Infosys Technologies Limited (B)
"The addition of Infosys Technologies to the NASDAQ Stock Market will provide investors
with a new opportunity to participate in the evolution of the world’s information technologies
industry. By trading on our market today, Infosys joins the ranks of some of the most innovative
enterprises in the world, including 440 non-US companies," said Frank Zarb, Chairman and CEO
of the National Association of Securities Dealers, Inc (NASDAQ).1 Infosys Technologies Limited
(ITL) launched its American Depository Receipt (ADR) offering on NASDAQ with much fanfare on
March 11, 1999. The company offered 2.07 million ADRs representing 1,035,000 equity shares
of the company at an offer price of $34 each through its lead manager NationsBanc Montgomery
Securities LLC.2 Two ADRs could be exchanged for one equity share in Infosys (NASDAQ:
INFY). The ADR opened at $37.375 at 10:45 AM and rose to a high of $50 before settling at
$46.875 at 4 PM when the markets closed. NR Narayana Murthy, ITL’s Chief Executive Officer,
was ecstatic. The ADR had appreciated almost 40% on its first day of trading, beyond his
expectations. “The fact that the stock jumped to $50 on the first day amid volumes nearly twice
the issue size itself is an indicator of the interest from individual investors," a dealer in London
said.3 “Of the 7,543 trades on the first day, 7,530 were non-bloc trades, which means there were
these many retail trades as against institutional ones. Since the placement is thus in many
hundreds of accounts, there is greater stability in this for the company,” commented John Wall,
President of NASDAQ International.4
Back in India, there was jubilation at the company headquarters as champagne bottles
popped in celebration. On the Mumbai Stock Exchange (BSE), ITL shares hit an all time high of
Rs. 3,457 (equivalent to an pre-bonus level of Rs. 6,914) before closing the day at Rs. 3,3925
(see Exhibit 1 for a record of Infosys stock prices since 1993.) In a glowing editorial, The
Economic Times stated that it had now become customary in the software industry to expect
success from Infosys (see Exhibit 2). This article also cautioned against being carried away by
the euphoria and pointed out that India, and software companies within India, needed to do
something to ensure the future sustainability of their strategic cost advantage. It then went on to
propose that Indian companies needed to continue to become more globally oriented, and made
a case for creating different centers with differing levels of infrastructure to meet the diverse
demands of the global software industry.
In the months leading up to the ADR issue, and in the months immediately following it,
Infosys had instituted many changes. Nandan Nilekani took over as President and COO of the
company on February 10, 1999 (see Exhibit 3 for a revised organization chart). In a press
release, the company stated, “This is in view of the various global initiatives that the company
plans to take up in the coming months.”6 Murthy concentrated all his efforts on the globalization
initiative. In the months that followed, he traveled to ITL offices around the world and discussed
the best approach to expanding regionally within each market with members of his management
team. ITL had also aggressively expanded its marketing and sales efforts and had added almost
50 new customers to its list. In April, it announced another record year, with profits more than
doubling to Rs. 1.352 billion on revenues of Rs. 5.13 billion (see Exhibit 4 for financial results for
Infosys’ 1999 fiscal year). Despite these results, the stock price fell by over 7% on the BSE.
Analysts attributed this fall to the expectations of higher profits and some profit taking.7
Among the first actions that Nilekani and Murthy undertook upon assuming their new
roles in the organization was to chart out guidelines for potential acquisition targets. They viewed
acquisitions as one key way that Infosys could transform itself into a truly global organization and
drew up a list of parameters to identify potential candidates for acquisition in the near future (see
Exhibit 5). These guidelines stipulated that any potential acquisition should:
· Be operating in a niche area – not competing with larger product companies
· Have a high post-sale implementation and customization component
· Have an established base of around 200 to 300 customers with high retention
· Create synergy with Infosys’ existing services and have the potential to apply the
offshore development model
The political situation in India was in turmoil again in spring 1999. The existing
government, which was formed by a weak coalition of regional parties, had fallen apart and no
single party was able to form a government to rule the country. In a move reminiscent of a few
years ago, the President had dissolved the parliament and ordered fresh elections for the fall of
1999. A caretaker government was appointed to rule through till the elections. All policies were
frozen, and although the stock markets in India had taken a beating, they rebounded when the
major parties involved in the election had vowed to keep economic reforms moving ahead at the
pace set by their predecessors. Although businesses were always cautious, Infosys moved
ahead in its globalization program with renewed optimism.
Murthy knew Infosys had a formidable task ahead of it if it was to make its globalization
effort a success. By splitting the work between Nilekani and himself, he hoped to erode some of
the firm’s recent stock market losses. Analysts viewed the dual leadership role favorably, as it
allowed focused concentration on the globalization program. The concerns expressed in the
Economic Times editorial (i.e., regarding the sustainability of the cost advantage) remained in his
mind, but he nonetheless wanted to move the company’s expansion plans forward. He felt that
increased costs could be more than offset by the added quality and value that they would provide
their customers. Yet eroding margins would lead only to reduced profits, and the stock market
had already demonstrated that it would not look favorably on such a move (as was evidenced by
the decline in Infosys’ stock price on the BSE in April.) With the ADR in place, Murthy knew that
Infosys was responsible to an added group of shareholders and analysts located many miles
away in the US. In a broadcast call to announce results to analysts and investors in the US
market, Infosys’ management was asked many questions on its future strategy. Although most
analysts concurred that the outlook for the company looked good, some worried about the
viability of the offshore delivery model and wondered what Infosys was doing to ensure a
sustainable advantage over its competition.8
In May 1999, Infosys’ board of directors assembled to take stock of the firm’s situation
and plan its future globalization strategy. Murthy, Nilekani, Raghavan, Dinesh, Gopalakrishnan,
and Phaneesh Murthy - head of worldwide sales, among others, attended the meeting. The
meeting began with an evaluation of the company’s strengths and policies that had contributed to
its success. Several key factors were identified (see Exhibit 6 for an exhaustive list of factors to
which Infosys’ success could be attributed):
· Infosys had an excellent management team comprising individuals with mutually exclusive
yet complementary skills.
· The company had a knack for consistently attracting and retaining the best talent available
due in a large part to its unique culture and management style.
· It had developed a clear vision and strategy that was closely monitored and adjusted as the
· All issues raised were transaction-based and oriented. Only valuable comments were
respected and non-contributing members were not entertained. In fact, Infosys had recently
released two members of its board after it was determined that they were not contributing to
the overall goals of the company.
Next followed a discussion of the major issues facing the company in the immediate
future (Exhibit 7 lists these in greater detail). Would Infosys’ past successes be an impediment
to taking bold, riskier decisions in the future? How could Infosys balance its objectives of rapid
growth and maintenance of a unique organizational culture? Would Infosys be able to balance
the diverse needs of all its stakeholders in a manner that was acceptable to all? More important,
was the expansion strategy it had pursued too aggressive? Should it scale back efforts now and
focus on shoring up its existing expansion plans, or should it continue to forge ahead? Finally,
how could Infosys continue to provide the business leadership much of the software industry in
India had continued to expect from it and at the same time groom the next generation of leaders
to take over the reins?
The meeting concluded with all members agreeing that although the company had
achieved significant milestones in a few short years due to its clearly focused strategy, many of
the real challenges were still to come. Both Murthy and Nilekani wondered what lay ahead for
Historic Price Information of Infosys Stock on the Bombay Stock Exchange:
Market Cap. (Rs. million)
June 14, 1993 160 536
March 31, 1994 600 2,011
August 12, 1994 (bonus 2 for 1 announced) 1,250 4,190
March 31, 1995 (ex-bonus) 475 3,488
March 31, 1996 495 3,593
March 31, 1997 1,007 7,308
August 14, 1997 (bonus 2 for 1 announced) 2,193 15,918
March 31, 1998 (ex-bonus) 1,828 29, 275
December 12, 1998 (bonus 2 for 1 announced) 2915 46,694
March 31, 1999 (ex-bonus) 2925 93,701
Source: Infosys Technologies Limited
March 12, 1999.
It is now almost customary in the software industry to expect success from Infosys
Technologies; and becoming the first Indian company to be listed on Nasdaq was just
another predictable step forward. But what must have surprised even the most
experienced observers was the enthusiastic response the share received on the first day;
reaching a peak of nearly 50 percent above the public offer price. It can now leverage
this success to build a truly global presence. The emergence of Infosys as a global player
is an example of what can be achieved by Indian business if it is willing to merge
professionalism with vision. And in a social ethos where corporate heroes are still not
fully recognized, Infosys deserves applause.
But there is a risk of being carried away by euphoria. It is convenient to assume that it is
just a matter of time before other Indian companies follow the Infosys path. But if we
look beyond the current major success stories of Indian software, there are some
challenges that need to be overcome. Infosys has succeeded by producing where it is
cheapest to produce and selling where it is most profitable to do so.
For this strategy to be replicated by others, India must remain one of the cheapest places
to produce software in the world. This advantage could be threatened if in the process of
developing infrastructure, the costs to the user are allowed to grow unchecked. One way
out of this dilemma, of modernizing infrastructure versus keeping down costs of living
and working, would be to recognize that costs are evaluated relative to the quality of
work being done.
There would then be a case for creating different centres with differing levels of
infrastructure to meet the diverse demands of global software. This would also help
Indian cities attract different segments of global software investment rather than merely
compete for the same business. The success of Infosys, and other software companies, is
an indication of what can be achieved. But not necessarily of what will automatically
Infosys Organization Chart
(As of August, 1999)
NR Narayana Murthy
Chairman and CEO
MD, President and COO
Sr. VP and Head
Sr. VP and Head
BBU Sales & Support
Director and Head –
Director and Head
SBU 1 and SBU 5
Head – Quality,
Productivity and IS
Head – Human
TV Mohandas Pai
Head – Finance and
Chief Security Officer
Source: Infosys Technologies Limited
Infosys Technologies Limited
Audited Financial Results for quarter, half year and fiscal year ended March 31, 1999.
All amounts in millions of Rupees
Particulars Third quarter ended
Six months ended
1999 1998 1999 1998
Income from software
- overseas 1,479.5 769.5 2,857.8 1,480.1 5,002.5 2,509.4
- domestic 39.7 17.0 55.9 36.7 86.4 67.2
Other income 17.8 6.6 25.1 9.9 38.5 27.1
Total Income 1,537.0 793.1 2,938.8 1,526.7 5,127.4 2,603.7
Provision for contingencies 33.3 - 66.6 - 66.6 -
Provision for investment in
- - 35.3 - 70.6 -
Total Expenses 869.5 512.8 1,656.0 990.9 3,072.7 1,717.5
Profit before Interest, Depreciation
and Taxes (PBIDT)
634.2 280.3 1,180.9 535.8 1,917.5 886.2
Interest - - - - - -
Depreciation 144.2 74.3 235.5 132.4 358.9 227.5
Profit before tax 490.0 206.0 945.4 403.4 1,558.6 658.7
Provision for tax 59.0 15.1 136.9 30.1 229.4 55.0
Profit after tax from ordinary
431.0 190.9 808.5 373.3 1,329.2 603.7
Extraordinary income (net of tax) - - 23.5 - 23.5 -
Net Profit 431.0 190.9 832.0 373.3 1,352.7 603.7
Paid up equity capital 330.7 160.2 330.7 160.2 330.7 160.2
Reserves NA NA NA NA 5,413.6 1,569.4
Source: Infosys Technologies Limited
The following guidelines have been established for potential acquisition companies within our
respective target market areas.
· Operating in a niche area – not competing with any large product companies
· Product has a high post sale implementation and customization component – the cost of
customization and implementation is a high proportion of total cost
· Product costs around $50,000 to $150,000 per copy
· Sales must be through a direct selling model
· Should have an established base of around 200 – 300 customers
· Product should need migration to a contemporary platform/infusion of R&D efforts to keep it
relevant and competitive
· There should be a high probability of retaining a large proportion of existing customers with
an upgraded product
· There should be a high probability of cross-selling Infosys’ existing products services to the
acquired company’s clients
· Product should have good potential for the future (with a constant infusion of a reasonable
level of development effort)
· Product should be highly relevant to the US market place – for non-US based companies
· Additional suggestion – Product should be in our focused vertical segments (Distribution,
Manufacturing, Telecom, Retailing, Financial Services, Transport, Utilities and Engineering)
· Should have a distinct focus in its work – operating in one of our focus vertical segments
· Should possess distinctive, useful IPRs (Intellectual Property Rights) in that line – processes,
· People – should have and be able to attract high caliber people
· Key personnel should be tied into the company for the long run – including in a post
· There should be a synergy with existing Infosys services
· There should be a potential for applying the offshore development model
Source: Infosys Technologies Ltd.
Major Reasons for Infosys’ Success
1. The ability to consistently attract and retain the best talent in the industry. Infosys does this
with a series of policies that are aimed at ensuring all of their employees are empowered and
compensated at a level unheard of in the Indian software industry.
2. The unique corporate culture and management style at Infosys. This has allowed the
company to maintain an environment that encourages the free flow of ideas and information
at all levels in the company.
3. Maintaining a clear vision and strategy. “To be a globally respected software company that
provides best-of-breed software solutions delivered by best-in-class people.”
4. The company maintains a distinct identity by doing some things differently than other
companies in the same industry.
5. Infosys has diverse management talent with mutually exclusive yet complimentary skills.
This ensures that every issue raised within the company has a champion who is an expert in
that area and a number of extremely intelligent people who can assist him/her in analyzing
6. The company has responded with speed and imagination in ensuring that it maintains a
leadership position in the industry. This has manifested itself in the company producing a
history of “firsts” that were unheard of in Indian industry a few years ago.
7. Senior management has maintained an equitable mix between individual goals and corporate
goals at all levels in the company.
8. The ability to accept that all problems that arise lie within the company and can be solved
given the right level of expertise and internal talent.
9. The ability to keep all issues transaction based and oriented. All employees have the right to
dissent and are welcome to fiercely debate any issue that is raised, but once a consensus is
reached, they will work as a team in resolving the issue.
10. All members of the Infosys family must make value added contributions towards the
company. If it is determined that any person is not contributing to the best interests of the
company then that individual will no longer be accepted by the company, irrespective of
his/her position within the company.
Source: Infosys Technologies Ltd.
Future Challenges for Infosys
1. Past history of successes could be an impediment for risky decisions that may need to be
taken in the future.
2. How can the company manage its goal of rapid growth and maintain its unique balance of
3. How would it manage an organization of global employees given its limited experience in this
4. How does it continue to maintain its leadership as a growth company?
5. How does it continue to position itself as a truly unique company in the area of software
6. What organizational issues would the company need in place to position itself for aggressive
7. With rapid growth, how can it ensure that our strong leadership is disbursed at all levels
within the company?
8. How does it continue to provide the business leadership that the industry has come to expect
9. What skills does it need to inculcate in its employees to ensure that it grooms the next
generation of business leaders to take over from the current leadership?
10. What global business model would be most appropriate for Infosys’ growth objectives into the
11. How can it ensure that it positions itself as being “close to the customer” when its business
model requires it to often be a great distances from its customers?
12. As the company expands into being a global company, how does it maintain its small
company culture and entrepreneurial spirit?
13. How would it create brand equity globally?
14. How would it motivate and empower employees from many different cultures while adhering
to the “one company” model?
15. How can it improve the productivity of its personnel to increase profitability?
16. How sustainable is the existing offshore delivery model?
Source: Infosys Technologies Ltd.
1 Business Wire, “Infosys Technologies Limited lists on the NASDAQ Stock Market; First Indian
Registered Direct Listing on a US Market”, March 11, 1999
2 ITL Infosys offer document for 1.8 million American Depository Receipts, March 11, 1999
3 The Economic Times, “INFY’s still firm on Nasdaq, hits record high at home”, March 12, 1999
4 The Economic Times, “Infosys did better than other entrants on Day 1: John Wall”,
March 12, 1999
5 The Times of India, “Arbitrage opportunity in Infosys scrip?” March 15, 1999
6 Infosys Technologies Limited Press Release, February 10, 1999
7 The Economic Times, “Infosys net profit doubles to Rs. 1,352.7 million in FY 99”,
April 9, 1999
8 Highlights of Infosys conference call to announce results from the company website,
April 9, 1999