Is there a silver lining for Silverline?

Silverline is in trouble—big trouble. Even as many feel the once high-flying company has bitten the dust and will never rise again, Srikanth R P and Ivor Soans analyse what went wrong, and also find out how the management plans to mop up the mess and get going again

With very few options left, Silverline has downed almost all shutters but Ravi Subramanian still feels the company can reopen shop again

As the bulls started a stampede again on Indian bourses, Shankar Narayan, an accountant working in an MNC bank frantically called up his broker to find out if the share price of Silverline Technologies had also gone up. Though the valuations of the company have dipped to an all time low, with the stock price hovering around the Rs 7 mark on the BSE, down hundreds of metres from the all time high of Rs 1,200 around three years ago, investors like Narayan are still hoping against hope.

Narayan was one of the few investors who bought the stock at the peak price of Rs 1,200. He has been watching on with considerable anguish as the one time Blue Chip (also the first Indian firm to list on the venerable NYSE), with export revenues of Rs 709 crore, and ranked by Nasscom in the number six slot of top software exporters for the year 2000-01, sank to a level that he is unable to comprehend. Narayan is not the only one on the long list of people affected by Silverline’s current woes. Employees, bankers and retail investors have all been burnt by the flames of doom that seem to be raging at Silverline, with no relief in sight.

Employees have not been paid for almost eight months. Bankers have moved the courts to reclaim their dues. The last category, retail investors who bought the shares of the company at extremely high levels, can hardly hope for a turnaround now. The company may have boasted of a Rs 700 crore turnover not so long ago, but now it only has accumulated losses which are eerily close to the same number—Rs 711 crore. (Source: Annual Report 2001-02)

Wrong moves boomerang

While most industry analysts today moot the ‘buy capability’ theory (through acquisitions) rather than the ‘build’ capability theory (organic growth), Silverline’s case is a classic example of the havoc that can be unleashed if a company makes some big mistakes on the acquisitions front.

The company, in a bid to boost revenues and grow faster than the others, went on a reckless acquisition spree in the year 2000. In a span of six months, the company acquired three companies, and in hindsight it does seem almost no thought was given to integration issues, and perhaps the due diligence exercise wasn’t as strict either. In April 2000, Silverline’s wholly owned subsidiary, Silverline Technologies Canada, acquired CIT Canada, a software development firm in Toronto, for approximately $4.2 million in cash. In September 2000, the company acquired Megasys Software Services for $6.2 million in cash. This was followed by the acquisition of Sky Capital International, a Hong Kong-based information technology consulting firm, for $22.0 million in cash. This was the beginning of Silverline’s problems as analysts started doubting the quality and capabilities of the management. Questions about the deals started emerging because normally acquisition deals were a combination of stock and cash and not all-cash deals.

Then came the high profile deal that supposedly delivered the knockout punch to Silverline. The acquisition of SeraNova, valued at $39.24 million, has been acknowledged by Silverline’s chairman Ravi Subramanian as the deal that landed Silverline in the current mess. Take this extract from Silverline’s US SEC filing, which states: "Due to substantial slowdown in the STI (US) and SeraNova Inc. a major portion of goodwill, accounts receivable and fixed assets were written off. Such expenses were $95.7 million (Rs 445 crore) and $52.6 million (Rs 244 crore) for the years ended March 31,2001 and March 31,2002." However, there seems to more than what meets the eye. All the analysts Express Computer spoke to were highly sceptical and say they do not buy this story. Analysts allege Silverline has never been transparent in its dealings and say that writing off such a huge amount for a software services company is unheard of in the industry.

Kumar Subramanian, vice chairman of Silverline Technologies is however still hopeful the company will manage to squeak through this crisis and make a turnaround. Express Computer managed to contact him after hundreds of calls and literally at the eleventh hour and fifty-ninth minute—just as this piece was going to press. Subramanian has a point by point rebuttal to the allegations.

Says he, "When we acquired SeraNova, e-business was seen as the biggest opportunity of the decade. But post-dotcom crash and the 9/11 episode, demand for e-business crashed and SeraNova became more of a liability for us. In hindsight, one can say that it was a costly mistake, but at the time we made the acquisition, it was a strategic and well thought out decision. Also, the decisions of making some of the acquisitions wholly using cash was not unwarranted because the deals were smaller in size and we needed to grab opportunities before someone else did. But unfortunately, with the slowdown in the e-business space and the 9/11 incident there was a chain reaction and we were soon left grappling with problems rather than being able to focus on operating our business. Also, the decision to write off receivables was taken to focus on the road ahead more aggressively."

Not everything above board

The Silverline story looks different from the normal stories of companies that go bust. For even today, many gullible investors like Narayan are investing in the shares of the company in the hope that the company will make a turnaround.

Says Gurunath Mudlapur, an IT analyst with Khandwala Finance, "The key qualitative parameters for analysis and valuation of any IT services company in our view are management excellence, human resources quality and retention ability, broad customer base, diversified domain proficiency and multiplicity of service offerings. In Silverline’s case, the warning signs were there for every investor to see. But most investors tend to ignore some basic signs. For example, Silverline has to its credit a constant churn at the management levels. The CEO, CFO and key managerial personnel have held positions and left at regular intervals. We think that in a knowledge-oriented industry where management and human resource quality is the key for success, having a management with extremely poor commitment towards long-term business performance could lead to certain catastrophe for Silverline."

This can be seen by the fact that after CEO, Ravi Singh resigned, Dr Nirmal Jain who had joined the company as the new CEO resigned within a few months. A CEO resigning in a span of only six months is probably unheard of in the IT industry. According to some market rumours, Dr Jain walked out when he discovered not everything was as hunky-dory as made out to be.

While company officials are still defending Silverline and say that any other company could have probably made the same mistakes, there are some big questions hanging over the company that no one has a clue about. For instance, Silverline had an animation division that employed around 260 professionals. Analysts say that despite the fact that there were no capabilities within the company as regards animation, which is a specialised sector, or any synergies with the existing SBUs, Silverline went ahead and invested in setting up facilities for undertaking animation work.

The division was involved in the making of a feature film based on the Hindu religious personality ‘Hanuman’. Today, no one has a clue on when the film will ever be completed. Moreover, the company never declared revenues that it accrued from the animation division. The animation division’s employees have filed a petition against Silverline in the Bombay Labour court for non-payment of dues. In Silverline’s defence, Kumar Subramanian says that the project was a small one-off project for an UK-based company and got terminated the moment the customer decided to do so. And as the company did not see any real growth coming from this division, it was decided to shut down this division. He also claims that most of employees working in the animation division were freelancers and promises that permanent employees would be given their dues when the company manages to regain its financial health.

One more instance of the company not being entirely fair in its business practices comes from the preferential issue of warrants to a promoter owned company—Subra Mauritius—to fund its acquisitions. A report by Khandwala Finance issued last year pinpoints this the one of the key reasons on why they think investors should exit the Silverline stock. The report states: "Silverline will be doing a preferential issue of warrants to its promoters—Subra Mauritius. The total number of warrants issued will be 20 million and the price for conversion is fixed at Rs 51, reduced radically from the earlier Rs 157. This exercise looks absolutely bizarre considering the current market price at around Rs 59, essentially implying that the promoters themselves have no faith in the improvement of the stock price going forward." While Kumar Subramanian counters this by saying that the option was never exercised, in the eyes of analysts, the fact that such moves were even seriously considered was enough reason to trash the company’s stock. Incidentally, the stake of the promoters in Silverline is only 4.6 percent today! And many in the market say that’s the bottom line—a fact that amply shows the level of the confidence the promoters have in the company. Ravi and Kumar Subramanian will need to first increase their stake if they want the market to take their revival plans seriously.

Rocky road ahead?

While most have written off Silverline and believe the company does not stand even the tiniest of chances of making a turnaround, Kumar Subramanian is still hopeful. Perhaps, just as hopeful as his Narayanan who invested in his firm. Says he, "We will stand by our commitments to our employees and bankers. Today there are many MNC companies who are looking to set up base in India and as we have our own development centres, there are different options we can explore with these companies to pay off our employees and bankers." Subramanian does not rule out the option of a joint venture too in order to stave off the current financial crisis. However, thanks to the company’s seemingly dodgy financial history and lack of confidence in the markets thanks to these issues, Subramanian may not find it easy to convince others to join hands with Silverline.

In conclusion, it must be said that while there many other companies like Silverline, who have seen a huge dip in their revenues and profitability due to wrong market decisions, Silverline is an aberration simply because the management is not transparent, like say a company such as Infosys. For instance, most analysts Express Computer spoke to said that Silverline did not disclose their complete financials to investors. The Silverline case and the resultant fear regarding IT companies in some sections of the markets should also be reason for industry organisations like Nasscom to ensure that IT organisations should adhere to a corporate code of conduct and governance. Only this will ensure that investors, employees and partners are not left in the lurch again.