Is Infosys worth saving?
Given Infosys's iconic status and place of pride in the collective consciousness of our generation, my answer is an unequivocal yes. All future narratives must flow from this central paradigm.
First, an objective look at the core issues devoid of all the emotions of the past few months to analyse why we got here in the first place. Bereft of the high decibel noise there are three issues of divergence: The Panaya acquisition; Sikka’s personal expenses on security, travel, etc; public disclosure of the investigation report on the whistle blowers allegations.
Valuation is always a matter of conjecture as any investment banker will testify. This is primarily because valuation is an art, and not a science, and there is no exact number: besides, tweaking the terminal value can swing valuations either way. The complexity increases manifold in young, high-growth and unlisted companies due to limited histories, inadequate cash flows and operating losses. In most cases grant of options to early stage investors affect later investors. Panaya was a young, high growth, private equity funded, unlisted, product/platform company and its terminal value considerations would have included large allocations towards a reduction in the “time to market considerations” for the acquirer. My professors in London Business School, all globally recognised experts, instilled in us the basic paradigm of the valuation game : “Be prepared to make estimates, lots of them, and to be uncertain about each and every one of them; and be prepared to be wrong, sometimes monumentally so”.
In this context, a valuation differential of 20-25% is par for the course . Panaya was valued at $200 million and its last investment prior to the Infosys acquisition was at $160 million. Its revenue multiple was at 6x whilst the norm for acquisition of similar SaaS (software as a service) companies during the 2015 tech bubble was between 6x and 10x. Thus, I personally find no error in judgement in this acquisition though I can imagine those from a purely services background may—accustomed as they are to valuing large established companies and having a difficulty with understanding valuation metrics applicable to young, product companies. However, to assign motives, without any proof of wrong doing, and pushing the company to the brink is a course of action which will find few supporters.
The second issue, with respect to Sikka’s personal expenses is best ignored. Cultural mismatches (international professionals vs austere Brahmanical entrepreneurs) are not governance failures and imposing one set of values over the other is not sustainable. In any case, cultural differences should have been obvious during the hiring process.
On the third issue, the board cannot be divested of its prerogative to appoint agencies, decide the scope of the investigation and the extent of releasing the report in the public domain. However, given the profile of this case and the fact that Ritika Suri ( the M&A signatory to the deal) has also resigned, it may consider clarifying the specific question whether persons related to the management were involved in the deal evaluation and had investments in Panaya, thus potentially compromising the independence necessary to sign off such acquisitions.
In intricate, emotive and non trivial situations such as this I rely on the Arthashastra for guidance. The principles which the board may now wish to apply to guide its thinking are threefold: put the interest of the company above narrow partisan viewpoints and do what is “right” for the company; align a set of allies to intermediate and advise impartially; and ignore the distractions.
The company must remain focussed on its path to implement the strategy to reinvent the business model: it needs to ensure no further confrontation to distract its employees, investors, customers and indeed prospective talent required for the transformation.
The hiring process for a new CEO would be a difficult one but the board must not succumb to the quick fix of a convenient internal candidate without the skill set necessary for this phase of strategic transformation. Media has wildly speculated on internal operating managers to fill the void and Infosys must not make this precise mistake as the other 4 top IT services companies in this regard where the entire leadership (excluding Cognizant ) is largely devoid of the necessary skill sets needed to navigate the disruptive challenges facing the industry. Erstwhile CFOs, accountants and operating managers cannot be expected to have the combination of core technological perspective and strategic capabilities necessary to combat the current onslaught of concurrent seismic shifts in the macro environment. The new CEO has to reinvent the business model whilst simultaneously cannibalizing the existing revenue streams.
Also read: No one wins in the Infosys saga
Customer visits and town hall meetings are an absolute must to instill confidence. There is also an immediate need to assuage investors. Class action suits must be pre-empted by opening a suitable conversation but must be contested if reason fails.
The board may wish to assemble a set of allies to intermediate, and act as a bridge with various stakeholders, advise impartially and handle the media.
Finally, it is time for the board to ignore all distractions. I cannot recollect where ex-founders, with such a small consolidated shareholding (it is unclear if Narayana Murthy represents all founders, as Nandan Nilekani and others have wisely kept their counsel and indeed voted differently during ballots), have had such a disproportionate influence on the outcomes of a public spat.
In the interest of the company he founded, and nurtured, Murthy must now reciprocate the civility of the board in patiently engaging with him over the past year. He must display his famed wisdom and sagacity as a doyen of the industry which is commensurate with his carefully crafted image of a leader. Leadership, after all, is about not allowing differences to become intractable disputes as has happened so far in this case. He must appreciate that whilst running a company some decisions will be open to question but the “intent” of the team should not be debated : unless, of course, there is substantive proof of wrong doing.
As I have previously written there have been instances where, despite the halo of good governance under Murthy’s watch, one could debate the decisions taken; but no one questioned the team’s intent. That is the courtesy he must now extend to the current board which has equally highly respected professionals led by R. Seshasayee and Ravi Venkatesan.
What actions the dramatis personae will take going forward will depend on how they choose to answer the primary question: Is Infosys worth saving?
Prabal Basu Roy is a Sloan Fellow from the London Business School and a Chartered Accountant: the writer presently manages a PE fund, advises start ups and has formerly been a Director and Group CFO in various companies.
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