Cash is King for Satyam

As the CFO of Satyam Computer Services Ltd. submitted his resignation in India's ballooning accounting-fraud scandal, remaining senior managers of the global outsourcing giant focused on explaining the internal challenges. Meanwhile, a stunning list of U.S., European, and other companies — and their investors — scrambled to assess their exposure.

 

Considering that Satyam has admitted to a Rs.5K crores fraud on their balance sheet. If you do the numbers, that tells you they have somewhere around — best case — Rs.300crores in cash, and no ability to raise further cash. To make matters worse, Citibank has frozen their receivable bank accounts to protect their working capital loans given to Satyam.

 

 No one will lend them money in their current circumstance. They have little or no hope of raising capital under their current ownership structure, unless they are rescued by a potential buyer.

 

Lack of cash is a serious concern, especially if you have a BPO contract with Satyam that requires it to spend capital up-front. Some of the contracts call for the construction of a new service facility, for example, or for adding technology, or reengineering processes. Reengineering business processes is a very expensive and complicated activity that can suck up a lot of cash before it starts generating cash. For customers of Satyam who have deals that require Satyam to spend cash, those contracts are potentially in very dire straits. And of course, contracts that depend on key people are, too.

For Satyam's part, its internal review is "focusing on our liquidity position," interim CEO Mynampati said in his webcast, conceding that the position "is not very encouraging at this point." The company has paid salaries for the month of December, and has paid its first installment of U.S. payroll.

"We are looking at the balance sheet and verifying the figures, including our receivables," he said. "Making an assessment of the steps to take to maintain liquidity in order to pay suppliers and [employees.] In order to deal with business continuity, we haveto have a healthy receivalbes position. We will put effort into ensuring that they are collected."

As for Satyam's clients, in addition to the cash worries they must also be concerned that their outsourcing partner is now essentially rudderless.  Customers may feel as there is no credibility left in the management, they wont know whom to contact in Satyam to make decisions.

That suggests, of course, that Satyam's customers must make a decision to move on — now. "If you are a customer and you are materially dependent on them, you have to take prompt action. Compared to likes of IBM or EDS, Satyam does not have mega deals, but they could be looking after critical systems for companies.

With perhaps two-thirds of Satyam's contracts being worth under Rs.5 crores, an exodus of clients might be handled by remaining players in the market. But the real challenge, is how do clients deal with Satyam especially when their projects are half way through and they are in a hostage situation.

There is one clear conclusion, if the internal management team needs to get Satyam back on it feet, they will need a lot of cash to keep the operations running and retaining key talent.

Cash is Satyam's king