Management

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Infosys Ltd.'s billionaire co-founders should stop behaving like teenagers trying to buy their first packet of condoms and learn something from Paul Singer's Elliott Management Corp.

It took the activist hedge fund less than three months and a polite missive to Cognizant Technology Solutions Corp. for the latter to agree to return more cash to shareholders.

Chump Change
Indian outsourcing companies' payout ratios are way behind Accenture's
Source: Elliott Management Corp. based on company filings
Note: Figures reflect last six fiscal years. HCL final period represents nine month period ending March 31, 2016 due to fiscal year change. Free cash flow defined as net cash flow from operations less capital expenditures. Percentages represent allocation of cumulative values.

This is exactly what N.R. Narayana Murthy, Nandan Nilekani and the three other founders of the Bangalore-based outsourcing firm, a Cognizant rival, should be doing.

Instead of demanding what they're entitled to as 13 percent owners, they're reportedly expressing unhappiness with "shifting values" at Infosys, giving rise to concern that they want to take over the board and fire CEO Vishal Sikka and/or Chairman Ramaswami Seshasayee.

Any such maneuvering, on the heels of a messy palace coup at the Mumbai-based Tata Group, would be a mistake.

For one thing, the Infosys founders have exhausted their quota for theatrics.

Murthy was an iconic CEO, but he has returned from retirement once -- and left again. Three of the other four have also tried their hands at running Infosys, though only Nilekani gets any bragging rights. When it comes to navigating the complexities of digital technologies, the cloud, artificial intelligence, and the new U.S. president's immigration policies, investors have no reason to believe the original crew will have any edge over Sikka, who was the technology czar at SAP SE less than three years ago.

Second, if it did come to a showdown, a shareholder vote would require the support of big investors like Deutsche Bank Trust Co., BlackRock Inc., Vanguard Group and Aberdeen Asset Management, as well as insurance companies and sovereign wealth funds such as Life Insurance Corp. of India and Singapore's GIC Pte. and the Abu Dhabi Investment Authority. Why should they agree to sack a CEO who has given them a 19 percent return since he came on board in August 2014, compared with minus 5 percent at Tata Consultancy Services Ltd., the main competitor?

Finally, it's not even clear from assorted press reports whether the founders' grouse is really with Sikka's $11 million pay; expensive severance packages for departing executives; a casual dress code; or with the fact that everybody else at Infosys seems to be having fun except them.

If it's the latter, they should mimic Elliott's strategy, and force Infosys to loosen its purse strings. A $4.5 billion cash hoard is just sitting on the balance sheet, depressing investor returns, while the company and its Indian peers keep on adding to the pile pointlessly.

Can Try Harder
Indian software companies are hoarding cash when they already have too much of it
Source: Elliott Management Corp. based on company filings (U.S. GAAP and IFRS conventions used where multiple exist)
Note: Figures reflect last six fiscal years. HCL final period represents nine month period ending March 31, 2016 due to fiscal year change. Free cash flow defined as net cash flow from operations less capital expenditures. Percentages represent allocation of cumulative values.

The only people among the old guard who have forcefully demanded a bigger payout are the two senior executives who never made it to the corner office. Former CFO T.V. Mohandas Pai, and V. Balakrishnan, who was passed over as CEO when Murthy returned as chairman in 2013, sought a $1.8 billion buyback in 2014 just as Sikka was taking over.

Pai says the board didn't even reply to him. A fight about missing shareholder value makes a lot more sense than a battle about shifting values.

Other investors couldn't care less if youngsters in jeans at the Infosys campus are offending the buttoned-up sensibilities of the founders. But they'd be happy co-campaigners if the five were to bang the table and ask for what everybody really wants here: a little more money.   

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net