Satyam: A Shameful End

Excerpted from Gilford Securities analyst Ashish R. Thadhani's recent report to clients on Satyam Computer Services (SAY):

• • •

Based on the shocking confession of fraud by former Chairman Ramalinga Raju, we are downgrading our rating to Sell from Buy, suspending our target price and withdrawing our estimates.

In a chilling letter to the Satyam board, Mr. Raju (53) disclosed an essentially nonexistent cash balance plus inflated operating results over several years, and admitted that the aborted Maytas deal was a final attempt to exchange fictitious assets with real ones. He also revealed that insider shares had been pledged for the purpose of raising funds to sustain operations.

No board member had any knowledge of this situation, nor did a vast majority of senior executives (listed by name in the letter).

PricewaterhouseCoopers is the company’s independent auditor. Fallout is likely to be widespread: ~50K employees, 180+ Fortune/Global-500 clients, international investors and peer companies.

Satyam shares plunged 78% and took down the entire Indian market (-7.3%). We are continuing to monitor developments.

I, Ashish Thadhani, certify that all the views expressed in this research report accurately reflect my personal views of the subject companies. I certify that I have not and will not receive compensation with respect to the issuance of this report.

Comments

[dw57:]

so what happens to the customers? are they now going to scramble to fix their problems?

Jan 07 10:43 AM

[dw57:]

or maybe they deserve what they get?

Jan 07 10:46 AM

[Chris B:]

What, no comments about how Sarbanes-Oxley is such a burden to the US economy and how industry, with the help of auditors, can self-regulate?

Jan 07 11:46 AM

[anyer:]

A real black eye for the Indian IT industry. PwC has a lot of questions to answer. The world will now see how the Indian regulators are able to handle this crisis. The world is watching. The future of other Indian IT majors may also be riding on the outcome of this.

Note to other IT majors - start your PR engines. It's time to go out and fight to win the hearts and minds of the global business community by reassuring them of your corporate governance.

Jan 07 04:08 PM

[Sekar:]

Ramalinga Raju was spinning cotton in 1992 when I owned Satyam Spinning Mills shares. Raju's crude luck brought him into IT area without any strong foundation. Raju leapfrogged TCS and Wipro (by the way was selling Hair oil and assemblying PCs) in 10 years using dubious practises. H1B Visa system was completely abused by Satyam using political connections in US and India. All the glitzy office complexes in Secunderabad are just empty coffins of greed. I hope Satyam's downfall will expose more skeletons with India's outsourcing madness.

Jan 07 06:16 PM

[E Nuff Sed:]

I can't believe PWC did not even verify the cash on hand. What are these guys guys collecting auding fees for? Seems to be prima facie case of incompetence and negligence.

I hope they get sued for every dime by the investors.

Jan 07 08:15 PM

[dw57:]

i am guessing PWC did the audits per the Indian rules. what you were expecting them to use US rules for some strange reason?

Jan 07 08:47 PM

[David Tsao:]

Instead of watching the Indian IT Majors, watch what Satyam's global customers will be doing. If they start to move, other clients from WiPro to Infosys will want assurances that they're doing business with a company that has solid governance. IBM Global Services may want to seize this opportunity to take market share.

PWC isn't looking good here.

Jan 07 10:50 PM

[Jayant:]

In our great nation a petty thief who steals small things more out of compulsion (to be able to eat 2 meals a day ) than out of greed for wealth is beaten to death by the society and the law enforcing agencies. As compared to the crime committed by a petty thief, the frauds committed by the corporate fraudsters are huge in proportion and have a big potential to harm the health of nation's whole economy. Therefore should not the coprorate fraudsters like Satyam's Chairman be given the most stringent punishment of the land so that no one in future will have courage to inflict on the economy, damage of such big proportions ?

Jan 08 06:54 AM

[Zyx007:]

PWC seem to deserve a fate similar to Arthur Andersen. Completely clueless and clearly incompetent. RIP

Jan 08 08:35 AM

[captainjohann:]

This Raju has notonly done harm to his company but also to his COUNTRY. Police in Bihar drag a petty cycle thief tied to their bike for stealing a cycle.This guy should be dragged like that. I am sure he has used or bribed very high in the RBI, Finance Ministry of India , Company law board of India even SEBI. He has openly admitted the guilt because after swallowing 7600 crores($2 Billion) of money he can bribe his way out of anybody and also get a comfortable stay in Indian criminal justice system with may be black cat commandoes guarding him!!
PWC has shown itself as an inefficient auditor and also an auditor who can be bribed.
Intelligent investors must ask tough questions to Government of India and also the auditors.

Jan 09 12:14 AM