01 September 2003 18:12
The 153-Million-Dollar Trial
The court will decide the fate of the largest deal in the history of the Russian software market – the purchase of Oracle by Svyazinvest
By Yuliana Petrova
 The 153-million-dollar deal, in which the Russian telecommunications holding Svyazinvest purchased the Oracle E-Business accounting management system, has sparked a serious conflict between minority and majority shareholders. Failing to win a reversal of the purchase decision at the shareholders’ meeting, Svyazinvest subsidiaries’ minority shareholders intend to bring action against the holding’s leaders.
Last May, Svyazinvest made the decision to purchase 70 thousand licenses for the Oracle E-Business Suite in hopes of automating the financial and economic activity of both the holding itself and its seven subsidiaries, all interregional communications companies (ICC) uniting 72 regional communication providers after the recent restructuring. The holding’s leaders see management activity automation as challenging but strategically important. Over 60 different accounting systems are currently in use at the ICCs with only 13% of ICC’s regional branches being automated (and even they are only partially automated). Such patchy automation, on one hand, leads to higher IT costs, as maintaining numerous systems is expensive. In addition, they make management of both the subsidiaries and the holding as a whole more difficult. Therefore, Svyainvest’s leaders stress, establishing a single enterprise management system has become a substantial component in the general plan for corporate reform. This system will automate the management of financial operations, supplies, investment activity, human resources, and equipment operation and repairs. As a result, in three and a half years, when the all-round automation is completed, Svyazinvest will become one of the leading Russian tech companies and undoubtedly attract investors.
The Svyazinvest subsidiaries’ minority shareholders, in principle, have no problem with something as practical as accounting-management system implementation. But they oppose the deal with Oracle.
Apple of discord
The minority shareholders’ bewilderment was brought about not only by the fantastic sum of the contract with Oracle but also by the way it was concluded. Specifically, they were astonished that a major contract costing more than half the holding’s net profits for last year did not involve an open call for bids from accounting system service providers. No pilot project was carried out, either. The holding’s leadership claims there are no laws whatsoever stipulating mandatory tenders. There was no need for a tender, as the holding’s management considered 16 potential ERP-system suppliers, including SAP, Galaktika, and Microsoft Business Solutions, and opted for Oracle at the recommendation of a consultant, Yunikon MS. No doubt, from the legal point of view, Svyazinvest hasn’t broken any laws. However, over the last few years, all major Russian companies have found open bidding the most efficient way to approach major contracts for goods and services.
The minority shareholders are also not happy that the holding’s leadership decided to purchase the Oracle E-Business Suite without even discussing it with the Board of Directors. ICC budgets for the current year approved at the beginning of April – only one month before the conclusion of the large-scale contract – made no mention of a new accounting-management system at all. Subsidiaries’ leaders admit that their companies’ financial performance indicators will have to be substantially adjusted downwards this year because of the unscheduled purchase of Oracle software.
ICC independent shareholders believe that the obviously overestimated number of licenses is another questionable point in the deal. Sibirtelekom plans to buy 12.5 thousand Oracle work stations at $1,500 per license for 49 thousand employees. In their view, the strange thing is not even the purchase of so many licenses. Basically, there are no standards whatsoever, neither in the West nor in Russia, linking the number of software licenses to the size of a company’s workforce. In Western telecom companies, the number of licenses per employees on payroll ratio ranges from 3% to 40%. The minority shareholders were mainly worried about the fact that the Oracle licenses were purchased before the pre-project examination of all Svyazinvest enterprises was completed and the number of required licenses determined. Moreover, payment for the software appears to have no connection with the implementation timetable, and the total amount is due before the end of the year.
Who’s accountable?
These and some other unclear details of the bargain prompted the Association for the Protection of Investors’ Rights, which represents the minority shareholders’ interests in this case, to address Svyazinvest General Director Valeri Yashin requesting him to postpone consideration of the Oracle software purchase. In the letter addressed to Mr. Yashin, the Association stated that a deal of such proportions could result in losses at the ICCs, which would trigger a host of legal actions both against the companies themselves and against some of their leaders.
Despite all their efforts, the minority shareholders have not succeeded in blocking the decision made at any of Svyazinvest’s regional companies. In late May – early June, all ICC Boards of Directors approved the Oracle purchase.
Having lost the first round, the ICCs’ independent shareholders managed to win the support of famous financier George Soros, who has a large stake in Svyazinvest. The state, via the Property Ministry and the Russian Federal Property Fund, is another major owner of the telecommunication holding (with 50% plus one share and 25% less two shares, respectively), whereas a Cyprus-based consortium, Mustcom, headed by Soros, owns a blocking stake (25% plus one share). In late June, Stewart Paperin and David Geovanis, the representatives of Soros Fund Management and Mustcom on the Svyazinvest Board of Directors, forwarded a letter to Yashin with 18 questions concerning the deal with Oracle. The letter’s authors asked Svyazinvest to provide them with copies of all agreements, letters, and decisions on the Oracle deal. They also stated that Mustcom would join the minority shareholders if the holding’s management failed to present satisfactory explanations to the consortium and didn’t put the Oracle software purchase on the agenda of a Board meeting. As Geovanis stated, Mustcom has no objection to the ERP system, but its implementation should be effective and profitable. The affair with letters and negotiations ended at a meeting of the Svyazinvest Board of Directors on July 31, where the conflict between the minority and majority shareholders reached its climax. As expected, seven representatives of the state voted against Mustcom’s motion to suspend the purchase of the Oracle E-Business Suite, and now the minority shareholders intend to kill the deal in court.
According to Oleg Rumyantsev, official representative of the Association for the Protection of Investors’ Rights, the actions of Svyazinvest’s leadership violate the articles of the Law on joint-stock companies holding managers accountable for decisions that cause damage to a company. Therefore, Rumyantsev explains, lawsuits will be brought against all Svyazinvest managers who were members of the ICC Boards voting for the purchase, as well against the seven members of the Board of Directors who represented the state’s interests, including Leonid Raizman, the Chairman of the Board and the Minister of Communications and Information. The minority shareholders have little chance of success, though. According to the Association, Svyazinvest’s regional subsidiaries have already paid 40-60% of the total contract amount to Oracle.
It’s clear that it will be extremely difficult to cancel the almost complete deal and get back tens of millions of dollars. It’s unclear how far the independent shareholders can count on Soros’ support, since during his recent visit to Russia the US financial mogul called his investments into the telecommunication holding wasted capital. In 1998, the blocking stake in Svyazinvest cost Soros $1.875 billion.
Privatization of Svyazinvest is right around the corner. Though it has been postponed for the time being, it could begin as early as next year. Investors will undoubtedly not put a very high value on the financially opaque and badly managed company. At the same time, an accounting-management system of such proportions will never be fully implemented by the scheduled sell date. With all its consultants, implementers, and equipment, the whole project will apparently exceed the stated $153 million cost considerably. And the telecom giant’s new owners will be the ones forced to deal with the Oracle debacle.
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