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Satyam (SAY)
Can Satyam Survive?
Satyam, an Indian company that derives its name from the Sanskrit translation of the word 'truth', admitted to fraudulent financial accounting and made headlines everywhere in the business world today. In a letter to Satyam's board of directors, Chairman Mr. Ramalinga Raju, stated he had been cooking the books for a few years now. This incident gives rise to one inevitable question: can Satyam survive?
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The accounting fraud has been occurring for a few years now. The most recent fraud came from the three month period ending on September 30 where Satyam's revenues were changed from 21.2 billion rupees to 27 billion rupees. This made operating profit 6.49 billion rupees instead of 610 million rupees. Mr. Raju stated that the fraud was done without the board of directors' knowledge. He also said that the most recent attempt to cover this fraud was when the company unsuccessfully tried to merge with two construction firms that co-founders Mr. Raju and B. Rama Raju had a stake in. According to the letter, a merger would have bridged the gap between the fictitious assets and real assets. However, all attempts to merge failed due to public disapproval of Satyam acquiring assets that the co-founders had ownership stakes in.
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Regarding Satyam's business, it provides outsourcing services to 690 companies including 185 Fortune 500 companies. Some companies like Nissan (NSAN.Y: Charts, News, Offers) have stated they have no plans to end their business relationships. Other companies have been less public about their intentions. Some of them are probably, as we speak, trying to decide whether to continue doing business with the outsourcing giant. Best case scenario for Satyam is for the majority of its clients to stay. However, instead of trying to worry about the possible ramifications of staying with Satyam, many businesses will end their relationship. So what should Satyam do to try and keep clients? Find out which clients are the most important ones and focus on convincing them to stay. One important client leaving will mean other clients will follow suit. Satyam probably won't be able to convince all of their clients to stay, but a few important clients staying might persuade others to stay.
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The companies that jettison Satyam can decide to establish their own back-office divisions or take their business to a competitor. In a time when companies are cutting costs, expenses associated with creating new back-office divisions seems unjustifiable. The more reasonable alternative is for companies to seek services from Satyam's competitors like Infosys (INFY: Charts, News, Offers) and Wipro (WIT: Charts, News, Offers). Assuming Satyam is unable to maintain their existing client-base, Mr. Raja's letter suggests the company sell itself to another company to stay afloat. Some analysts have suggested companies like Hewlett-Packard (HPQ: Charts, News, Offers) or IBM (IBM: Charts, News, Offers), or even another Indian competitor like HLL Technologies as potentially good matches.
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What decisions are ultimately made need to be made quickly. The company is heading towards being history. As more details come up with regard to the company's accounting records, different alternatives can be considered. Will this company rise to the occasion? With the magnitude of this company's accounting fraud, only time will tell.
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