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Changes at Gridstone

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From tomorrow I will no longer be CEO of Gridstone Research. Once again, as I have done twice before in my career, I step into the unknown.

I devoted the last three and a half years to our journey at Gridstone. We set out to build an important technology company serving the capital markets. However, Gridstone’s market, the investment managment industry, has been going through one of its worse downturns ever. Needless to say, budgets have been slashed and Gridstone had to take cost-reduction measures to adjust to the new reality.

Banks and the Dreaded N-Word

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What is it about ‘Nationalization’ that makes it such a loaded word in the US? You can spot a politically loaded word if

The media gleefully uses [word] in its headlines, the opposition in Congress and interviews.
The government refuses to acknowledge that they have any plans to [substitute with loaded word] and come up with new words to describe what they are doing.
In all this, the public has only a vague idea about what is going on.

‘Bailout’ was one such word. Remember George Bush refusing to admit that what the federal government was doing amounted to a Bailout. Here’s an earlier post of mine on Bailouts.

Well, Nationalization is the latest politically loaded word.

Career Advice to the IIM Ahmedabad Graduating Class

1395668938_dc7ce824e6_m Last week I was at IIM Ahmedabad for my 20 year reunion. For two days and three nights we had non-stop fun reliving all the special memories from our times at IIM. Reunions, some say, can be quite a let down. Your classmates and you went down different walks of life, they’ll say, and you don’t quite have that connection anymore. Our reunion was, if possible, even better than the high expectations we came with. The reconnection was instant, as if no time had gone by. Needless to say, a good time was had by all.

During one of the few serious sessions on campus, we talked to some of the current PGPs and PGP Xs about careers and career choices. (PGP is the Post Graduate Program, which is the regular two year MBA. PGP X is a 12 month program akin to an Exec MBA). Given how bleak the job scene out there looks, and how concerned the students were, I thought I’d do a post for IIM A students graduating this year or the next.

Expected Bonuses on Wall Street

Bonuses paid to Wall Street were 44% down from last year but still, at $18.4B were the sixth highest in history [official release]. While the state of New York wrung its hands over the lower tax revenues, President Obama called it “shameful”. Practically everyone in the media roundly criticized the fallen Masters of the Universe for untramelled greed.

Yet, some people who know what bonuses on the Street are really about wrote in partial defense of the bonuses. Felix Salmon writes

Now there are good reasons for having a bonus system: it incentivizes profitable work, and it makes it easy for banks to pay less money in lean years. But as Bookstaber writes, there’s definitely an implicit minimum bonus at investment banks — a sticky level below which it’s hard to cut bonuses any further.

There are reasons to have a minimum bonus, rather than baking that money into base pay: it’s not included in pay-rise calculations, for starters. But when banks start getting multi-billion-dollar government bailouts, it looks really bad if they then just turn around and spend a similar amount of money on bonuses.

I spoke to a friend of mine on Wall Street a few weeks back. His point amplifies what Salmon says. People adjust their standards of living – mortgage payments, kids’ schools being the big ticket items – to an expected compensation level that includes that implicit minimum bonus.

At Infosys bonuses in the sales organization did not have an implicit minimum. Or rather, the implicit minimum was zero. The bonus pool was decided based upon how well the company and the sales teams had done. Business heads were encouraged to have a high standard deviation in the bonus awards. And some folks did end up getting no bonus. We had arguments every cycle about the fairness of a zero bonus for people who may have tried but not succeeded in meeting their goals for the period. But ultimately, I believe, it was the right thing to do. It creates a performance oriented culture. It also gets folks used to the idea that there is no implicit minimum bonus.

The more difficult task is to convince high performers that their bonus will be zero because the company can’t afford to fund the bonus pool, which is the situation on Wall Street. High performing producers can up and leave if there are other opportunities in the market. My sense is that there was a bit of game theory going on on Wall Street. CEOs were probably thinking “I know I’ll look bad if I pay out bonuses this year after losing gazillions of dollars. But if I don’t and [insert investment bank names here] do, I’ll lose all my best performers to them and then when the market turns around, I’ll lose market share.”

But somehow I don’t think that’s what they were thinking. That would imply that they were thinking long-term and I don’t know how many CEOs on Wall Street can think beyond the next quarter right now.

How Tech Savvy is Obama?

officialportrait The 44th President of the United States was sworn in yesterday. A great speech was made ordinary by the high standards he has himself set and the even higher expectations of the public.

As the new President and his new cabinet swings into action to meet the challenges of this economic crisis that has no parallels since The Great Depression, we ask ourselves the all important question – does Obama have street cred in tech land? Since this blog’s audience is very tech savvy, I am sure they will want to know if the leader of the free world gets it, when it comes to tech.

The short answer is yes. By almost any measure, but certainly compared to any other President. Probably compared to most of the Congress as well.

Everybody who has followed his campaign knows how Obama used the internet to mobilize campaign funds and volunteers. Never has that kind of money been raised in a US election with no strings attached.

Then there’s his blackberry. Apparently, they are inseparable. There is even talk of amending the Presidential Records Act of 1978 to allow him to retain his blackberry in the White House.

His photos such as the one above, and all content on his website change.gov is all under Creative Commons Attribution 3.0 License which gives unfettered freedom for his photo to be published around the world on blogs such as these.

The Whitehouse website http://whitehouse.gov went live at 12:01, a minute after he officially became President. His entire agenda is up there for the scrutiny of the world.

And like most techies, he won’t wear his jacket a minute more than he has to!

Did I leave out anything that might co-opt him into the tech-savvy crowd?

Satyam – the Larceny Scenario

Investigators looking into the fraud that has been called India’s Enron have found a “maze” of about 300 companies related to Mr. Raju that were used to “siphon” as much as $1 billion in cash from Satyam, said a senior official involved in the inquiry, who was granted anonymity to discuss developments in the case.

A New York Times report indicates a simple answer to what happened to Satyam’s missing billion dollars – larceny. The performance of the company – revenues, margins – were not systematically overstated over many years as Ramalinga Raju claimed they were. Instead, the promoters were stealing. This simpler explanation is something I have suspected all along.

Ironically, if this is true, this is good news for Satyam. On many fronts.

Satyam Operating Margins Look Real

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I pulled this chart together on our very own research platform just to see if there were any signs in the operating margins that Satyam was managing earnings. I found none.

The comparables to Satyam (SAY) are Infosys, Wipro and Cognizant. Satyam’s range of the operating margins is just fine. The seasonality caused by the annual influx of trainees through campus hiring is also there. I couldn’t figure out why the dip was a quarter later than Infosys but there is probably a rational reason for that.

Also present is the uptick in margins in the last couple of quarters, which is presumably because of the favourable movement in exchange rates.

Managed earnings should leave some fingerprints. I couldn’t find any. So either Raju and co were very, very careful with how they were managing the earnings. Or, they weren’t managing earnings at all and the money has actually gone missing.

Satyam Next Steps

India’s regulatory authorities have made a great start on the Satyam accounting fraud scandal. The two bodies that would have regulatory oversight over such a situation – the Ministry of Company Affairs and SEBI – are both playing this on the front foot. The Raju brothers the CFO have been arrested and remanded to judicial custody. The Satyam board has been sacked and very quickly a new board is being assembled. So far so good.

More on Satyam

We are where we are. The biggest corporate fraud in India’s history was disclosed by its perpetrator yesterday. Where we go from here, as I wrote yesterday, this is a test of our regulators. How they handle this crisis will determine how investors see the Indian market in the future. Frauds happen everywhere. But if in India, fraudsters go scot free or with just a slap on their wrists, we will damage the trust that investors – both within India and outside – must have to get back into Indian markets when things start looking up.

I find it hard to believe that this fraud was committed to inflate earnings. If that were the case, the Rajus would have sold at least some of their stock. Did they believe that this was going to continue forever? As others have pointed out, a 3% operating margin is very hard to believe. The downward pressures on rates in IT Services simply isn’t enough to cause that, assuming that salaries were on par with other IT Services companies. So the question is, where did all that money go?

I think Raju is doing a Madoff – taking the fall for the rest of the family. It is impossible to cook the books of a large company for this long without half a dozen people being complicit. That includes their auditors by the way – PriceWaterhouseCoopers – who must be held to account.

The way this investigation is carried out and its outcomes will be closely watched. The net must thrown wide to catch everyone involved. Follow the money and you will find them. The court cases should not drag out. Justice must be expedited with its proceedings as open to the public as is permitted. And along with the due punishment under law, we must seek disgorgement of ill-gotten gains. It would be a downright shame if at the end of this, just one person gets a light sentence and $1 Billion, or whatever part of it is truly missing, is never recovered.

I understand Merrill Lynch resigned the Satyam account. That doesn’t change the fact that they were advising Raju on the Maytas acquisition, which stank to high heaven.

I wonder what’s going on in the heads of Satyam’s clients? Well for one, every CIO of Satyam’s client companies will be wondering if the people from his company who were involved in the selection of Satyam did so entirely on the merits of their proposal. Next, he’ll be worried about business continuity. A major service provider that’s been delisted on the stock exchange doesn’t exactly give you the confidence that your systems are in safe hands.

On the other hand, this could be a great opportunity for a dirt cheap acquisition. If only we knew what their true accounts looked like.

What an amazing destruction of a company, its shareholders practically wiped out, dispirited employees who would be heading for the door if there were jobs out there and customers who are ruing the day they hired Satyam. And for what! Truly, greed has no limits.

Questions re Satyam

While I was out of circulation and not blogging (business trip and vacation) the Satyam saga was unfolding. I remained abreast of what was happening but didn’t post anything on it. It’s been well covered by other bloggers and the media in general both in India and abroad. So I won’t bother adding my opinion except to say that if India Inc. is to redeem itself, what happens from here on out is what matters. The Rajus, on the other hand, cannot redeem themselves. Nor can the independent directors, unless they publicly say that critical information was withheld from them.

But I have several questions about the whole affair. Some of them are rhetorical, others are real questions. So if you know the answers or where I can read up on material, please let me know.