Conditions Leading To The Mahindra Group Scam Accounting Essay

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The Mahindra Group, with a net worth of US $6.3 billion is one of the top 10 industrial houses in India. It is a market leader in multi-utility vehicles in the Indian market and world's second largest producer of tractors. The Mahindra Group is now a pioneer in the most of the key sectors of the Indian economy including the financial services, trade, retail and logistics, automotive components, IT and Infrastructure. It is also the proud recipient of the Japan Quality Medal, the only tractor company worldwide to be bestowed this honor. It also holds the distinction of being the only tractor company worldwide to win the Deming Prize. The US based Reputation Institute recently ranked Mahindra among the top 10 Indian companies in its Global 200: The World's Best Corporate Reputations list.

The Mahindra Group has many verticals of its business ranging from Automobiles to IT. Automobiles, Farm Equipment, Infrastructure and Real Estate, Engineering Services and IT are its main verticals. The IT vertical of Mahindra's business is called Tech Mahindra.

Tech Mahindra has more than 25000 employees and was once known as Mahindra British Telecom (MBT). This was an Indian Information Technology service provider with its headquarters located in Pune, a city in Maharashtra, west of India. It is ranked 6th in India as the largest software exporter and ranked 2nd in the field of the largest Telecom Software Provider in India and is the Joint Venture between Mahindra and British Telecommunications. Tech Mahindra is a leading provider of solutions and services to the telecommunications industry, with a majority stake owned by Mahindra & Mahindra Limited, in partnership with British Telecommunications plc. With total revenues of Rs 44,647 million in the year ended March 31, 2009, Tech Mahindra serves telecom service providers, equipment manufacturers, software vendors and systems integrators.

Satyam Computers:- [2] 

Satyam is ranked 4th in the field of the largest software services exporter. It was founded in the year 1987 by B Ramalinga Raju. Satyam Computers began with a mere 20 employees and captured a number of IT projects from companies.

Satyam Computers is a leading global business and information technology Services Company, which delivers consulting, systems integration, and outsourcing solutions to clients in numerous industries across the globe. Satyam leverages deep industry and functional expertise, leading technology practices, and an advanced, global delivery model to help clients transform their highest-value business processes and improve their business performance. The company's professionals excel in engineering and product development, supply chain management, client relationship management, business process quality, business intelligence, enterprise integration, and infrastructure management, among other key capabilities. Satyam also caters other services such as Enterprise Integration and Infrastructure Management. It specializes in Sheet Metal Parts and Fabrication in the fields of Automobiles and Electrical Industries. Satyam Computers also has a strong presence in the Aerospace Industry. Satyam has various international and national clients such as General Electric, Nestle, Qantas Airways. It also has a high level of competition with firms like Tata Consultancy Services, Wipro and Infosys Technologies along with highly rated international competitors like IBM and Accenture, in the field of outsourcing.

PART IV- RESEARCH FINDINGS

4.1: Background information of the scam:-

Though Mahindra Group has a strong hold in the Automobile sector, they felt the need to advance in the IT sector as Mahindra was a small player in the IT sector. They realized that the fastest way to grow in the IT sector was through Mergers and Acquisitions. In the year 2007, Mahindra started scouting for companies to acquire in the IT sector. In 2008, as a part of their plan, Mahindra sent feelers to Satyam Computers and offered Satyam an opportunity to merge with them.

This proposal was at the time when B. Ramalinga Raju was still the Chairman and more importantly it was before the fraud was admitted. Though Raju wanted to merge with Tech Mahindra, he chose not to answer this proposal. Soon after this, Ramalinga Raju admitted to the fraud and Satyam was almost driven to bankruptcy. Mahindra felt that this was the breakthrough they required in the IT sector and lunged at it.

4.2: The conditions leading to the scam, the reasons, and its aftermaths:-

It started with Satyam's plans to buy Maytas properties and Maytas Infrastructure Company for a proposed $1.6 billion. Satyam had planned to acquire about a 51 per cent stake in Maytas Infrastructure costing $300 million and a 100 per cent share in Maytas Properties which would cost them $1.3 billion. Satyam would buy 31 per cent stake in Maytas Infra from promoters at Rs 475 per share with an open offer to public for 20 per cent stake at Rs 525 per share.

It seemed that this deal would empty Satyam's treasury and would bring in debt along with adding almost $1.48 billion to the promoters' kitty. This acquisition did not go down well with the investors and this raised several suspicions about the deal. Soon after Ramalinga Raju announced that Satyam was going to acquire Maytas Infrastructure and Maytas Properties, he invited the wrath of the investors in a conference call. The shareholders were furious over the deal; Moreover, Satyam was criticized by the government over this acquisition. As a result, Satyam called of the deal to acquire Maytas. However, by then, the damage was done. What had shocked investors is that this will be funded out of cash reserves and debt in 75:25 ratios. The big question was why a share swap option couldn't have been considered instead of draining Satyam Computer's cash reserves.

4.3: Research findings about incidents which added to Satyam's ethical miseries:- [3] 

One incident which proved costly to Satyam was the ban of 8 years that it faced from the World Bank. It had come to this stage when Satyam was accused of bribing and several other malpractices. This ban impacted Satyam Computers heavily since it was already finding it difficult to not only retain but also attract clients in a global market which was infected with recession. This ban had been put forth due to the reasons of "improper benefits to bank staff" and "lack of documentation on invoices."

In 2005, when Satyam provided IT services to the World Bank, allegations of bribery surfaced. In 2007, an internal World Bank investigation found that former VP Mohamed Muhsin had secured contracts and purchase orders worth $100 million for the Indian firm in return for Satyam's stock options at privileged prices. It was after this investigation that he was banned from the World Bank. However, Satyam was allowed to provide services to the bank till 2008.

Moreover, Satyam also faces severe allegations of breaching the security at the World Bank. Many of the World Bank's records have been illegally accessed over the last year by Satyam Computers. This raised greater questions over the ethical behavior of Satyam.

Due to this, an investigation was carried out into the accounting statements of Satyam and there were found to be large gaps in the balance sheet along with inflated profit margins and others.

Ramalinga Raju then admitted to committing a fraud of Rs.7000 crore and held himself accountable for the gaps in the balance sheet and other accounts. On January 7, 2009, Ramalinga Raju wrote a confession letter to the board of directors as well as to the Chairman of SEBI regarding the fraud that was committed by him. In the letter, he stated how he had tampered with the accounts and the balance sheet by inflating the profits and the bank and cash balances, by accruing non-existent interests and by overstating debtors' position.

The following is an extract from his letter of confession:- [4] 

Dear Board Members,

It is with deep regret and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:-

Inflated (non-existent) cash and bank balances of Rs.5040 crore (as against Rs.5361 crore as reflected in the books)

An accrued interest of Rs.376 crore which is non-existent.

An understated liability of Rs.1230 crore on account of funds arranged by me.

An overstated debtors position of Rs.490 crore (as against Rs.2651 reflected in the books)

4.4: Tech-Mahindra Satyam deal:-

After the scam, Satyam's condition took a turn for the worse. Hence, the Government seceded to appoint four directors for Satyam till someone took over Satyam and made conditions better for Satyam. Later, the Government held a bid for the takeover of Satyam Computers.

Now, even though Satyam has been labeled as a scam-tainted company, IT analysts consider Satyam Computers to be a good deal in order for the further development of any company which has a scope for growth. One company which has strong expertise across verticals and would benefit the most with this acquisition would be IBM as it would be able to capitalize on its own strengths and the advantages of this deal. Cognizant, the US based company was another contender in the race for the acquisition of Satyam. This acquisition of Satyam would aid Cognizant in building a significant scale and would hence introduce it into the big league of IT players.

However, the unexpected winner turned out to be Tech Mahindra, coming out from the blue and taking the bid by storm. Tech Mahindra had bid for Satyam Computer at Rs 58 per share which was the highest as compared to the rest of the bidders. Tech Mahindra offered an amount of Rs 1, 757 crore for a 31% stake in Satyam Computers. No other bid was within at least 90 per cent of Tech Mahindra's bid. The other competitors were L&T and WL Ross and their bids stood at Rs46/ share and Rs 20/share respectively. Other competitors were Spice Corp, IBM and iGATE, who, after showing an interest in buying the company, opted out of the bid. On April 13, 2009, it was announced that IT services provider Tech Mahindra had offered the highest bid for Satyam Computers and had rightfully become its new owner. However, Tech Mahindra announced that Satyam would be operated as an independent company with its separate liabilities.

Part V: ANALYSIS

5.1: Benefits behind the takeover of Satyam by Tech Mahindra (Through SWOT and PEST Analysis):- [5] 

The Mahindra Group is one of the top 10 industrial houses in India. It has proven to be a pioneer in the automobile industry and is also a pioneer in the key sectors of the Indian economy. Tech Mahindra (IT) is a provider of solutions and services to the telecommunications industry, with a majority stake owned by Mahindra & Mahindra Limited, in partnership with British Telecommunications plc.

The Mahindra group, although strong in the automobile industry, is not well-balanced in the IT sector. Hence, it needed to diversify itself into the IT sector and create a name for itself there just like it has done in the automobiles and farm equipment sectors. Having a strong hold in the IT sector would prove beneficial for Mahindra as it would enhance its versatility. The downfall of the IT service giant Satyam Computers provided a breakthrough for Tech Mahindra. Tech Mahindra won the bid for Satyam at the price of Rs 58/ share in the presence of giants like IBM, iGATE, L&T and WL Ross.

After Tech Mahindra won the bid for Satyam Computers, Anand Mahindra, the owner of The Mahindra Group revealed the motive behind the takeover saying, "We want to be the leader in the IT field and that is our vision for Mahindra Satyam. But right now, the immediate task is to bring the company back on track." Tech Mahindra prior to the acquisition specialized in Telecom services, Equipment manufacturing, Software vendoring and in System Integration. Whereas after the acquisition, they would specialize in other fields where they have a lack of experience like Consulting services, Outsourcing solutions, Engineering and Product Development, Supply Chain management, Business Intelligence, Enterprise Integration, Infrastructure management, etc.

Satyam also provides engineering services to many of the component manufacturers in the world today especially in Sheet Metal Parts and Fabrication which are used in Automobile and Electrical Industries. This deal with Satyam would also introduce Tech Mahindra into new industries ranging from manufacturing to financial services. It would also introduce Satyam into the Aerospace Industry as Satyam has a strong presence in it. With skill strength of about 6,000 engineers, the work in this vertical would be dealt with effectively.

Through this takeover, Tech Mahindra has become the 4th largest IT service firm in India ranked only spaces behind local giants such as Tata Consultancy Services, Wipro Technologies and Infosys Technologies. Prior to this takeover, Tech Mahindra drew almost 50% of its revenues from a single client- British Telecom plc. But with the takeover of Satyam, they would be servicing the customers of Satyam like Ford, Opel, etc. who require designs, drawings, etc. from the engineers of Satyam. Mr. C.P. Gurnani, the to-be CEO of Mahindra Satyam said that it would be beneficial for Satyam to be associated with the 65- year old Tech Mahindra. This is because of the fact that the company would get about 110 of Tech Mahindra's clients for the Enterprises Services business. One of the big tasks would be to get Satyam back on track as there would be many challenges that have to be faced after the takeover. These challenges will be quoted below.

5.2: Challenges for Tech Mahindra (Through SWOT and PEST Analysis):- [6] 

The biggest challenge that Tech Mahindra will have to face is that they have to reduce the workforce to an optimum level which will be a difficult task as Satyam Computers has about 50,000 employees most of whom are in ineffective positions whom Tech Mahindra can layoff.

1. Another big challenge for Tech Mahindra will be to regain customer confidence.

2. Tech Mahindra does not have the adequate experience in all of Satyam's business verticals and it will be a challenge to deal with the issues relating to these verticals.

3. Tech Mahindra has to complete all the legal liabilities of Satyam Computers.

4. Tech Mahindra has to face challenge of merging the work cultures of both the companies as the work cultures of both the companies are not similar. It also has to face the challenge of winning over the trust of the employees of Satyam and other human resource management issues.

5. It will also be a challenge for Tech Mahindra to repair the balance sheet of the scam-tainted company as it will be difficult to know as to where the lost money has gone. Another challenge will be to show the real profits and losses of Satyam Computers.

6. The steps taken by Tech Mahindra have to be chosen very carefully as they are now managing one of the biggest IT giants in India. Any wrong move may result in very dire circumstances for Tech Mahindra.

5.3: ANALYSIS OF THE GRAPHS SHOWING THE SHARE PRICE: Graphs Showing the Share Price of Satyam Computers and Tech Mahindra before and after the scam and the Takeover:

Graph Showing the Share Price of Satyam Computers before the scam

Share price High before the scam and the takeover

Graphs showing the share price of Tech Mahindra before and since the takeover

Steady Increase in Share Price Since takeover

Steep fall in share price due to the scam

Graphs showing the accomplishments of Tech Mahindra since the takeover

Before the Takeover

Since the Takeover

Graph Showing the Steady Increase in share price since the Takeover

The above graphs clearly bring to light the benefits that Tech Mahindra has acquired through this takeover. As we can see, the share price of Satyam which was soaring at a high level before the scam went down to a drastic share price of Rs 6/ share. This can be seen in the graphs above showing the historic prices of Satyam. However, we can also look at the benefits which Tech Mahindra and Satyam have reaped since the takeover. The share price of Tech Mahindra has been increasing steadily since the takeover; from a low price of Rs 6.20 ps to a really high share price value since Jan-Feb 2009, the time of the takeover which rescued Tech Mahindra from a slump at that period of time.

5.4: The Steps That should be taken by Tech Mahindra at this Stage (Through wheel of fortune: pre-merger and Post Merger Analysis): [7] 

Tech Mahindra, now, after the takeover needs to concentrate on integrating the different work cultures and patterns of Tech Mahindra and Satyam. In order to improve the conditions of the workplace, this step is very crucial as it may make or break the conditions in the workplace. This would also be an important asset in order to motivate the employees from both the companies, Satyam and Tech Mahindra. In order to do so effectively, what is vital is research and planning.

Stage 1 and 2: Negotiation and announcement; Acquisition Integration workout:

These two phases are very crucial to the company as it may make or break the deal. Tech Mahindra should conduct a thorough research into its employees as well as Satyam's employees in order to create a sense of harmony in the workplace environment. With a thorough research, they will be able to look at the forces which will be able to motivate the employees to a considerable extent; so much so that, they will be able to work together. Tech Mahindra needs to appoint an integration manager whose main aim will be to integrate the work cultures of both the companies. This manager must ensure that the employees of both the companies will be able to work and co-exist with each other. Also, communication strategies should be implemented so as to fill the void which would exist between the co-ordination of the two working cultures and patterns. The manager should be formally introduced to the employees of both the companies and also, a sufficient involvement of the higher up officials should be prominent.

Stage 3 and 4: Course Assessment and Adjustment; Long-term plan evaluation and Adjustment:

These two phases are equally important as they would bank on the future of the companies in the long run. The course assessment and the long-term plan evaluation and adjustment would clearly help Tech Mahindra in determining as to what steps should be taken later on. Tech Mahindra should take up process mapping and workout in order to accelerate the integration plan since the employees would also like to set targets for themselves for the shot as well as the long-run. It would also be very helpful for Tech Mahindra to set-up audit staffs in order to process the audits which would be able to help Mahindra-Satyam to point out their own flaws, mostly internal flaws. Mahindra Satyam should also opt to undertake primary research which would be useful in order for them to realize the company's flaws so that they can learn and continually adapt to the integration process. Also, short-term and long-term management exchange should be conducted so as to provide the employees with an exposure to the various areas of Mahindra Satyam which would make them versatile in all the fields and would hence improve the overall teamwork and co-operation of the employees. In turn, this would then improve the overall efficiency of the business.

Hence, we have seen as to what steps should be taken by Tech Mahindra in order to improve the integration process and also how to improve its efficiency.

5.5: Lewins' Force Field analysis (Driving and restraining forces are extracted from SWOT and PEST analysis):

Restraining Forces

Driving Forces

Takeover of Satyam by Tech Mahindra: Yes or no?

DRIVING FORCES:

The following are the driving forces of Lewins' force field which would encourage Tech Mahindra to go ahead with the acquisition. After the acquisition of Satyam, they would specialize in other fields where they have a lack of experience like Consulting services, Outsourcing solutions, Engineering and Product Development, Supply Chain management, Business Intelligence, Enterprise Integration, Infrastructure management, etc. This deal with Satyam would also bring Tech Mahindra into new industries from manufacturing to financial services. It would also introduce Satyam into the Aerospace Industry as Satyam has a strong presence in it. Prior to this takeover, Tech Mahindra drew almost 50% of its revenues from a single client- British Telecom plc. But with the takeover of Satyam, they would be servicing the customers of Satyam like Ford, Opel, etc. who require designs, drawings, etc. from the engineers.

RESTRAINING FORCES:

Tech Mahindra cannot account for its lack of experience in all of Satyam's verticals. Due to this, handling these many verticals of a single company such as Satyam along with its own verticals would prove to be an uphill task for Tech Mahindra. Since Satyam Computers is now labeled as a scam-tainted one, regaining its customer confidence will also be a difficult task for Tech Mahindra. Tech Mahindra would also need to complete all the legal liabilities of Satyam Computers. This would again be a highly difficult and time consuming task due to scam that took place. Reducing the colossal workforce of 52,000 employees of Satyam Computers to an optimum level of employees will also prove to be tricky. Since the financial documents and balance sheets have been tampered with by Ramalinga Raju and his manager, fixing the flaws in the financial documents of the scam-tainted company will also be a big challenge.

Hence, by looking at the driving and the restraining forces which come up when the takeover is analyzed, we can see that the driving forces account for more and their cause is much heavier than that of the restraining forces as the driving forces would account for a large amount of Tech Mahindra's profit and Mahindra's reputation. Hence, through the Lewins' forces field analysis, we can say that Tech Mahindra should be recommended to acquire Satyam Computers.

PART VI: CONCLUSION AND RECOMMENDATIONS

Conclusion:

The research findings and the tools used to analyze the case, bring about the conclusion that Tech Mahindra should indeed go ahead with the acquisition of Satyam Computers. The SWOT and PEST analysis of Tech Mahindra and Satyam would then give us the advantages of the disadvantages of the takeover. Moreover, the Lewins' force field would also help in order to make a concrete conclusion about the takeover. Also, the graphs showing the share price of Tech Mahindra and Satyam would be helpful in comparing the profits and the revenues of both the companies and would indicate as to how the companies were faring before the takeover and also after the takeover. Hence, looking at all the tools and questionnaires, it can be concluded that Tech Mahindra can indeed go ahead with the acquisition of Satyam.

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