Satyam Computer Services (BOM:500376)

Satyam's Chairman agreed to inflating the balance sheets of the company with artificial (non-existent) profits.

Of Satyam’s reported cash and bank balances of Rs 5,361 crore on September 30, Rs 5,004 crore was non-existent, Raju said in the letter. Operating margin in the quarter ended September 30 was 3% of revenue, instead of the reported 24%, Raju said. The company’s revenue was Rs 2,100 crore, 22% less than the inflated figure of Rs 2,700 crore that had been reported.

Raju arranged Rs 1,230 crore “to keep operations going” at Satyam over the last two years by pledging the founders’ shares and raising funds from other sources, he said.

“What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years,” Raju said. “It was like riding a tiger, not knowing how to get off without being eaten.”

His concern was that a poor performance, combined with the fact they held a small stake in the company, would make Satyam an easy target for a takeover, exposing the inflated figures, he said.

When it rains, it pours. Just over a month ago, I had turned my eyes toward the Indian IT outsourcing companies, focusing in on any long term opportunities given the Mumbai terrorist incident. It didn't take long for a major storm to hit with Satyam's CEO admitting to cooking up financial numbers. This was right after his company had made an attempt to acquire two other companies owned by his family members. It didn't take long for Satyam's customers to grow weary and possibly defect.

A business week article posted a few weeks ago mentions that Satyam is pretty much in damage control mode trying to assure their customers that they have their act together.

Not suprisingly, Wipro, Infosys, and TCS (Tata Consulting Services) will be doing what they can to seize the moment. Those other companies had better take lead from Mr. Obama not send any gifts to prospective clients :)

The company also has to worry about defections amongst its engineers/coders/systems workforce. Here is a quote from one of Satyam's officials trying to assure customers that everything is ok, "We have told them that there is no need to worry about contracts and that we are here to stay". For a good dose of reality, they had better pay attention to their workforce. Defections of knowledge workers is not easily solved by hiring more off the street. I work in this industry and it is not plug-n-play. Customers concerns may not likely be around the company's governance, but around business continuity with all of the systems they have outsourced to Satyam. No business process or enterprise business system is immune to the risk of a new flock of employees trying to pick up what was left off by previous employees.

So what now? Time to take a look at Wipro and Infosys. And if you're into solid governance and think Obama is going to push for US jobs, you may want to look at IBM which posted a surprising strong quarter and has a deep and established global services division.

Indian Rupee has been seeing a rise against the US dollar. This hits the revenues of many outsourcing companies from in India.