1) I) Period of Tremendous Growth Upto 2000

SIL custom-built the Silverline Software Technology Park in Thane in September 1999. It
had state of the art facilities with an area of over 110,000 square feet extending over 8 floors.
It could house 1000 employees and had a 512 Kbps dedicated frame relay network to the US.
SIL chronicled a CAGR of 22 % and 29 % in revenues and post-tax incomes respectively.
This was during 1995-1999.
Keeping the future in mind, the company changed its ownership arrangement by divesting a
part of its equity holdings in favor of another promoter owned entity - Subra Holdings Inc. in
January 1997. Subra acquired a 51 percent stake in SIL and made the latter its subsidiary. The
mentioned objective of the above change was to meet the increasing cash requirement for
escalating the structure and marketing operations of its subsidiaries.
Maganbhai thought that an increase in the stake of the promoters was an encouraging sign.
Their confidence could be corroborated by the fact that the warrants to Subra holdings, if
exercised would mean that its stake would now be 69%.
Lalbhai was apprehensive about the fact that SIL was valuing its shares at less than market
price, but there was no serious threat to the concerns of the investor as the company was
raising a good quantity of money by raising ADS (4.7 Billion). This represented about 12
percent of the companys equity.
II) The Aggressive Phase (2000-2002)
STL assimilated 3 firms in a period of 6 months, spending a total of 32.4 million dollars.
There was a point of concern in these transactions, as all were cash deals, and it was unusual
for the IT Industry.
Secondly, the amalgamation of STL and Serra Nova equaled 175 million dollars and STL
paying its debts as well. The debts amounted to 21 million dollars.
Despite perceiving a trek in its financial position, the worldwide soaring of the financial
evolution of STL and the 9/11 terror attacks had a negative effect.
III) Period of Catastrophe - Post April 2002
The rupture of the IT bubble, and the crash of the stock prices of IT companies around the
globe led to the dismissal of 2300 employees resulting in cash outflow of 2.8 billion rupees,
ultimately affecting the capital expenditure of the company. Major acquisitions made by the
company also were the reason of its plummeting stock prices - from 1395 per share to 23 per
share.
Maganbhai on the other hand mentioned that the promoters share in the business would
surge by redeeming warrants, but this was unmanageable as the parent company itself was
suffering from liquidity issues.
The company avoided payments to its bankers in India. Long term liabilities of SLT increased
ultimately leading to loans from all the banks.

Then in FY 2003 the company was dragged into a number of litigations, both in India and the
US. There were hints of links with Ketan Parekh and it was one of the companies to be
investigated by the JPC.
Q2. From the case, please list a few early warning signs of a company in trouble. List a few
supporting red flags.
Ans.
1. Non-diversified portfolio: 45 percent of SILs revenue came from wo corporate clients
and that too in a business (Mainframe) where the margins were quite low.
2. Acquisition methods: The acquisition of CIT Canada, Megasys Software Services and
Sky capital International involved all cash transactions which were unusual for IT sector
M&As.
3. Acquisition of businesses different from ones core competencies: STLs acquisition of
SeraNova in March 2001 where industry experts felt that these were different businesses
requiring varied skills and knowledge.
4. Falling share price: The share price of STL fell from heights of 1395/- per share to below
100/- per share in 2001 following the Dot-Com Bubble burst in 2001.
5. Layoffs: Laying off 2300 STL employees sent very negative signals to the market about
the cash crunch being faced by the company.
6. Resignation of Senior Management: The change of auditors of STL and its subsidiaries,
and the resignation of five independent directors from the board of the company raised
eyebrows.
7. Posting losses: STL posted a net loss of Rs. 286 million on total revenue of Rs. 1.8 billion
for the quarter ended September 2001, compared 559 million profit and Rs. 1.73 billion
revenue recorded for the corresponding period in the previous fiscal.
The following signs were enough to signal the crisis that STL was facing and a breakdown
was imminent.