The Satyam saga worsens – terribly so

The Enron of India (Probably!)The news today re: Satyam is really bad.
Written by Brian Sommer, Contributor

The Enron of India (Probably!)

The news today re: Satyam is really bad. It makes the events of last month pale in comparison. To begin, you should read Satyam Chairman Raju’s letter of resignation where he accounts for the accounting sleight of hand he says that he alone masterminded. This is an epic resignation letter for any CEO to have written.

Next, check out MarketWatch. They reported that:

Chairman B. Ramalinga Raju said the balance sheet as of Sept. 30 had inflated non-existing cash and bank balances of 50.40 billion rupees ($1.04 billion), understated a liability of 12.3 billion rupees, and overstated debtors' position of 4.9 billion rupees.

"The gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years ... 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," he said. "I am now prepared to subject myself to the laws of the land and face consequences thereof," Raju added.

In another article, MarketWatch reported:

Angel Broking analyst Harit Shah dubbed Satyam "India's 'Enron'", adding Satyam's misrepresentation constituted "one of the biggest-ever frauds in Indian corporate history."

Reuters did a great piece that indicated, among other things, that Merrill Lynch has cancelled their engagement with Satyam as a result of this episode. Interestingly, Raju indicated in his resignation letter that Merrill should continue to seek strategic alternatives for the company.

A check of Satyam’s stock on the NYSE shows it to have fallen from over $8.50 yesterday to around 82 cents at the time of this report’s preparation. Lawyers aren’t waiting for the dust to settle either. A class action lawsuit has already been filed for investors of Satyam.

I spoke with fellow industry watcher Vinnie Mirchandani about this latest chapter in the Satyam history. We discussed this situation in particular and the parallels to the Arthur Andersen collapse after Enron. We discussed that:

- No one will launch a takeover of Satyam now. The company’s profitability (and hence its book value) are big unknowns for now and will be until a corrected set of books is produced. That will likely take a while to complete though.

- Satyam is probably finished as an on-going entity. Parts of the firm may be sold off as asset sales but creditors, litigants, shareholders, etc. will all want their piece of the firm. The real estate the firm has (e.g., training center) may be an asset that isn’t sold anytime soon. Andersen’s Q Center, its big training center in St. Charles, Illinois, has been one of that firm’s most coveted assets by many claimants and is still operating under the aegis of Andersen today. What could get sold off are specific practice groups a la the Andersen practice sales.

- If someone doesn't swoop in soon to take over Satyam's assets/operations, then they will suffer lots of voluntary attrition and create a deadly downward economic spiral. Since the #1 asset of a services firm is its people, morale is a key issue for any service firm. There has been so much negative press about Satyam the last month that employees would naturally look for a better place to work. Today's events are toxic to a service firm and people will likely start leaving asap.

- If Satyam’s CEO isn’t prosecuted in India, we both believe the SEC would love to get a crack at him here. If former CA CEO Sanjay Kumar can get U.S. Federal prison time for a revenue recognition issue, then Raju would get considerably more time.

Vinnie and I didn’t get a chance to discuss his old employer PriceWaterhouseCoopers. They audited Satyam’s books and they’ll likely have a lot of explaining to do regarding this accounting deception. This will certainly draw out additional litigators looking for deep pockets to sue. Many writers are, correctly, asking how could they have missed this multi-year deception? A good question indeed.

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