Santosh Nair
Moneycontrol.com
The stakes are much higher the second time around. Having built
Infosys from scratch to becoming the bellwether of the IT services industry, 66-year old
Narayana Murthy returns to the helm at a difficult time. The board’s decision to recall Murthy suggests that waning shareholder confidence could now be at a tipping point, and if not addressed quickly, could have serious repercussions.
Once the first choice of any fund manager wanting to have IT services in his portfolio, Infosys shares have had a miserable run over the last two-and-a-half years, declining 21 percent. During the same period, the Nifty rose 2 percent, and shares of Infosys’ rivals
TCS and
HCL Tech gained nearly 40 percent and 85 percent respectively. In the league, only Wipro fared worse than Infosys, with the stock declining 22 percent.
During this period, IT shares were not exactly the rage, with the benchmark CNX IT index declining around 3 percent. The business environment had become challenging, due to the problems in the US and Eurozone. But consistent quarterly performances from TCS and HCL Tech showed that Infosys’ troubles were largely company specific.
Among the key criticisms of the company were its conservative approach to acquisitions, a business model that had not changed with times, an obsession with margins that put off prospective and existing clients, and a succession policy that focused on allowing the founders to take turns in the CEO’s chair.
Infosys tried to address investor concerns by embarking on an overhaul of its business model, in an attempt to create a niche for itself in the value-added, high margin offerings segment.
But volatile earnings growth over the last four quarters shows that the new strategy—Infosys 3.0—
is not delivering the expected results as quickly as the market had expected. Also, the high attrition rate of middle level management has been a cause of concern for market as much as for the company.
For reasons right or wrong, shareholders appear to be fast losing patience with the stock and the existing management. Soon after the March quarter numbers, market was rife with rumours of MD & CEO Shibulal stepping down from his post. There were also reports that the company itself could be a potential takeover candidate for global IT global majors.
Narayana Murthy’s return could partially restore some confidence among investors, and a knee-jerk reaction driven by sentiment could lift the stock on Monday. Murthy has been the driving force behind Infosys as its CEO between 1981 and 2002, as the company rose to becoming the second largest IT services player in the country, before being dethroned by Cognizant two years back. He then stayed on as executive chairman till 2006, and then as non-executive chairman of the company from 2006 from 2011. But investors would do well to bear in mind that given the size of Infosys, and the present business environment, it won’t be an easy ship for Murthy to turn. The road to recovery would well turn out to be a long one, irrespective of Murthy’s stature and track record.
The immediate question is: will Murthy choose to persist with the 3.0 strategy in its current form, or make radical changes? Depending on the decision, there could be a major realignment of power centers within the organisation, which could possibly create some upheaval within the middle and top management, before things settle down.
Among founder CEOs who returned to take charge of their companies, Steve Jobs was a spectacular success, Howard Schulz too managed to turn things around, the jury is still out on Michael Dell, while Jerry Yang’s second act was a failure.
Meanwhile, it appears to be a season of second acts.
In April this year, US-retailer JC Penney recalled its former CEO Myron Ullman, and last month, Procter & Gamble brought back former boss AG Lafley.
Here is what The Economist in its recent edition had to say about
recalling old hands to take charge:
The pros:"The best argument for bringing back former CEOs is that they are known quantities, and will thus reassure both employees and investors. Another is that they know as well as anybody what nasties are hidden in the hold."
And the cons:"Their return almost invariably signals that the company is in deep doo-doo, and often the mess they are brought back to fix is one they left behind. The business they built may not have been sustainable; the deals they did may have looked good at the time but were bound to come unstuck eventually."
