Recent corporate governance woes at Satyam have taken a turn for the worse. After the company's CEO Ramalinga Raju, resigned admitting to massive irregularities in the company accounts, the impact on Satyam has already been enormous and threatens its continued existence.

The Satyam Effect
The impact on the Satyam share price was immediate, with over 75% knocked off the value of the company bringing the BSE Sensex down over 4% in a chain reaction. Volumes of Satyam stock traded during the day were enormous as investors bailed. The Indian technology market had already been weakened by a tough 2008, and the badly dented broader market sentiment is sure to impact adversely most other Indian IT services providers. It will potentially even make a dent in the wider international market.

In the short and medium term the hugely deflated valuation of Satyam is likely to make it vulnerable to takeover. Even before the news of these corporate governance issues there was open market speculation that Satyam was either looking to bulk up through acquisition or that it would be at the core of a merger with rivals of similar scale. MindTree, HCL Technologies and Tech Mahindra have all been mentioned among the rumours although the reality of this gossip is currently impossible to gauge. Just like the Big Six in the UK became the Big Four, so the Indian SWITCH (Satyam, Wipro, Infosys, TCS, Cognizant, HCL) may become the WITCH.

Those who bought into Satyam stock on the day of Raju's resignation are likely to be hoping for a takeover bid that will drive up the price again. However, it also possible that Satyam might find itself broken into pieces and the pieces sold off separately. The expected fraud enquiry could delay the inevitable but it is equally likely that it will accelerate things, with criminal investigators and forensic accountants working together to establish the real financial position and working out what is in the best interests of the shareholders.

Corporate Governance Changes and Marketing
Given the events at Satyam, corporate governance will become top priority for most executives even though it was already on the agenda for many IT companies. As the credit crunch continues and price pressure on contracts is increasing, suppliers were turning to less tangible elements to differentiate their propositions. Corporate governance is probably now a taboo theme for marketing to play with. For instance Satyam was awarded the Golden Peacock award for corporate governance by the World Council for Corporate Governance three months ago, making a laughing stock of such accolades.

Corporate governance problems elsewhere, such as those at Enron, Worldcom, Global Crossing, Tyco, Polly Peck and Parmalat, have typically brought strengthened regulation and a tightening of the supervisory framework, resulting in legislation such as the Sarbanes-Oxley Act. Though the governance regime and associated legislative frameworks vary from country to country, in this case, the Indian government will re-examining its corporate government framework, and make changes to strengthen it or at least to ensure the existing frameworks are robustly implemented.

The scale of the corporate governance hole here is difficult to overestimate. From a cash and balance sheet perspective, Raju's letter to the board and the stock exchanges where Satyam is listed declared that the real cash and balance sheet was only 6% of the figure declared in September 2008. Margins were 3% rather than the 24% claimed, and revenues were 22% lower than the Rs. 27 billion that was declared. This is massive Enronesque in scale.