Analyst: Satyam vulnerable to takeover

The Indian outsourcing firm's corporate governance woes may result in the company being divided up and sold off separately, according to Ovum.
Written by Sol E. Solomon on

The impact of recent corporate governance woes at Satyam Computer Services threatens the continued existence of the Indian outsourcing company, an Ovum analyst said.

In a press statement released Friday, Ovum's senior vice president of IT research David Mitchell, noted that in the short- and medium-term, Satyam's hugely deflated valuation is likely to make the company vulnerable to takeover.

The company's market value was knocked off by over 75 percent as its share price tumbled Wednesday following the shock resignation of Satyam's chairman and founder B. Ramalinga Raju, who admitted to massive irregularities in the company's accounts.

Mitchell said: "Even before the news of these corporate governance issues, there was open market speculation that Satyam was either looking to bulk up through acquisition or that it would be at the core of a merger with rivals of similar scale."

It is also possible that the Indian company might find itself broken into parts, and the pieces sold off separately, he said.

In a press statement Thursday, Satyam said it had begun a process to ascertain the company's financial liquidity position and verify Raju's allegations.

Mitchell said: "The expected fraud enquiry could delay the inevitable, but it is equally likely that it will accelerate things, with criminal investigators and forensic accountants working together to establish the real financial position--and working out what is in the best interests of the shareholders."

As for corporate governance, the Ovum analyst said, other companies will also be keen to find out if the problems were unique to Satyam.

"Many will wonder whether their own controls are strong enough and whether they are sure their companies are not hiding similar problems, although at a lesser scale," he explained.

With some optimism, he noted corporate governance problems at Enron, Worldcom, Global Crossing, Tyco, Polly Peck and Parmalat, had subsequently strengthened regulation and tightened the supervisory framework, resulting in legislation such as the Sarbanes-Oxley Act.

"In this case, we will see the Indian government reexamining its corporate government framework, with changes being made to strengthen it or at least to ensure the existing frameworks are robustly implemented," Mitchell said. "After all, Satyam was already subject to substantial scrutiny through external auditors, strong independent directors on the board and other supervisory controls."

In his resignation letter, Raju declared that Satyam's cash and balance sheet was only 6 percent of the figure declared in September 2008. Margins were 3 percent, rather than the 24 percent claimed, and revenues were 22 percent lower than the 27 billion rupees (US$556 million) initially declared.

Mitchell said: "This is massive--Enronesque in scale."

Satyam also announced an action plan focusing on business continuity, corporate transparency and leadership transition for board and management. It created a council comprising 40 top managers representing various geographical regions, and headed by interim CEO Ram Mynampati.

To strengthen corporate governance, Satyam said the council has accorded top priority to addressing various legal issues that are expected to unfold; and has written to the regulatory authorities and various industry associations for assistance to identify candidates to be new members of Satyam's board.

A task force has also been formulated to address ongoing operational issues to ensure business continuity, which includes maintaining customer confidence, the company added. For this, it noted that a customer outreach program has been put in place to assure clients that Satyam would meet all its business commitments.

Mynampati said in the company's official statement: "While we have to address various customer concerns, we have been heartened by expressions of confidence and support from various clients."

The company has clients in 20 industries and more than 65 countries.


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