Satyam in danger of losing clients: Analysts

Soon after the failed Maytas acquisition bid became public, the World Bank said that it had found Satyam ineligible for direct contracts with the Bank for a period of eight years, effective from last September, on grounds of bribery, fraud and business malpractice.

The World Bank's move triggered concerns among investors that other clients, including General Electric, Nestle, ArcelorMittal, Nissan Motor Co. and Qantas Airways, might follow the Bank's move.

Already, one such client, Applied Materials, which awarded a $200 million five-year contract last year to Satyam for managing the semiconductor firm's software application and maintenance work, has expressed concerns over the recent events and, though it is not exploring any immediate termination of the contract, is reportedly trying to restructure the agreement.

Global audit and tax advisory firm PricewaterhouseCoopers (PwC) is also planning to review its "continuance" with the beleaguered technology outsourcer. A source close to the development said PwC, which has been the statutory auditor for the software services firm for at least six years is seeking to re-evaluate its relationship with Satyam as the Maytas deal has cast a doubt on its corporate governance and increased its reputation risk.

Last month, UK-based mobile and online payments firm Upaid Systems Ltd., which is an old client of Satyam, also filed a motion in Texas district court, alleging that Satyam had devised a plan designed to deplete its assets and divert resources out of the company before a judgment is passed on its $1 billion lawsuit against the tech firm after the latter falsely leveled charges of fraud, forgery and breach of contract against its client.

According to brokerage Edelweiss, given the current scenario, Satyam's technology clients might cut back incremental business to the Indian outsourcer as a result of the controversy.

"In this environment, vendor credibility is also important, not just vendor capability," the brokerage said, adding that while the World Bank's decision is a blow to Satyam, it will not affect the credibility of other Indian outsourcers, as each outsourcing company is evaluated on its own merits.

According to Sabyasachi Satpathy, co-founder of Mindplex Consulting, Satyam's decision to use its cash reserves to buy unrelated businesses without any transparency did not bode well for its governance. "If the focus of the company is going to change, there will be a significant risk for the clients. While outsourcing the IT contracts to vendors, overseas clients take decisions based on the reliability of the vendors. The long-term sustainability of a service provider is a very critical factor for any client before they start engagement with them. This, of course, is the reason why a service provider is required to take their clients into confidence before making any strategic decision, which might deviate from their long-term goal," he said, adding it will take some time for Satyam to restore confidence both in the market as well as in its client base.

According to HDFC Securities, "Satyam has brought disrepute not only upon itself, but also on corporate India."

While 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, R.K. Gupta, managing director of Taurus Mutual Fund, said, "There is huge pressure on Satyam to improve its corporate governance norms."

"Following the World Bank's decision, Satyam's reputation for maintaining high standards of corporate governance and data security has taken a blow and it is doubtful whether it can continue to attract the business of Fortune 500 clients, governments and multilateral agencies such as the World Bank," an independent analyst said.

Shares of Satyam closed down 6 percent at Rs.166.90 at the Bombay Stock Exchange (BSE) on Monday.