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 usd
2. Megasys- 6.2 million usd
3. 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 prices trajectory towards south just starts because
1. A number of acquisitions with pure cash seemed fishy
2. Acquisitions in stock of indebted companies carrying
accumulated losses
3. The ADRs issued were eligible for immediate sale.
4. That made the company seem vulnerable to market crashes
5. 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 decline10100014002700120010023)
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 assets
hence
Indian holdings 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 companys 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 promoters 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 promoters 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