On the Brink, Outsourcing Giant Is Center Stage in India
The New York Times
Published: Jan 10, 2009
NEW DELHI — Is India Inc. about to get a bailout?
The giant outsourcing company Satyam Computer Services is struggling for survival after its founder, B. Ramalinga Raju, admitted to an enormous fraud.
The company’s demise would put 53,000 employees out of work and would also disrupt operations like billing and computer systems at some of the largest companies in the world.
The scope and seriousness of the situation, coming as the red-hot Indian outsourcing industry starts to cool, has prompted a chorus of analysts and investors to suggest that the government should intervene.
“The question becomes: Will the Indian government step in or will the company be sold either as a whole or in pieces?,” analysts from Forrester Research said in a note Friday.
“This is an election year, and there are a lot of considerations” for the government to think about at Satyam, including employees, investors and especially small investors, Sudin Apte, one author of the research report, said in an interview.
Satyam might be able to continue until it finds a buyer with another $1 billion in cash, noted another analyst who did not want to be identified because his bank stopped covering Satyam when the fraud was revealed.
Indian officials acted quickly on Friday to try to shore up investor confidence, removing the company’s directors and pledging to appoint 10 new ones shortly. The new board will hold a meeting within seven days, the minister for corporate affairs, Prem Chand Gupta, said.
Satyam faces a liquidity crisis and may not have enough cash to meet basic operating expenses like payroll as soon as this month. On Thursday, the company confirmed the direness of its financial situation.
A takeover is unlikely while questions still hang over the company’s accounts, many bankers say, and it may be months before those questions are answered.
Regulators are delving into how and why Mr. Raju was able to fool auditors and investors for several years. India’s market regulator, the Securities and Exchange Board of India, began an investigation Thursday into trading of Satyam’s stock and on Friday met with the company’s chief financial officer, Srinivas Vadlamani.
The Criminal Investigation Department of the police in the state of Andhra Pradesh, where Satyam is based, has also joined the investigation.
The market regulator said that it planned to hold “peer reviews” of auditors, a move intended to increase confidence in publicly traded companies. The regulator’s chairman, Chandrasekhar Bhaskar Bhave, said the regulator needed to reassure investors that Satyam was a “one-off.”
Local politicians put pressure on government officials to step in to rescue Satyam. Y.S. Rajasekhar Reddy, the chief minister of Satyam’s home state of Andhra Pradesh, asked Prime Minister Manmohan Singh in a letter to put together a new management team to run the company.
Investors showed little faith Friday in Satyam’s chances; its shares fell 41 percent on the Bombay Stock Exchange. Mr. Raju said Wednesday that he had fabricated $1 billion worth of cash and bank balances, nearly all of the company’s cash assets. Shares fell 78 percent that day. The market was closed Thursday.
So far, the government is balking at the idea of bailing out Satyam.
“This is a corporate governance issue,” said Rajiv Jain, a spokesman for the commerce ministry. The government is in “no position” to put cash into the company.
The Congress party government of India, which must have general elections before a May deadline, has a tenuous hold over the country, and any decisions it makes on Satyam are expected to be challenged by its opposition.
The mood at the company’s headquarters was grim. Pankaj Kumar, a software developer who has worked for the company for a year and a half, said that employees were worried about layoffs. The worst thing was the lack of concrete information about the Satyam’s financial position and future. “There is too much rumor and speculation,” he said.
If Satyam goes under, job losses will not be limited to India. As many as 30 percent of Satyam’s employees, about 16,000, are outside India, analysts estimate. Some of these employees are Indians on temporary assignments, while others are local citizens. A third group of employees work for a string of companies that Satyam purchased during a buying spree.
Outsourcers like Satyam may once have operated from backrooms in Bangalore, but they have expanded in recent years into continent-spanning giants with offices near their clients and an appetite for international deals. One of Satyam’s biggest overseas offices is in Princeton, N.J., analysts noted.
Satyam, the fourth-largest outsourcing company in India, went on a European and American buying spree in recent years that stretched from Boston to Belgium. In the first half of 2008 alone, the company struck deals for all or part of four small to midsize consultants and back-office firms, including Bridge Strategy Group of Chicago last January for $35 million.
On April 21, Satyam said it had agreed to buy Caterpillar’s market research and customer analytics business for $60 million in cash. That same day, Satyam said it would buy S&V Management Consultants, a Belgian supply chain management company with 60 consultants, for $35.5 million.
All of Satyam’s businesses may be in peril. “If nothing happens in the next two to three weeks, clients as well as employees will desert the company,” Mr. Apte of Forrester said.
© The New York Times. All rights reserved. This article originally appeared in The New York Times.
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