York Stock Exchange has halted trading in Satyam stock as of 7 January 2009. India's National Stock Exchange removed Satyam from its S&P CNX Nifty 50-share index on 12 January09.

The Aftermath cont.

Satyam's shares fell to 11.50 rupees on 10 January 2009, their lowest level

since March 1998, compared to a high of 544 rupees in 2008. In New York Stock Exchange Satyam shares peaked in 2008 at US$ 29.10; by March 2009 they were trading around US $1.80. The Indian Government has stated that it may provide temporary direct or indirect liquidity support to the company. However, whether employment will continue at pre-crisis levels, particularly for new recruits, is questionable . On 14 January 2009, Price Waterhouse, the Indian division of PricewaterhouseCoopers, announced that its reliance on potentially false information provided by the management of Satyam may have rendered its audit reports "inaccurate and unreliable". On 22 January 2009, CID told in court that the actual number of employees is only 40,000 and not 53,000 as reported earlier and that Mr. Raju had been allegedly withdrawing INR 20 crore rupees every month for paying these 13,000 non-existent employees.

Conclusion
On 5 February 2009, the six-member board appointed by the

Government of India named A. S. Murthy as the new CEO of the firm with immediate effect. Murthy, an electrical engineer, has been with Satyam since January 1994 and was heading the Global Delivery Section before being appointed as CEO of the company. in spite of there being a strong corporate governance framework and strong legislation in India, top management sometimes violates governance norms either to favour family members or because of jealousy among siblings. There is a lack of regulatory supervision and inefficiency in prosecuting violators.

Case2-BP
BP(British Petroleum) plc is a global energy company

headquartered in London, United Kingdom. It is the third largest energy company and the fourth largest company in the world. BP America's headquarters is in the One Westlake Park in the Houston Energy Corridor, Texas. The company is among the largest private sector energy corporations in the world and is one of the six "super majors" (vertically integrated private sector oil exploration, natural gas, and petroleum product marketing companies). The company is listed on the London Stock Exchange, the New York Stock Exchange, and is a constituent of the FTSE 100 Index.

The spill
The 20 April 2010 explosion of the Deepwater Horizon, in which 11

people died, led to an oil spill that contaminated a vast area of United States marine environment along the Gulf of Mexico, and continues to have a serious impact on wildlife, the local fishing industry, and regional tourism. The catastrophe has severely depressed BP's stock price as well as its reputation, and led to speculation about consequences, such as a takeover of the company. Attempts at capping the leak and containing the slick continue. Capture of new oil flows is approaching completion, and the estimated date for the well's permanent closure is between August and October 2010. Cleanup along the marshes and coasts is expected to take much longer

Whats up in the gulf of mexico?

On 20 April 2010, the semi-submersible exploratory offshore

drilling rig Deepwater Horizon exploded after a blowout; it sank two days later, killing 11 people. This blowout in the Macondo Prospect field in the Gulf of Mexico resulted in a partially capped oil well one mile below the surface of the water. Experts estimate the gusher to be flowing at 35,000 to 60,000 barrels per day (5,600 to 9,500 m3/d) of oil. The exact flow rate is uncertain due to the difficulty of installing measurement devices at that depth and is a matter of ongoing debate. The resulting oil slick covers at least 2,500 square miles (6,500 km2), fluctuating from day to day depending on weather conditions. It threatens the coasts of Louisiana, Mississippi, Alabama,Texas, and Florida

 The drilling rig was owned and operated by Transocean Ltd on

behalf of BP(65%), which is the majority owner of the Macondo oil field. At the time of the explosion, there were 126 crew on board; seven were employees of BP and 79 of Transocean. There were also employees of various other companies involved in the drilling operation, including Anadarko(25%), Halliburton and M-I Swaco The U.S. Government has named BP the responsible party, and officials have committed to hold the company accountable for all cleanup costs and other damage.

The aftermath-Bada mehenga pada!

On July 5 BP reported that its own expenditures on the oil spill had

reached $3.12 billion, including the cost of the spill response, containment, relief well drilling, grants to the Gulf states, claims paid, and federal costs. The United States Oil Pollution Act of 1990 limits BP's liability for non-cleanup costs to $75 million unless gross negligence is proven. BP has said it would pay for all cleanup and remediation regardless of the statutory liability cap. Nevertheless, some Democratic lawmakers are seeking to pass legislation that would increase the liability limit to $10 billion. Analysts for Swiss Re have estimated that the total insured losses from the accident could reach $3.5 billion. According to UBS, final losses could be $12 billion.

The aftermath
According to Willis Group Holdings, total losses could amount to

$30 billion, of which estimated total claims to the market from the disaster, including control of well, re-drilling, third-party liability and seepage and pollution costs, could exceed $1.2 billion On June 25 BP's market value reached a 52-week low he company's total value lost since April 20 was $105 billion Investors saw their holdings in BP shrink to $27.02, a nearly 54% loss of value in 2010. A month later, the company's loss in market value totalled $60 billion, a 35% decline since the explosion. At that time, BP reported a second-quarter loss of $17 billion, its first loss in 18 years. This includes a one-time $32.2 billion charge, including $20 billion for the fund created for reparations and $2.9 billion in actual costs.

The aftermath
BP has announced that it is setting up a new unit to oversee

management of the oil spill and its aftermath, which will be headed by former TNK-BP chief executive Robert Dudley. BP gas stations, the majority of which the company does not own, have reported sales off between 10 and 40% due to backlash against the company. Some BP station owners that lost sales say the name should change back to Amoco, while others say after all the effort that went into promoting BP, such a move would be a gamble, and the company should work to restore its image BP has agreed to allocate $100 million for payments to offshore oil workers who are unemployed due to the six-month moratorium on drilling in the deep-water Gulf of Mexico.

The aftermath
The real estate prices and a number of transactions in the Gulf of

Mexico area have decreased significantly since beginning of the oil spill. As a result, area officials want the state legislature to allow property tax to be paid based on current market value, which could mean millions of dollars in losses for each county affected. Approximately 40% of BP shares are held by UK shareholders, and 39% in the USA. BP's UK dividends represent approximately oneseventh of all dividend payments in the UK and form the basis of many pension schemes, hence there is a great political pressure on BP to solve the crisis.

What BP is doing?
BP has stated that it would harness all of its resources to battle the

oil spill, spending $7 million a day with its partners to try to contain the disaster. In comparison, BP's 1st quarter profits for 2010 were approximately $61 million per day. BP has agreed to create a $20 billion spill response fund administered by Kenneth Feinberg. The amount of this fund is not a cap on BP's liabilities. BP will pay $3 billion in third quarter of 2010 and $2 billion in fourth quarter into the fund followed by a payment of $1.25 billion per quarter until it reaches $20 billion. In the interim, BP posts its US assets worth $20 billion as bond. For the fund's payments, BP will cut its capital spending budget, sell $10 billion in assets, and drop its dividend

Conclusion
The Organization for International Investment, a Washington-

based advocate for overseas investment into the U.S., warned in early July that the political rhetoric surrounding the disaster is potentially damaging the reputation of all British companies with operations in the U.S. and sparked a wave of U.S. protectionism that has restricted British firms from winning government contracts, making political donations and lobbying. There are speculations in the press, based chiefly on comments from Fred Lucas, Energy Analyst at J.P. Morgan Cazenove, that there would be a takeover of the company, focusing on possible bids from Exxon or Shell at a presumed price of 88 billion, underlining that the magnitude of the crisis is such that it could take a mammoth sized company down.

Thank you