As scandal rocks Satyam, rivals may pick off clients

NEW DELHI Thu Jan 8, 2009 3:13pm GMT

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NEW DELHI (Reuters) - A $1 billion fraud at Satyam Computer Services may have put the Indian outsourcing firm's future in doubt, but could be a boost in troubled times for local and global rivals if they can lure away worried clients.

Satyam founder and chairman Ramalinga Raju quit on Wednesday after disclosing that profits had been overstated for years, raising questions about the survival of India's fourth-largest software services exporter.

"Satyam is way too risky a deal. Clients will walk. Key employees will walk," analysts at broker First Global wrote.

Local rivals Tata Consultancy Services (TCS) and Infosys Technologies are among those who could pick up defecting Satyam clients.

Among foreign vendors, Accenture and Cognizant, which have large offshore centers and already serve Satyam clients such as Kimberly-Clark and Telstra, would also benefit, analysts said.

Satyam, which specializes in business software and offers back-office outsourcing and consulting, counts General Electric, Nestle, Qantas and Fujitsu among its major customers.

"At this stage, Qantas assesses any risks to business as manageable," the Australian airline said, adding it would monitor the situation daily.

Satyam has appointed an interim CEO and a team to help him run the company, and a senior company official told Reuters that customers were being told it was "business as usual."

"This is a 'must' for Satyam, but not enough to restore customer confidence," said Avinash Vashistha, chief executive at consultancy Tholons. "Such an incident will definitely erode customers over a period of time.

PLAN B?

Satyam rose to prominence in the late 1990s as Western firms looked to cut labor costs by outsourcing operations. Its fall has been swift, starting in mid-December with a failed bid to take over two firms connected to its founders -- which Raju said was a final attempt to replace fictitious assets with real ones.

Raju revealed that about $1 billion of the cash and bank balances reported on Sept 30 did not exist and the firm's operating margin was 3 percent in July-September rather the 24 percent reported, leaving investors wondering about the company's real financial position and if anything else had been concealed.

John McCarthy, analyst with Forrester Research in the United States, spent much of Wednesday talking to IT managers at firms that deal with Satyam. He advised them to be prepared for a worst-case scenario, which would be that the IT outsourcing vendor is unable to meet its payroll.

"Nothing is going to change in the next two weeks, but I think clients, especially the big-spending ones, need to start looking at 'What are my options? What is my back-up plan?' until Satyam's financial position is clear," he said.

Gartner analyst Fran Karamouzis said it was unlikely Satyam could win new business as potential clients worry about its finances, but existing clients could stay as it is tough to switch ongoing projects.

The fraud has sent shockwaves through India's $50 billion export-driven IT industry, but McCarthy said he was not advising clients to pull business with other Indian outsourcers.

"The song says 'One bad apple don't spoil the whole bunch."

UBS analysts said TCS and Infosys, which have "meaningful" relationships with some of Satyam's clients, could gain the most.

Until Raju's bombshell, Satyam was seen as an attractive takeover target given its strong cash positions, with media reports speculating global majors Capgemini and IBM were potential suitors.

Local firms Tech Mahindra and HCL Technologies were also said to be looking at merging with Satyam.

Now, analysts question who would buy it, even at a rock-bottom price, given that the full extent of the accounting scandal may be unknown and the company could face huge lawsuits.

"A takeover looks unlikely in our view," UBS analysts said.

Tholons' Vashistha said the government could step in and bolster the sector by pushing for a merger.

"I guess the government needs to do something for them, maybe a Bear Stearns-style approach ... I feel they should merge it with some established firm like TCS or L&T Infotech," he said, referring to the software unit of engineering firm Larsen & Toubro.

(Additional reporting by Jim Finkle in BOSTON)

(Editing by Kim Coghill)

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