Satyam Update: Circling the Wagons

The Satyam (SAY - Analyst Report) saga appears to be coming full circle, now with the arrest of both Satyam Computer Services Ltd.'s ex-CEO and ex-CFO, and the interim management announcement that it’ll make all attempts to clean up its books and appoint a new auditor.

A new Board is being formed to spearhead the task of salvaging the company, and three members have already been appointed by the Government of India itself. The Board will face a difficult task indeed, given that the company is cash-strapped, under investigation and the subject of criticism from all possible angles.

The option of a merger/takeover is on the table, although it is abundantly clear that there are no suitors at the current time. The only other option may be a government-sponsored Indian-style bailout, specifically in terms of providing short-term working capital, although there is no precedence in the Indian financial history of a bailout of this magnitude.

No sooner had I spoken of the Satyam fiasco and its potential ripple effect on the sector (in response to specific questions on CNBC India’s “Power Breakfast” last Wednesday) that Wipro Tech. (WIT - Snapshot Report, Hold) came out with the revelation that the World Bank, a la Satyam, has also disqualified WIT from any business engagements with the Bank, dating back to 2007.

Although the issue appears insignificant compared to the fraud perpetrated at Satyam, the timing and the nature of the indiscretion couldn’t have been any worse for Wipro. The stock gave up over 10% in trading yesterday, and the near-term sentiment may continue to be maligned with the Satyam fallout syndrome.

Assuming that there is no more blockbuster news coming out of Wipro or any of Satyam’s competitors, it is likely that Wipro will be able to withstand the current backlash and move on with its business and provide adequate investor returns in the coming quarters.

As for Satyam, it may be an entirely different story. The task ahead would be daunting at best and enormously time consuming. After all, we are looking at forensic auditing of books that were falsified presumably over a period of three to four years, according to the interim management. A lot is at stake: over 50K employees, 180+ Fortune/Global-500 clients, international investors and peer companies with ties to Satyam. And then there is the question of leadership, a failed vacuum that may not be so desirable to many of the worthy stalwarts of the new-age Indian business culture.

All in all, the legacy of India’s fourth-largest global IT service provider may have come to pass and all that one may remember is the specter of an unworthy CEO caught with his hand in a $1 billion+ cookie jar.

Although we continue our coverage of SAY with a Hold rating, we have suspended our estimates at the current time.

Read the full analyst report on SAY

Read the full analyst report on WIT

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