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Image via Wikipedia01/07/09 - Update. MSN Market Dispatches adds to the story this morning by dropping this bomb on the news.

The chairman of India’s Satyam Computer Services (SAY, news, msgs) resigned this morning after he admitted to inflating revenue and profit for a number of quarters. Shares of the stock tanked 71%, to $2.70, on the news. After India’s Sensex 30 Index closed, the stock fell an additional 20%. The Sensex fell 7.3% in trading today. ADR shares of Satyam (which is Sanskrit for “truth”) have not opened in the U.S. for trading. Chairman B. Ramalinga Raju, who founded the fourth-biggest software company in India, said he is “now prepared to subject (himself) to the laws of the land and face consequences” in a letter to the company’s board. Source: MSN Market Dispatch

Satyam Computers, India’s fourth largest computer software company is looking at major layoffs amongst employee demoralization after news has hit that upwards of 4500 employees could be laid off.

The story centers around the idea that the owners of the company, management, went on a capital intensive buy in companies that were also partly owned by said same board members. Seeking Alpha states:

SAY shares sold off 55% on the news due to deep concerns: depletion of Satyam cash ($1.0 billion or $2.95 per ADS as of September) to acquire entities that are ~35%-owned by the Chairman’s immediate family – without a shareholder vote; abrupt entry into an unrelated, capital intensive business during a challenging time (Maytas Infra shares have dropped 47% in 2008); implicit lack of growth opportunities within the IT services business; and negative financial implications, i.e., near-term EPS dilution and longer-term P/E erosion. After the close, in deference to shareholder feedback, Satyam reversed its decision. Source: Seeking Alpha

The idea of purchasing out properties and entities that were semi-owned by the board of Satyam has caused a major slump in the price per share, along with the latest formal review has employees wondering what is going to happen next. While Satyam management says that the 4500 (in total) employees to be laid off are the bottom 5% of the company, with some on Performance Improvement Plans, the real issue is the corporate governance problem that has crashed the stock, and put at risk many people’s jobs.

The blow back has hit other Indian IT Outsourcing stocks, and completely cleaned out the cash that Satyam has on hand. This will make weathering the downturn (not expected to turn around until at least Midyear 2009) much harder for the company. Right now it is also looking like a target, as they have also been put on hold by World Bank and ineligible to work for them until 2016 (at end of contract in 2007). In all the Indian IT services are in for a rough year, as this will send equal ripples through the community that have been seen every time there is another case of corporate management doing unusual deals.

Tags: Satyam, india, outsource, layoffs, fired, hired, interesting