The new owner of Satyam Computer Services Ltd, Tech Mahindra Ltd, may have to consider cutting close to 10% of Satyam’s workforce which was inflated by the company’s founder to help mask false revenues, according to Satyam’s government-appointed chairman.
Separately, India’s Serious Fraud Investigation Office has found that Satyam, the company at the centre of an accounting scandal, faked both bank deposits and sales, according to a person familiar with the contents of a report produced by the agency.
The fraud, to which founder B. Ramalinga Raju confessed in January, was brought to the attention of independent Satyam directors by a whistleblower who is a former senior executive at the company, this person said.
Kiran Karnik, who has headed the board since the government intervened in the Satyam scandal in early January, said in an interview that the company’s work force is too large for the amount of work it is doing. He said that B. Ramalinga Raju, the Satyam founder who confessed to inflating revenues by more than $1 billion, had hired more employees than needed as part of his effort to hide the fraud.
At technology companies, the revenue per employee ratio is closely watched by investors and analysts. If the falsely-inflated revenue wasn’t matched by an increased number of employees and a revenue per employee ration roughly in line with other tech companies, it might have aroused suspicion.
As a result, Satyam’s profit margins are well below the industry average as its workforce is too large for the amount of actual revenue it is bringing in, Karnik said. “Without a doubt the profit margin is far lower than what it should be for a company of Satyam’s size and stature,” Karnik said.
Satyam has already cut its total work force from more than 51,000 to 48,000 since the scandal broke. They are educated and qualified through a rigorous in-house training. But Tech Mahindra will have to decide whether they want to keep everyone and expand the business or slash the 4,000 to 5,000 “extra” employees that are still at Satyam, Karnik said.
“Decisions about the whole aspect of cost particularly with regard to people,” is one of the first things Tech Mahindra will have to grapple with, Karnik said. “The bench strength is far more than what it would normally be for a company like this.”
Tech Mahindra has other options, though. If it wants to lift profit margins, it could also get a similar amount of savings by cutting everyone’s salary by 10%, said Karnik.
Tech Mahindra declined comment.
Karnik would not comment on the precise level of profit margins since Satyam is still going through its books for the last five years. Analysts estimate that after the fake revenues were taken out of Satyam’s earnings, it had a profit margin of only 3% in an industry that often sees margins closer to 20%.
Tech Mahindra outbid W.L. Ross and Co., the US private-equity firm headed by billionaire investor Wilbur Ross, and Larsen and Toubro Ltd, an engineering and construction conglomerate, to win a 31% stake in Satyam valued at $351 million earlier this week. It will purchase an additional 20% soon at the same price per share. Its bid valued the company at about $1.1 billion.
Satyam’s new board, with six government-appointed members and four from Tech Mahindra, will meet on Monday and Tuesday, Karnik said. They will discuss case against Satyam brought by investors in US courts and the internal investigation into the fraud. They also will start building a plan to hand over control of the company to Tech Mahindra, Karnik said.
email@example.com Jackie Range in New Delhi contributed to this story.