Despite scandal, Satyam pulls off 'best outcome'

Year after founder admitted to inflating profits, Indian IT services vendor--with greater transparency and new owner and brand--has done well, says analyst.
Written by Vivian Yeo, Contributor

Satyam Computer Services, having fallen from grace over an accounting scandal last year, has since pulled off "the best outcome" given its circumstances, according to an industry analyst.

Philip Carter, associate research director of IT services at IDC Asia-Pacific, said in an e-mail interview that Satyam avoided having to declare bankruptcy, and remained largely intact following the move to put itself up for sale last year.

Satyam, once the fourth-largest Indian IT services vendor, stunned the world last January, when its founder and chairman B. Ramalinga Raju admitted he overstated the company's profits over several years.

A year on, while Raju serves out his time in jail, the company he founded has somehow managed to stay afloat. Carter said: "On the whole, given the events in January 2008, I think it was the best outcome for the organization. The entire business entity was purchased by a reasonably credible IT services player with global capabilities, in the form of Tech Mahindra, in April 2009."

Satyam has since been renamed Mahindra Satyam, after the new owner reorganized the company and governance practices, and embarked on a campaign to reassure customers and employees worldwide that it was business-as-usual.

Carter noted, however, that the business had no doubt "suffered" in terms of customer and talent losses. A high-profile client in Australia, Telstra, cut its ties with Satyam, while Virender Aggarwal, who headed Satyam's Asia-Pacific and the Middle East business left for rival HCL.

Yet Tech Mahindra, the IDC analyst noted, has "made the right initial moves" in the Satyam acquisition. To date, it has managed Mahindra Satyam well, having set out a new company structure and manage a revised brand identity, as well as proactively engaging with various external stakeholders, he added.

The remediation measures may have worked, judging by several healthy signs. Its share price is now hovering at around 110 rupees (US$2.38), according to Yahoo's U.K. and Ireland site. In the last 52 weeks, Satyam's stock had fallen to as low as 44.9 rupees, or just under US$1.

The resurgence, however, still falls short of its former glory. Mahindra Satyam could not reveal its peak share price, but one shareholder lamented to the Wall Street Journal that her Satyam investments were now worth less than one-fifth of their value in late-2008.

Winning back clients
The company also continues to win new clientele, Rohit Gandhi, Mahindra Satyam's Asia-Pacific senior vice president, said in an e-mail interview. Existing customers such as GE and GlaxoSmithKline, have extended their relationships with Mahindra Satyam with contracts ranging between three and five years, he added.

"The momentum is positive, and we are focusing on emerging markets and verticals in a big way to drive our revenues," Gandhi said.

"Customers have been understanding of the situation and believe the fundamentals of the organization continue to be strong. They have been very supportive, and understand the dynamic situation that we are in," he added. "Of course, there have been occasional concerns regarding the lack of audited and declared revised financial statements, which was to be expected given the circumstances.

"But, I believe, we have responded quickly and in a transparent and effective manner."

It helped, too, that Satyam's new owner had sound credentials, said Gandhi. The Mahindra group is a US$6.5 billion organization that has been in business since 1945. "This pedigree of our new owner helped us convince customers about the continuity of the business," he said.

On the employee front, Mahindra Satyam has reinstated performance-related variable pay and adjusted salaries "in select pockets" to signal its financial stability, he noted. Activities to bring together its associates have also been rolled out to increase the "happiness quotient", Ghandi said.

Minimal impact on industry
He acknowledged that last year's scandal had "rocked the Indian IT industry" as well as the country's local corporations, "which were already reeling under the [effects of the] global financial crisis".

Yet, outsourcing volumes from India were hardly affected. In fact, the industry recorded growth over last fiscal year, Ghandi said. One reason for this was the timely, and "very helpful", intervention by the Indian government, he said.

IDC's Carter concurred, noting that the speed at which the country's administration responded to the crisis, and the decision to set up a new board and the appointment of experts to helm Satyam while the company searched for new leadership, "sent a very powerful message" to the rest of the world.

"I think it had the desired effect in terms of business sentiment toward India in the aftermath," he said.

Moving forward, 2010 is expected to be "an interesting year for all vendors" in India, according to Carter, who said the country's domestic IT services market is expected to grow 15.7 percent over 2009.

On the export front, however, labor and living costs have risen and global companies are seeking to diversify their offshore delivery as a result of terrorist attacks and the H1N1 outbreak. These developments will demand Indian services vendors to "continually reinvent themselves to maintain leadership positions," the analyst said.

The question then for Satyam will be, how well it can execute" in the face of the likely economic recovery", said Carter.

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