Yes and No!
Recap: B. Ramalingam (Ramalinga) Raju and Rama Raju the entrepreneurs behind India’s No. 4 company Hyderabad based Satyam Computer Services, a Global IT giant (No. 1, 2 and 3 are Infosys, TCS, and Wipro) have announced that they have been fudging their books. B. Ramaligam Raju was the Chairman of Satyam Computer Services, and Rama Raju (his brother) was the Managing Director. So, I present a simple analysis on how it would affect various relationships like company-shareholders, share markets, balance sheet figures/ analysis, public-private companies, foreign investors, mergers, employees, clients, lenders and finally Satyam itself. So off we go…
Will it affect the share market?
Satyam was listed in BSE, NSE, and NASDAQ, so surely, the score of armchair entrepreneurs who rely on the books to place their bets would surely be affected. Since books are their only means to analyze a company. However, it is the share market, which affects such companies and not the vice versa. So, accept for the share price of Satyam this should not affect the share market. Thumbs Up.
Does this mean that we can’t rely on the balance sheet figures any more?
Well, book building is not as new a phenomenon as newspapers would have us believe. It has always been the public company’s bane that it never reflects it’s true worth on paper. No public company will show an accurate account of what it’s worth. It is like a movie heroine who would always present a larger than life figure. Since, we do not complain about a movie heroine till she’s caught in her own web, similarly we would only criticize the company which over hinges or over leverages its worth. Usually, these company’s skeletons tumble out after persistent market downturns. So in no way are such company’s responsible for the downturns. So go on and rely on the balance sheets, but watch out for companies that regularly and consistently over perform, without having any special USP/ innovative products to justify the same. Thumbs Up.
Do all companies cook their balance sheet to upscale their achievements?
Sad, but true for all public companies. Same as the reverse is true for all private companies (unless they plan to go public sometime in future). Thumbs Down.
Would this affect Indian software industry?
Well employee morale surely goes down and this would reflect in their work. The competitors’ employees’ salaries also would get squeezed because of (a) excess manpower availability and (b) perception that the company’s margins are lower that what is shown. Finally, the IT profession, currently highly valued by public would go lower are some other careers come back in reckoning (is the marriage market listening?). Thumbs Down.
Well from the investor POV (point-of-view) surely it would mean a temporary slowdown on Buying and Mergers. However, anyway, investors scrutinize such companies very thoroughly and would usually spot the fudging. Neutral.
From Client/ customer’s POV, it should not affect since the company did not shortchange it’s customers. However, some large project customers may be cautious about the continuity of the company. However, since a company is an Entity on it’s own. Hence it should survive this. Thumbs Up.
It indeed is a troublesome thought that the company seems to be totally bankrupt. Which would mean, that it could get cash strapped enough, to be unable to pay the salaries in the short term. But if it manages this phase it can pull back, since it is not a product or a core-industry company but a services company. And services companies don’t have any heavy incubation periods. Or in other words there is no product life cycle it can get caught in. However, because of the same reasons the margins are usually low, since their assets keep getting revalued at current prices (salaries keep getting revised to suck any extra profits). Some people may disagree with this – but the truth is that if the salaries of the staff are not revised the top-management revises theirs, so rarely would you find extra cash with such companies. Thumbs Down.