Assignment no 12

Ans -1

(a) Solid growth phase till 2000

Pre 1997 period

SIL total income rose from 0.5 bn INR(in 1993) to 1.5 bn INR; an increase of 200% Bottomline improved from 49 million INR (in 1993) to 316 million INR; an increase of 545% Share price had gone north upto INR 33 SIL entering into a strategic alliance with US-based Platinum Technology Inc (PTI), the world's

seventh largest independent software vendor the market was buoyant about SIL Lalbhai and Maganbhai were rightly optimistic about SIL

Post 1997 period

1997-1999

SIL consistently placed amon the top 20 IT companies and finished 1999 with a rank of 16 Increase in share price from (50 to 1500). An increase of 2900% Cash balance =29.7 crores Recievables = 28.1 crores Current assets = 59 crores Total assets= 185 crores Net worth = 174 crores PAT=41.2 crores All figures were comparable if not neck in neck with the IT giant Infosys. Hence Maganbhai was rightly optimistic

But SIL had made a transaction with its holding company valuing the shares at less than

the market price The majority of its revenues were coming from a few clients Nearly 45 percent of the revenues of SIL came from two corporate clients Hence lalbhai was worried and skeptical about the company

1999-2000

In May 1999, the company issued 22,050,030 equity shares at Rs 22 per share to Silverline Holdings Corp

STL also began a process of restructuring, with the company disinvesting its entire equity stake in its subsidiary, Silverline Mecon Ltd

In June 2000, STL made a public offering in the US, becoming the first Indian IT company to be listed on the NYSE (ticker “SLT”). The company issued 4.35 million American Depository Shares (ADS), representing 8.7 million equity shares at a price of $ 25 per ADS, significantly higher than the indicative price of $ 19.68 at the time of primary registration with the SEC

Share price rose from 1500 to 2750. However it even declined to 1250 in the later part of 2000. Cash balance remained same and strong Account recievables increased by 233% to 93.6 crores Total assets increased bt 165% to 481 crores Net worth increased by 165% to 461.9 crores PAT doubled to 41.2 crores

(b) Aggressive acquisitions with low growth

2000-2001

Acquisition spree started 3 acquistions in six months

1. CIT-4.2 million usd2. Megasys- 6.2 million usd3. Skyline -22 million usd

All being all cash deals Acquired SERANOVA for 99million USD stock; it had accumulated losses of 7 million $ and debt of 14 million $

Its rank among top Indian IT companies improved to 12 Even though the net assets tripled from481 crores to 1211 crores the liabilities became 5 times

due to acquisitions Pat doubled Share price’s trajectory towards south just starts because

1. A number of acquisitions with pure cash seemed fishy2. Acquisitions in stock of indebted companies carrying accumulated losses3. The ADRs issued were eligible for immediate sale.4. That made the company seem vulnerable to market crashes5. Dotcom bubble burst on the doorstep

2001-2002

things start to go awry 9/11 accentuates IT crash. DOTCOM BUBBLE BURSTS BSE plummets big time. So does the share price of STL. ( plummets by over 92%) 2300 employees laid off. Lay off expenses increased cash outflow ANXIETY INCREASED Share price plummets to 23 inr(see the decline—10-100014002700120010023) Inorganic growth by company made matters worse wrote off US $96 million and US $53 million in 2002 and 2001 even this was a skewed picture. The revenues with the india holding was one fifth of the total

revenues. However the assets were approximately equal to total assetshence

Indian holding’s ratio of =revenue share/assets share=20/100=0.2

An error of 80%

no of board meetings attented reduced considerably percentage of promoter stake started declining sera nova which was earlier posting huge profits started showing losses liquidity cruch for STL could not even pay salaries drastic increase in receivable by 90% although maganbhai was optimistic about the effect of FIPB on subra Mauritius and STL The warrant issue by STL to Silverline at 51 INR down fron 157 looked bizarre It proved that promoter themselves had no confidence in STL Hence lalbhai was rightly skeptical

(c) Phase of failure

The downward slide had already begun in the last period. It continued its downward spiral. STL became involved in litigations. Reputation took a beating Conversion rate of ADR into shares increased from 2 to 10 ADR per share Investor confidence in ADR severely affected ADR holders would have received five new ADR for one ADR surrendered Promoter share gone down to 15% Shubra holdings never exercised its warrants Maganbhai was rightly pessimistic; he sensed the the upcoming decline unlike lalbhai who

mistakenly interpreted it as company’s restructuring policy A Joint Parliamentary Committee (JPC) probed the issue and had suspected fifteen companies The total non-recurring write offs was $ 102 million and the net loss for the nine month period

ended March 31, 2003 was $ 110 million

The shares of the company at BSE fell to a new all time low of Rs. 6.65 in May 2003. Cash balances reduced from 35 crores to1. Crores Recievables reduced from 261 crores to 0 Total assets reduced from 1200 crores to 26 crores Profits of 131 crores became losses of 291 crores Magan bhai was right and lalbhai was wrong

Ans-2

Ques 2: From the case, please list down a few early warning signs of a company in trouble. List a few supporting red flags.

Answer: Following were the warning signs from the activities of SIL:

Inorganic growth strategy by the firm as large scale mergers and acquisitions were carried out that too in full cash payment which was reducing their liquidity and huge cash outflow.

Investments account rose from 14m$ to 2007m$ in straight 1 year.

They were trying to move from legacy projects to more high end projects( for that they also bought SeraNova) but there lack of expertise was a major question mark.

In spite of share price going from Rs 105 to Rs 272, SIL had made a transaction with its holding company valuing the shares at less than the market price. This showed that even the promoters had a shaky confidence in the firm.

The promoter’s stake in STL had steadily fallen to 31% in 2000 and 23% in 2001 respectively ,furthermore the warrants issued to Subra Holdings Mauritius were never exercised .Hence the promoter’s stake remained low.(Hence low accountability)

The company also initiated a one-time write-off of assets to the tune of $95.6 million, out of which accounts receivables and investments formed the biggest chunk with $32.2 million and $31.6 million respectively

The change of auditors of STL and its subsidiaries, and the resignation of five independent directors from the board of the company raised eyebrows