Satyam's credibility in line of fire

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BANGALORE/NEW DELHI: Concerns surrounding corporate governance and the decision-making capabilities of the management of Satyam Computer Services could adversely affect the way the company is viewed by potential customers such as Australian phone firm Telstra and existing clients such as Applied Material, IT industry insiders and analysts say. While customers look at the consulting and technical capabilities of a vendor, any ambiguity around management and corporate governance will send the wrong signals, especially when an outsourcing decision is being taken, an expert familiar with outsourcing decisions at Telstra and several other customers said, requesting anonymity. India’s fourth largest software exporter faced a backlash from financial investors after it announced a decision to buy companies run by the sons of Satyam founder-chairman Ramalinga Raju for $1.6 billion. Within a few hours, a chastened Satyam called the deal off. Satyam, which ironically won Golden Peacock Award for corporate governance this year, might have some explaining to do while bidding for large deals worth $50-$100 million. Existing customers such as Applied Material, which awarded a $200-million contract to Satyam last year, are also concerned. “In fact, Applied Material earlier thought Satyam was acquiring an IT infrastructure company. After they got the true picture, they are concerned,” said a person familiar with decision-making at Applied Material. The company itself could not be reached for comment on Wednesday. A Satyam spokesperson did not reply to an email query by ET. Many large customers, including US conglomerate GE, are expected to review and plan their IT budgets over the next two months, and several others will be looking to renegotiate their existing contracts. “We fear collateral damage as Satyam defends its customer base from predatory attacks from competition, and perhaps pricing will get even weaker,” said Bhavtosh Vajpayee of CLSA. While any ambiguity will send the wrong signals to potential customers and existing clients of Satyam, there are concerns that the rest of the Indian IT industry may be tarnished with the same brush. “When a company such as Satyam attempts to do something like this, it also raises questions about the industry as a whole in the minds of customers,” said Sabyasachi Satyaprasad, founder of outsourcing advisory firm Mindplex. “Customers planning to reduce the number of vendors they work with will also think twice before retaining Satyam,” he added. A Mumbai-based investment banker said the knee-jerk reaction demonstrates that Satyam is losing interest in the IT business. “Why will any client give its IT contract to Satyam? At a point when growth is the single most challenge, the move sends a wrong signal to the market.’’ Analysts such as James Friedman of Susquehanna Financial Group, described the developments as “reckless behavior with regard to corporate governance and cash balance usage for other considerations while its (Satyam’s) peers instead are contemplating and/or pursuing share repurchases.” In a note on Wednesday, Mr Friedman observed that that it will be a hard grind to restore management credibility at the company, “but we believe a share repurchase would go a long way.” Anil Advani, research head at SBICAP Securities, said that customers might reconsider their decisions fearing a possible takeover of the company and a potential management change. Meanwhile, industry veterans such as Raman Roy, who helped outsourcers such as GE establish their IT offshoring programs in India, said the impact might not be severe for Satyam. “Corporate governance is a hygiene issue, which is significant in cases where the relationship is strategic and larger than a simple client-vendor relationship. In a normal vendor-client relationship, the impact will be less significant,” said Mr Roy, who is now the managing director of Quatrro BPO Solutions. (With inputs from Shelly Singh in Delhi)