The Sad Saga Of Satyam Computers

What began as a corporate governance issue back in December has now turned into a major financial scandal for the ages in India. The shares of Satyam Computer Services (SAY) has plummeted more than 90% in trading here at the NYSE Wednesday, a stark reminder that investors must always cover their backs or else get racked by the likes of Enron, Bernie Madoff or Ramalingam Raju.

Early today, Ramalingam Raju, the chairman of troubled Indian IT outsourcing company Satyam Computers (on which I had a Hold rating), sent a startling letter to his board and the Securities & Exchange Board of India. Raju acknowledged his culpability in hiding news that he had inflated the amount of cash on the balance sheet of India’s fourth-largest IT company by nearly $1 billion, incurred a liability of $253 million on funds arranged by him personally, and overstated Satyam’s September 2008 quarterly revenues by 76% and profits by 97%. Raju also resigned as the Chairman/CEO of Satyam, and left a trail of dust that may cover other Indian IT outsourcing companies as well in the near-term.

I had indicated earlier in our media interviews with CNBC India that the 48-hour reversal by the management of Satyam on Dec 17 in its decision to acquire Maytas Properties was expected, and it could be the tip of an iceberg — at least on the issues of corporate governance. But now, even I am dumbfounded by the magnitude of culpability, and it makes the issues of corporate governance pale in comparison.

Questions also arise as to the role of the the auditors, particluarly PriceWaterhouseCoopers, and how such a magnitude of financial fraud could have gone unnoticed. Then again, there is the Madoff saga we are contending with here in the heart of the world’s financial center, and one could stipulate that India, in its nascent stages of mismanaged growth, has a long way to go for the free market forces to disentangle from the personal prejudices and greed of the people entrusted to safeguard shareholder and national interests.

Undoubtedly, intense focus will now be directed at the other Indian IT Services companies as well, at least by default. Both Wipro ((WIT), Hold) and Infosys ((INFY), Hold) have issued statements in attempts to contain the fallout, indicating that this debacle in specific only to Satyam and not the entire industry. That will hardly contain investor skepticism, at least in the near-term.

In the end, the Satyam debacle may also make its competitors bolder in terms of garnering market share created by its fallout, provided the indutsry can regain the trust of the same investors that Satyam has so deliberately deceived.

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