Panaya in The Eye of Infosys Storm
Concerns related to the $200-m acquisition of Israeli software co in 2015 key to current battle
Kunal Talgeri, KR Balasubramanyam, Jochelle Mendonca & TV Mahalingam
Bengaluru: The $200-million acquisition of Israeli software company Panaya by Infosys in February 2015 and the series of contentious internal debates it triggered is at the heart of the high-decibel battle underway between some of the iconic founders of India’s second-largest software company and its management, according to four people aware of the details.
The acquisition gave rise to a series of questions on the process of due diligence and governance, with the then chief financial officer Rajiv Bansal questioning the validity of the transaction before finally resigning from the company, according to the sources cited above. ET spoke to two former senior employees, a current employee, and a consultant who has worked with Infosys for over a decade, about the concerns surrounding the Panaya transaction and the subsequent fallout.
“The Infosys board needs to revisit the Panaya deal in shareholder interests,” said one of the former employees. “Three points merit examination. One, did the deal have Bansal’s sign-off ? Two, did it comply with all due diligence norms to ensure there were no conflicts of interest? Three, the circumstances in which it got board approval,” he said. The consultant quoted above told ET, “Bansal was not happy about the acquisition, especially the price”. Another former employee said that Bansal was kept out of the deal because he raised uncomfortable questions. The former CFO did not reply to emailed queries, text messages and phone calls. Infosys did not reply to email questions sent by ET on the issue.
Former CFO Rajiv Bansal questioned validity of transaction before finally resigning from the company
However, independent director Roopa Kudva, in reply to questions about governance within Infosys, told ET: “There was never any intention to silence him (Bansal), and he has always been free to complain to a regulator about any impropriety he may have seen during his tenure. He has been at absolute liberty to do so.”
“In the case of Bansal’s severance, due process was followed, necessary approvals were taken and disclosures were made. There was no impropriety or ‘hush money’ involved,” Kudva said.
In an explosive interview in ET’s Friday edition, Infosys founder NR Narayana Murthy questioned the high severance payouts made by the company (since June 2015) saying “such payments raise doubts whether the company is using such payments as hush money to hide something”.
Murthy did not reply to emailed queries from ET on possible conflicts-of-interest in the Panaya deal. A senior former employee, who was privy to the Panaya developments, said the Israeli company was on the verge of shutting down, and a number of people were laid off before the buyout.
The price paid by Infosys meant the company was valued six times its revenue, Bansal had told analysts in the earnings call when the deal was announced. The former employee who spoke to ET pointed to a February16, 2015 article in Israeli daily Globes, which he said triggered intense debate within Infosys after the acquisition.
“The company was in a severe state of crisis and had laid off employees, and now they are receiving a decent return on their money. The list of investors include the Benchmark Capital and Battery Ventures venture capital firms, alongside Hasso Plattner Ventures. Hasso Plattner was among the founders of SAP. Haim Shani and Moshe Lichtman’s Israel Growth Ventures came into the company at the last minute before the exit, investing $20 million in January this year,” the report said.
Sikka used to report to Hasso Plattner at SAP. At Infosys, Sikka has hired several ex-SAP executives like Michael Reh, Ritika Suri and Abdul Razack. Subsequent to the January 2015 capital infusion in Panaya, Infosys acquired the company a month later. The four sources who spoke to ET said the “Panaya factor” is crucial because it is now linked to Bansal’s exit.
The 2015-16 Infosys annual report revealed that the company had paid Rs 17 crore to CFO Rajiv Bansal, who quit in October 2015, but continued to serve as an adviser to the CEO and the board until December. Infosys subsequently explained the payment as part of an enhanced non-compete.
The company tried to put to rest doubts about Bansal’s severance even at the June 2016 annual general meeting.
In October 2016, Infosys in a statement to the stock exchange said it had carried out two investigations into severance payment made to Bansal. The company wrote that the investigations were conducted following “insinuations” and rumours and an anonymous letter it received following Bansal’s exit.
Both investigations, the company said, were conducted by Cyril Amarchand Mangaldas and were “shadowed” by consultancy KPMG. The investigations looked into the circumstances that led to the severance payments, and in particular, whether it had been made to prevent Bansal from disclosing any impropriety.
The first investigation was carried out in October 2015. The second investigation, carried out in August 2016, was ordered by the audit committee of the board following the receipt of an anonymous letter that alleged that the severance payments made to Bansal were to silence him. Both investigations revealed no wrongdoings or efforts to cover up wrongdoings.
In the February 16, 2016 call to announce the acquisition, stock brokerage Nomura’s Ashwin Mehta was the only analyst who had attempted to probe the valuation ascribed to Panaya. “If you can share how much of a premium have we paid on valuations versus the $20 million round that happened in there in January,” he asked.
In response to Mehta’s question, Infosys CEO Sikka said, “Maybe, I can make a broad comment on the valuation, we looked at the valuation from multiple different perspectives, and in all perspectives, the valuations come within the correct band. We had an independent group, bankers from Deutsche Bank, look at the valuation of Panaya, and we feel very comfortable with the valuation.”
When Mehta asked if there had been a restructuring at Panaya, Ritika Suri, former SAP executive and current head of mergers and acquisitions at Infosys said, “They did have a CEO change back in April or May but we feel pretty confident in the existing management team and their ability to deliver,” she said. When ET asked Sikka on November 10, 2016 about Bansal’s departure, he replied: “First of all, this is a board matter. You should talk to the board.”
“In retrospect, you can argue that it (the severance package) was larger than it should have been. It was a judgement that we made at the time, it was done over a two-day period that was intense. The thing that I am comforted by is that the company has done nothing wrong,” he told ET.
One of the senior ex-employees who corroborated the Panaya conflict of interest in Infosys said it is just one of the instances of poor practice of disclosures. “This is not an issue of law — it is of governance.”
Former Infosys CFO Rajiv Bansal FILE PHOTO