Gadget maker SanDisk (NSDQ: SNDK) is warning investors that the trouble at scandal-plagued outsourcer Satyam has put its business operations at risk.
SanDisk outsourced a number of critical IT projects to Satyam, but now some of those projects are in trouble following Satyam's admission that its chairman falsified profits and other financial information as part of a scam that's been dubbed India's Enron.
Among other things, SanDisk's plan to implement a new enterprise resource planning system this year is in jeopardy.
"The design and implementation of the new ERP system could also take longer than anticipated and put further strain on our ability to run our business on the older, existing ERP system," SanDisk warned in a document filed last week with the Securities and Exchange Commission that I happened across.
"Our current system integrator, Satyam Computer Services Ltd., is experiencing financial difficulty which has resulted in some project delays and loss of productivity," SanDisk stated.
"If the system integrator were to lose key personnel, declare bankruptcy or otherwise be unable to perform at the level we expect, we would have to engage a new integrator, which would likely result in significant delays in our implementation and additional cost," SanDisk continued.
"Any design flaws or delays in the new ERP system or any distraction of our workforce from competing business requirements could harm our business or results of operations," according to SanDisk, indicating that the stakes are pretty high.
On Jan. 7, Satyam chairman Ramalinga Raju admitted falsifying the company's cash position by as much as $1 billion while overstating quarterly earnings and revenue by up to 28%. Satyam may also have faked employee numbers and other data. Raju tendered his resignation and has since been arrested and jailed.
Some customers have fled Satyam in light of the scandal. India's Economic Times reported that U.S. heavy equipment manufacturer Caterpillar may terminate its deal. Insurer State Farm has said it would seek an end to its outsourcing contract with the company.
Satyam is now facing lawsuits from shareholders who claim they were misled about the company's financial situation. For their part, SanDisk investors might be wondering how much due diligence the manufacturer performed on Satyam before inking an outsourcing deal that has now come back to bite it.
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