The Rise and Fall of Ramalinga Raju

ABSTRACT:The case discusses the rise and subsequent fall of one of the visionary leaders in the Indian IT sector, Ramalinga Raju (Raju). US-educated Raju founded Satyam Computers Services Limited (Satyam) and under his leadership, the company grew to become one of the leading IT services companies in the world. In an announcement that surprised the IT and investor communities both in India and across the world, Raju confessed to a major accounting fraud that marked his fall, drawing comparisons to Bernard Madoff. The case examines in detail the inception and growth of Satyam, vision and leadership skills of Raju, the problems Satyam faced due to growing competition, the Maytas fiasco and the events leading to confession of accounting fraud by Raju.

FALL FROM GRACE:On January 07, 2009, B. Ramalinga Raju (Raju), Founder and Chairman of India's fourth largest IT services company, Satyam Computer Services Limited (Satyam), claimed that the company had been inflating the revenue and profit figures for several years. He confessed to an accounting fraud that amounted to Rs.70 billion.4 In a letter addressed to the board of directors of the company, he declared that the Rs. 50 billion of cash balances reported by Satyam for the quarter ending September 30, 2008, did not exist, that the revenues were Rs. 21.12 billion as against Rs. 27 billion reported earlier, and the operating margins were only 3% as against the 24% declared by the company earlier.

He wrote that the gap arose due to the difference between actual profits and the profits reported, which kept on growing over the years. In his confession, Raju wrote, "Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in the takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten. Industry insiders were of the view that Satyam's growth was not matching up to that of the top three companies in the Indian IT industry, namely, Tata Consultancy Services Limited (TCS),6 Infosys Technologies Limited (Infosys)7, and Wipro Technologies (Wipro)8. At the same time, analysts warned that if Satyam did not keep up its growth momentum, it could lose its coveted position to multinational companies like IBM or Accenture that had ventured into India, or to home-grown companies like HCL Technologies. Analysts blamed the slowdown at Satyam on Raju shifting his focus to his family promoted real estate businesses Maytas Properties Pvt. Ltd (Maytas Properties) and Maytas Infrastructure Limited (Maytas Infra). Raju faced severe criticism in mid-December 2008, when Satyam made its intentions of acquiring the two Maytas companies public. RAJU FALLS BEGIN:On December 16, 2008, Raju announced that Satyam planned to use the cash reserves to acquire two companies - Maytas Infra and Maytas Properties. Maytas

Infra was a public, listed infrastructure development company that had been operational for more than two decades. Maytas Properties was involved in developing residential townships and urban infrastructure. For the six months ended September 30, 2008, Maytas Infra reported revenues of Rs. 7.37 billion and a net profit of Rs. 0.37 billion.

RAJU CONFESSED TO FRAUD:However, before Raju could take a breather, on January 06, 2009, DSP Merrill Lynch announced that it was terminating its advisory agreement with Satyam. In its communication, it said, "We have terminated our advisory engagement with Satyam Computer Services Ltd for considering various strategic options on January 06, 2009. THE AFTERMATH:After Raju announced that the accounts had been fudged, analysts were able to piece together the real picture behind the abandoned Maytas acquisition. They realized that Maytas' acquisition was an effort to save Satyam, and replace fictitious assets with real ones.

ISSUES:

Study the inception and growth of Satyam. Analyze the importance of visionary leadership for the growth of a company. Examine the importance of having a strong board and governance structure. Understand the reasons that led to the fall of Raju. Appreciate the importance of ethical leadership.