Is Infosys worth saving ?

Given its iconic status and place of pride in the collective mindsets of our generation, my answer is - "unequivocally yes". And if this be so, all future narrative must flow from this central paradigm.

But first an objective look at the core issues devoid of all the recent emotions would be necessary 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 full investigation report.

Valuations are 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 never an exact number : besides, tweaking the terminal value can swing valuations either way. The complexity increases manifold in young, high growth, 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, PE funded, unlisted, product/platform company and its terminal value considerations would have included large allocations towards a reduction in the "time to market factors" 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 ; be prepared to be wrong, sometimes monumentally so".

In this context, a valuation differential of upto 20% is par for the course. Panaya was valued at $ 200 mln whilst its last investment prior to the Infosys acquisition was at $ 160 mln. Its revenue multiple translated to 6x whilst the norm for similar acquisitions of SaaS companies during the 2015 tech bubble was between 6x and 10x. Thus, I personally find no apparent error in judgement though I can imagine those from a purely services background, accustomed to valuing large established companies, having a difficulty with understanding valuation metrics applicable to young, product companies. However, to assign motives, without any proof of wrong doing being placed in the public domain, 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 as I had warned against in my interview to BBC the day Sikka was hired.

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 disclosure in the public domain. However, given the profile of this case and the fact that Ritika Suri ( the M&A signatory) 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 epics for guidance. Arthashastra lays out the three principles which the Board may now wish to apply to guide its thinking : put the interest of the company above narrow partisan viewpoints and do what is "right" for the organisation ; mobilise a set of allies to intermediate and advise impartially ; ignore the distractions.

Firstly, the company’s interest is in remaining focussed on its path in implementing the strategy to reinvent the business model : it needs to ensure no further confrontation to distract its employees, investors, customers and 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 have the other four top IT services companies, 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 onslaught of four concurrent seismic shifts in the macro environment : and reinvent the business model whilst simultaneously cannibalizing the existing revenue streams to prepare the industry to remain relevant in the context of the massive disruptive forces facing it today.

Customer visits and town hall meetings are an absolute must by selected Board members to instill confidence needed to address business continuity risks, as will be the immediate need to assuage investors to preempt class action suits but which must be contested if reason fails.

Secondly, 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.

Thirdly, having shown enough magnanimity and professionalism to continuously placate Mr. Murthy, it is time they now apply the third principle of ignoring all distractions. I cannot recollect where ex- founders, with such a small shareholding ( it is even unclear if Mr. Murthy indeed represents all founders as Nandan Nilekani and others have wisely kept their counsel and have voted differently during ballots), have had such a disproportionate influence on the outcomes of a public spat. The Board must also realise that, given the reasoning in the earlier part of this article, Mr. Murthy is unlikely to garner broader shareholder support if he chooses to traverse that path as alluded to in his letter. Furthermore, NCLT petitions would be futile as this is not a fit case to plead “oppression and mismanagement”.

In the interest of the company he founded, and nurtured, Mr. Murthy must now reciprocate the civility of the Board in patiently engaging with him despite risking a governance breach relating to preferential shareholder access. He must display his famed wisdom and sagacity as a doyen of the industry 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 would be open to question but the "intent" of the team should be above debate : unless, of course, substantive proof of wrongdoing is disclosed in the public domain by the person making the allegation. As I have written in these columns in February 2017 there were instances where, despite the halo of good governance under Mr. Murthy's watch, one could debate the decisions taken - and which indeed was done in the media in the nineties - but no one questioned the team's intent. That is the courtesy he must now extend to the current Board constituted of equally eminent professionals led by Seshasayee and Ravi Venkatesan. They must be allowed to do their job they entrusted to by the shareholders who presently have the confidence that they can deliver given their stature, integrity and experience.

What actions the dramatis personae will take going forward will depend on how they choose to answer the primary question : Is Infosys worth saving ? And if they really believe that dignity, respect, elegance and decency are ultimately evident only in defeat.

The edited version appeared in The MINT dated Aug 21, 2017 as an Op-Ed article under Opinion> Expert View>Article

(PRABAL BASU ROY)

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.He is one of LinkedIn's Top Voices ; his views are frequently published in the national media on the intersection of current affairs, leadership and strategy with matters of finance, public policy, financial markets and corporate affairs.

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