A shrinking Satyam

The stakes are growing as uncertainty continues

Satyam is another services firm with some retention issues: employees and clients.

Let’s start with the client erosion issue first. Satyam apparently had around $2 billion/year in revenues. Of course, that number may change due to the investigation into the finances of the firm. Nonetheless, let’s go with that number for now. We first heard that State Farm cancelled a $80 million contract. Now, additional client work has or may soon be disappearing from Satyam’s revenue rolls. These include:

- Merrill Lynch moving a $40 million (annual) contract to Tata Consulting Services (source: Wachovia Capital Markets, LLC) - Coca- Cola may transfer its ERP systems from Satyam – approx. $30-50 million revenue/year for a $100 million total contract value) source: Economic Times - - Update: Apparently, CapGemini has won the 7-year, $100 million Coca-Cola deal. (Source: Economic Times ) - Cigna has put Satyam on notice that it may pull its work unless the company stabilizes (Source: Economic Times ) - British Petroleum – is looking for assurances that its big project with Satyam won’t be impacted (Source: Economic Times ) - Qantas – Has 5 years out of a 7 year contract left with Satyam – They are evaluating Satyam on a day by day basis (Source: Economic Times ) - GE and DuPont – Are continuing to monitor events but are waiting a few months to see how Satyam settles (Source: Economic Times ) - Telstra is frequently mentioned in articles concerning potential Satyam client defections - GSK (GlaxoSmithKline) - Apparently, Cognizant has snagged a $35 million deal from Satyam (Source: Economic Times ) Full disclosure: I own a few shares of Cognizant

Potential suitors are also nervous about buying some or all of Satyam as long as client defections are occurring.

There has also been a lot of discussion about the loss of key Satyam executives and whether these people can/will take client business with them to new employers. According to Wachovia Capital Markets:

Senior Executive Departures. The head of its manufacturing and automotive services division and the head of its banking, financial services and insurance business vertical have resigned. Indian press is reporting that more resignations are expected and speculating that the new government-appointed board is asking for resignations because of attempts by senior executives to take clients to competitors.

Is Satyam losing client work? There are a few reports that Satyam has already recalled 1,500 employees from client sites.

What does all this mean?

The company must move quickly to convince clients of its long-term stability, financial footing and management. Right now, with the sale of some or all of the company in play, that measure of re-assurance cannot be given. Worse, the value of the firm weakens daily as prospective buyers will only pay so much per dollar of backlog. As backlog declines, so does the firm’s valuation and profitability. And declining fortunes will only cause existing employees to question their future with the firm and trigger more moves to competitors. Now is the time to stem the tide of uncertainty.