India's Madoff? Satyam Scandal Rocks Outsourcing Industry

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• Raju's Letter to the Board
• Satyam Casts Grim Cloud on India Inc.
• The Satyam Scandal: India's Reaction

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Tip of the Iceberg

In India, the Raju family's non-IT activities had already been viewed with some suspicion, in particular a free emergency ambulance service Raju began in Hyderabad, where Satyam is based. Last year, public-interest activists filed a petition challenging the lack of transparency and arbitrariness in the award of ambulance-services contracts in 12 Indian states—all of which had been awarded to Raju's operation. In November the Supreme Court of India questioned the contracts and demanded an explanation, which could result in the contracts being canceled.

With Satyam's management focused elsewhere, business suffered. Clients complained about lack of attention, and many professional managers began to leave.

Angry Satyam investors' reaction to the botched acquisition led to talk of Satyam being a takeover target. A deal might have been interesting since, as Gartner's Chakraborti says, Satyam had been undergoing a "crisis of confidence, rather than a crisis of revenues." Before the shocking confession today from Raju, there was a long list of reported suitors for Satyam. They included HCL Technologies, Wipro, IBM (IBM), Hewlett-Packard (HPQ), Larsen & Toubro Infotech, Cognizant (CTSH), Cap Gemini (CAPP.PA), and even private equity players KKR and TPG. By Jan. 6, the Indian press added a new one—Tech Mahindra, a Pune-based software-services company focused on the telecom industry in which British Telecom (BT.L) has a 31% stake. Although most companies denied the rumors, on Jan. 6 an executive of a rival company told BusinessWeek that Satyam's value should be between $2.6 billion and $3 billion.

Competition Will Jump In

Now, just a day later, Satyam's value has plummeted. Tech Mahindra made a public statement that it would not be interested in acquiring Satyam "in the current environment." CLSA India valued the company, minus its debt, at $600 million. "What happens to Satyam now?" asked Mumbai-based research firm First Global in a note on Jan. 7. "With Satyam's operations failing to generate the required amount of cash, we believe that it will be impossible for the company to continue its operations." Satyam clients are likely to shift to other companies, First Global predicted, as Satyam's stock price continues to fall.

That leaves Ram Mynampati, the Satyam president whom Raju has appointed as interim chief executive, the difficult task of boosting morale. In a letter to Satyam's 53,000 employees, Mynampati reminded them that Satyam had top-notch clients and was acknowledged as one of the three best employers in India by both Hewitt (HEW) and Mercer (MERC), the international human resources firms. But "this quarter will be tumultuous for us," he said. "Rumors will abound and it would be fair to assume that competition will try and leverage it to their advantage."

The competition sure is trying. Already, Satyam customers are getting calls from other Indian IT providers offering their services. And life could get tough for Satyam's thousands of engineers and employees. Despite their valuable skills, IT companies are hiring fresh college grads over the more expensive, experienced hands. Still, with the IT business already suffering from the global downturn, a large competitor out of the way could mean more deals for Satyam's rivals—if they can overcome new doubts about the reliability of the country's IT industry.

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Kripalani is BusinessWeek's India bureau chief.