Satyam Customers Mull Exit Strategies

Increasingly nervous Satyam customers are looking for alternatives in case the scandal-scarred outsourcer is unable to restore internal stability or find a buyer with pockets deep enough to see the Indian company through its current crisis.

The latest Satyam customer to eye alternatives is Selective Insurance Group Inc., the 47th largest property and casualty insurer in the United States. SIGI has outsourced about a quarter of its IT staffing requirements to Satyam, but it may be looking for other arrangements in light of Satyam's woes.

"We believe we would be able to manage an efficient transition to a new vendor and not experience a significant negative impact to our operations in the event that we no longer retain Satyam in their current capacity due to the financial issues they are currently experiencing," SIGI said in papers filed Feb. 27 with the Securities and Exchange Commission.

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. He's now in the custody of India's version of the U.S. Federal Bureau of Investigation.

Other Satyam officers, and two employees of PricewaterhouseCoopers India, have also been detained in connection with the case.

SIGI is but the latest in a growing list of Satyam customers that may head for the exit.

Gadget maker SanDisk recently warned investors that Satyam's troubles have put its business operations at risk. SanDisk outsourced a number of critical IT projects to Satyam, including the build out of a company-wide ERP system. Some of those projects are in trouble. "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 in an SEC filing.

India's Economic Times has reported that U.S. heavy equipment manufacturer Caterpillar may terminate its deal with Satyam. Insurer State Farm has said it would seek an end to its outsourcing contract with the company.

Satyam this week began taking bids in an effort to secure new ownership in the hope of distancing itself from the scandal. After receiving regulatory permission on Friday to launch the auction, Satyam's board is looking for an investor that will take a 51% majority stake in the firm.

Some interested parties have already emerged. Indian construction and engineering company Larsen & Toubro has informed Satyam's board of its intention to bid, an L&T spokesman told The Times Of India. Other reports suggest that IBM may be interested in tendering an offer, given its already strong presence in India. IBM typically doesn't comment on such speculation.

Adding to its problems, Satyam is now facing lawsuits from shareholders who claim they were misled about the company's financial situation.