Infosys to sell Panaya: Narayana Murthy's stand is vindicated; not everything was clear about the 2015 deal

On Friday, while announcing its results for the quarter ended 31 March, 2018, IT services major Infosys said it will sell Panaya, the Israeli automation subsidiary it acquired during former CEO Vishal Sikka’s tenure. The 2015 Panaya deal was the tipping point for former Infosys chief Vishal Sikka, handpicked by co-founder Narayana Murthy for the top job. The allegations leveled against Sikka and the Board back then was that Infosys overvalued Panaya. Furthermore, Murthy, a shareholder, also questioned the hefty severance package handed out to former CFO Rajiv Bansal.

In a filing to the BSE on Friday, India’s second-largest software services exporter said, "In the quarter ended March 31, 2018, on conclusion of a strategic review of its portfolio of businesses, the company initiated identification and evaluation of potential buyers for its subsidiaries, Kallidus and Skava (together referred to as "Skava”) and Panaya (collectively referred to as the “disposal group”)."

Infosys putting Panaya up for sale is vindication of what Murthy said about the deal, Manoj Kumar, Founder – Hammurabi & Solomon, and a Visiting Fellow at the Observer Research Foundation, told Firstpost.

The Infosys Board had, during Sikka's tenure, instituted a forensic audit of the issues raised, but found no wrongdoing on the part of any of the company's executives. However, the company did not make the entire audit report public - a summary of the findings was published. "Now, Infosys is not in any financial crisis to sell Panaya and therefore investors have every right to know the rationale behind the decision to offload Panaya", Kumar said.

“Investigations were done internally and if nothing was found wrong with the deal, why is Panaya being sold,” asked Kumar, adding that there seems to be a contradiction in what the Board said during Sikka’s tenure and what Board members are implying by putting Panaya on the block. “The company stands exposed,” Kumar said.

 Infosys to sell Panaya: Narayana Murthys stand is vindicated; not everything was clear about the 2015 deal

N R Narayana Murthy (left), co-founder, Infosys and Vishal Sikka, former CEO & MD

The Panaya deal became controversial following two anonymous letters, in February 2017, that alleged wrongdoing in some of Infosys' acquisitions, including Panaya. The letters also raised issues such as improper contracting, CEO compensation, as well as expenditure. Post the allegations, the company instituted an independent forensic investigation by US law firm Gibson Dunn & Crutcher.

On the acquisition, Gibson Dunn & Crutcher had said that it did not find any evidence of "inappropriate contracting" or that the mergers and acquisitions team had failed to obtain appropriate approvals. "Gibson Dunn, and Control Risks have now completed their detailed and extensive Independent Investigation and as they have described in the attached document, they did not find any evidence whatsoever of wrongdoing," Infosys had said in a statement. Control Risks, a consultancy, was hired to probe the whistle-blower's complaint.

Gibson Dunn & Crutcher, in its report, stated that it had found no evidence to support allegations regarding wrongdoing by the company or its directors and employees. It added that there were no conflicts of interest or kickbacks and that approvals required for acquisitions were obtained with regard to the Panaya acquisition. "...Thorough due diligence was conducted, the valuations of the target companies done by an outside financial advisor were reasonable, and the purchase prices were within the range of values determined by that advisor," it had said.

The decision to sell Panaya proves that Murthy was right all along in asking some tough questions about the deal, said Krishnamurthy Subramanian, Associate Professor, Finance, Indian School of Business (ISB). “There were issues with it that Murthy pointed out then." The lesson for Infosys and corporate India from this episode is to choose leaders who are the right cultural fit for the organisation, Subramanian added.

From giving a clean chit to the deal in 2017, to putting Panaya on the block, the Board has made a quick turnaround on its decision. A former executive of Infosys said the move makes it clear that there was ‘no value’ in that deal. “The former CEO had an interest in the deal though the company had no real value,” the executive said, adding Murthy was right in asking for the release of the report which the Board did not make public. “The procedures were shortcut in case of the Panaya acquisition and no due diligence was done,” the executive said, speaking on condition of anonymity.

The Board should ‘sack’ those members who were on the investment committee, the executive suggested. “There is no reason why the investors should pay a price for the Board not carrying out its duties,” the executive added.

The decision to sell Panaya can also be seen as a change in mindset of the new management under current CEO Salil Parekh, said sector experts. “A merger isn’t just about the technology that comes with it but the overall fitment in the broader scheme of things like cultural match which is the hardest task amongst all. We must give Salil time to explain, and more importantly, justify his decision to sell Panaya and not necessarily read it as an undoing of what Vishal did,” said Sanchit Gogia, Chief Analyst, Founder & CEO of Greyhound Research. He points out that Parekh is continuing with Sikka's legacy in the form of 'Nia', an AI platform for businesses rolled out by Sikka. "This is going to be a breather for clients and investors."

The controversies of the past must be laid to rest, experts added. As the former executive of Infosys said, the past is in the past. "Now is the time to look forward and that is what the Board is doing."

The company must stay focused on improving margins and cutting attrition - both reflective on overall health or otherwise.​

IT budgets are moving away from chief information officers and are now in the hands of chief marketing officers. In this scenario, the WongDoody acquisition is important, said Gogia. According to a recent Greyhound Research report, 50 percent of all IT budgets will sit with roles other than those of the CIO by 2020. "What particularly stands out is the focus on remaining relevant, on relying on CMOs instead of CIOs, which is evident in the WongDoody deal. It’s Infosys' first credible attempt in wanting to remain relevant in the new-age of digital. This is a first for Infosys and will take it’s own course before it becomes a company culture - hence it's critical that the street manages expectations. Lastly, it brings a net-net talent set to the company’s portfolio which the clients expect today," Gogia added.

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Updated Date: Apr 14, 2018 14:08:44 IST