Merger best option for Satyam, says Ovum

LONDON: The Satyam scandal has rocked corporate India and is being termed ‘India’s Enron’. The aftershocks of the scandal have shaken clients’ and investors’ confidence in Indian corporations, particularly those that are part of family owned conglomerates. The fallout of the scandal will most likely alter the competitive landscape of the Indian IT industry and bring to light the immediate need to improve governance and the regulatory environment in India to reinstate confidence in the Indian IT industry.

Satyam CEO Ramalinga Raju’s admission to overstating assets and understating liabilities to the extent of $1 billion has brought embarrassment and anger across corporate India. However, it seems that these weren’t the only skeletons in Satyam’s closet.

Satyam is also understood to have overstated its employee numbers, which are far fewer than the claimed 53,000 worldwide, raising questions about what happened to the funds apparently paid as salaries to the non-existent employees. The financial situation at Satyam is indeed dire, with inside sources confirming that the company lacks sufficient working capital to meet current expenses and employee salaries for this month. News that Satyam has started firing employees onsite in the US, Australia, New Zealand and Europe has heightened employee jitters in India.

Meanwhile, the Indian government dissolved Satyam’s board and has appointed Deepak Parekh – who is credited with bringing mutual fund company Unit Trust of India (UTI) back from the brink of bankruptcy in 2002 – as well as former chairman of Nasscom Kiran Karnik and former SEBI member C. Achutan to the IT company’s board.

The new board needs to address the major question of injecting the required working capital into the business

The first task for Satyam’s reconstituted board is to re-instill confidence in investors, clients and employees about the company’s abilities to meet its current obligations and continue business as usual. The first challenge is to find a bank willing to risk supplying the necessary working capital to keep the business running, although the Indian government is understood to be open to offering a bail out. Major clients such as GE, Nestle and BP will no doubt be considering their options, which could benefit Infosys and Wipro, Satyam’s partners in these multi-sourcing contracts. Although Indian rivals Infosys and Wipro have stated that they will not proactively approach Satyam’s clients, they’re not going to refuse business that comes their way as a result of its troubles.

Allowing an acquisition would most likely be the best approach for salvaging Satyam

The best approach for Satyam at this juncture would be a takeover, as the company does not have the resources to function independently. It is also likely that the business could be broken up into parts and each sold separately. The general sentiment to retain ownership of Satyam within India brings up L&T Infotech as the best suitor. The Indian vendor, which is part of engineering giant Larsen & Toubro, has long been a laggard in the Indian IT sector. Acquiring Satyam will boost its SAP practice, strengthen its telecoms, media and technology industry practices, and provide a foothold in the financial services segment. The L&T interest is further corroborated by the fact that the company, through its subsidiary L&T Capital, acquired a 4% stake in Satyam a week before the scandal erupted. L&T’s management has not ruled out an acquisition, stating that it will wait and watch for now, and decide once the true extent of Satyam’s liabilities are discovered.

There is a mammoth task ahead of the three veterans on the new board, and their decisions are likely to permanently alter the competitive landscape of the Indian IT industry.