On September 27, 2012, two decades after he started the company and one day before his investors were to vote to extend his term as managing director and CEO for another five years, Subash Menon resigned from Subex. He had already stepped down as chairman a few months ago.
It’s normal to reward longtime employees of a company when they leave; and in this case, Menon was the company’s founder too. Yet, he wasn’t eligible for either the separation or the notice period amounts in his employment contract. Subex’s board had in July amended those contracts to first remove the separation payment, and then to prevent a notice period if Menon resigned on his own.
Within a week, Ramanathan J, head of the company’s finance function, resigned. Sudheesh Yezhuvath, Menon’s brother and the company’s COO, was removed.
The board that took these decisions was mostly new. Anil Singhvi, a former CEO of cement maker Gujarat Ambuja and founder of investment advisory firm Institutional Investor Advisory Services (IIAS), and Sanjeev Aga, former managing director of Idea Cellular, joined the board in April 2011 as independent directors. Both Singhvi and Aga are part of a new tribe of shareholder activists-cum-advisors, who are seen as a minority shareholder bulwark against the whims and fancies of promoters.
Two more board members were added this July when Surjeet Singh, former CFO of Patni, and Karthikeyan Muthuswamy, an investment advisor to Elliott Capital, were brought in as nominee directors.
On October 5, Singh was elected as Subex’s new CEO. He had left iGate Patni (now iGate Corp) in May 2011, reportedly after being denied the CFO’s role.
And so it happened that Subash Menon—entrepreneur, risk-taker, history buff and socialist-communist—found himself surgically separated from the Rs 477-crore Subex, a company he started with a loan of Rs 20,000 from an ex-employer in 1992.
His shareholding is down to just over 5 percent in Subex and the five-year-long rope his investors had given him has finally run out. Like with many entrepreneurs, his sheer ambition was simultaneously the reason for Subex’s meteoric rise as well as its catastrophic fall.
But if he’s dejected, he doesn’t show it. “The company is on a strong footing and it can now go back to its earlier rate of growth. To me, it’s a job done to a large extent,” says Menon.
The Perfect Storm
In the 1990s and 2000s, Subex challenged the conventional wisdom about creating software in India. It sold branded software licences instead of selling code by the kilo (or KLOC—kilo lines of code), ploughed back cash and equity liberally for growth instead of hoarding every penny of profit, and aggressively acquired foreign companies.
From 2000, its revenues grew at a compounded annual rate of 33 percent to reach $54.8 million by 2007.
Then, in January 2007, Subex bought Canadian telecom software company Syndesis, its seventh acquisition, for $165 million in cash. You could say that was the beginning of the end of Subex’s dream run.
It had first approached Syndesis for a merger in late 2005, but the company was not interested in selling. Ironically, in 2006, just a year later, Syndesis approached Subex offering itself for sale ostensibly because its investors—a clutch of venture capital firms, including the likes of Sequoia and Greylock—wanted an exit. But the deal would have to be done in cash, the entire 100 percent of it.
That was the first mistake because, in the past, Subex had done most major acquisitions using its own stock instead of cash.
For the first time in its history, Subex acquired a company for its IP instead of its customers. But because Subex’s expertise lay in a different area (revenue maximisation) than Syndesis’ (service assurance), it was unable to either fully understand the complexity of the latter’s software or poke holes in its rosy sales projections. That was the second mistake.
“Syndesis had negative margins. Venture-backed companies are not very profit-oriented. Their view is to get revenue up, achieve capital gains, sell and get out,” said Menon to Forbes India in an interview in September 2008.
Subex then decided to raise most of the money for the acquisition by listing its shares on the London Stock Exchange through the GDR (Global Depository Receipts) route. But on February 27, 2007, one day before its fund-raising roadshow was to end, stock markets around the world crashed following the lead from the Dow, which fell 416 points—its largest fall since September 2001. Subex’s stock crashed to Rs 620, lesser than the SEBI-set floor price of Rs 650 for its GDR.
While Menon was fighting to stave off the mountain of debt, Subex’s business was deteriorating rapidly. With all its profits being set aside to account for the growing mark-to-market losses on its debt, it didn’t have any money to invest in things like R&D and marketing.
(This story appears in the 23 November, 2012 issue of Forbes India. To visit our Archives, click here.)
This guy planned his exit from Subex when @ "Subex bought Canadian telecom software company Syndesis, its seventh acquisition, for $165 million in cash" and later reduced his share to 5% in subex. He is smart and not as greedy as Satyma founder.
on Apr 3, 2014And that is the spirit of a Malayali. I am from Mumbai. All Malayalees here with empty hands and majority earns something and settle in Mumbai.
on Sep 28, 2013Good opportunity for an investigative journalist here. The scam is bigger than Saytam. So far no evidence to prove. It is great challenge because of the intelligence level of the people. They have proved this by well planned execution
on Dec 11, 2012Subex rose due to share broker Ketan Parekh. Doing no worthwhile business but shares rose phenomenally due to Ketan Parekh and his cohorts. If Subhash was keen on his company, why was his stake at 5%. It is clear he has sold out at a high price and jumped ship. Subex is another Satyam, Pentafour software or Square D software.
on Nov 17, 2012You are correct. Subex shares rose because of manipulations. There are bigger operational issues. Mr. Menon’s theory of inorganic growth is not acceptable. Can’t they build new products and improve quality of existing products for decades? There are number of issues with products. Teams are structured to hide each others incapability. People went to evaluate Syndesis and acquired and mismanaged are continued to be rewarded abnormally. Talented people can not survive there. People who objected mismanagement were made so uncomfortable and forced to quit. Questions are how Anil Singhvi and Sanjeev Aga will fix these issues? Is the CEO with finance background been misguided? Will this CEO take risk of short Subex stint like his previous one? Good luck to the investors.
on Nov 18, 2012Good luck Mr.Menon with Kivar. Forbes will do another story on you titled \"The Rise ,Fall and Rise of Subex Founder Subash Menon\"
on Nov 16, 2012The title of the story \"How Menon is smarter than Raju\".
on Dec 11, 2012