Business Today

Consulting caper

 With over Rs 8,000 crore in cash, India’s best-known IT company, Infosys, finally bit the big acquisition bullet when it announced its plans to acquire London-based Axon Group. Infosys’ acquisition of Axon could pay off in the long run.

Rahul Sachitanand | Print Edition: September 21, 2008

This was the news Indian IT was awaiting for some time. With over Rs 8,000 crore in cash, India’s best-known IT company, Infosys, finally bit the big acquisition bullet when it announced its plans to acquire London-based Axon Group, a specialist in SAP-related consulting and services, for $753.1 million (approx. Rs 3,300 crore) on August 26. If completed, this would be Infosys’ third buyout, after Expert IS in December 2003 for Rs 104 crore, and three Philips back offices in July 2007, for Rs 115 crore. But the Axon acquisition won’t be cheap: Infosys will be paying roughly two times revenues, 20 times profits and a 33 per cent premium on the six-month average share price of the British company.

Infosys’ Gopalakrishnan: He is banking on the acquisition to move up the IT value chain
Infosys’ Gopalakrishnan: He is banking on the acquisition to move up the IT value chain
For all that money, Infosys gets access to a fairly healthy firm; in a slow-growing European IT industry (inching ahead at under 5 per cent per annum), Axon has been growing at a cumulative average rate of 42 per cent annually for the past four years.

Its margins of 10 per cent are also better than many of its peers in that industry. Axon’s 2,100 SAP consultants will enable Infosys to double its headcount in that specialised area, where consultants are at a premium the world over. According to Infosys executives, the company services some 100 SAP clients and the practice has grown at a cumulative average rate of 66 per cent over the last three years.

“The acquisition is a strategic step and would strengthen the presence of Infosys in transformation deals, consulting and PI (Package Implementation),” says Priya Rohira, IT Analyst at Enam Securities. According to the brokerage, Axon’s 61 per cent revenue derivation from Europe would be instrumental in driving market share in large deals for Infosys. The acquisition of Axon Group would add 9 per cent to Infosys’ 2008-09 top line, 4 per cent to operating profits and 3 per cent to post-tax profits, according to various industry estimates.

Given the strategic nature of the deal, some analysts expect a counter offer from Infosys’ global and Indian competitors for Axon. According to Infosys CFO V. Balakrishnan, shareholders owning only 18.1 per cent of the company (the founders and the key management) have agreed to sell, with Infosys planning to de-list the company’s shares on the London Stock Exchange. Standard Life Investments, Blackrock, JPMorgan Chase, Aegon and UBS are some existing institutional investors in Axon Group. Infosys has little over a year to persuade them to sell their shares.

With nearly 82 per cent of the shareholding yet to be acquired, Infosys has given itself plenty of time. “We expect to complete the deal by November next year,” says Balakrishnan. Incidentally, Axon is hardly a pure-play consulting outfit. In reality, the company gets just a fifth of its revenues from the high-value consulting business and the rest from systems integration.

Despite the long lead time before the deal is finally done, Infosys executives argue that the prolonged closure would be worth the wait. “In Axon, we find an opportunity to take full advantage of the clients they have, the capabilities they have and the reach they have to create one of the world’s largest SAP consulting providers,” Kris Gopalakrishnan, CEO and MD, Infosys, told analysts after signing the deal.

According to some analysts, this deal works because Infosys and Axon have complementary areas of expertise and client concentration. “The acquisition will significantly enhance Infosys’ high-end business consulting and global delivery capability. It now brings, we estimate, over a hundred new clients and missing industry verticals, such as the public sector in Europe into Infosys’ fold,” says Sudin Apte, Senior Analyst with Forrester Research. The Axon buy also helps Infosys build local European ‘onsite’ presence with Infosys’ strong offshore delivery capability, he adds.

Despite this bullishness, there are others who feel Infosys will take some time to digest such a large deal and key financial metrics could be hurt, at least in the short term. “We expect the deal to be dilutive in terms of operating margins in the current year and in 2009-10 notwithstanding enhanced offshoring efforts and other streamlining of Axon’s processes by Infosys,” according to Jayendran Rajappa and Jaspreet Chhabra, analysts at Mumbai brokerage Prabhudas Lilladher.

For Infosys then, the real value of this deal may be in the long term, as the Bangalore-based company seeks to transform itself from an India-based IT services company into a global technology and consulting firm. “This deal is the first yet substantial step towards building superior business transformation capability to match traditional back office services such as application development and maintenance,” says Forrester’s Apte. Infosys had started its consulting business back in 2003-04, when it invested $20 million (Rs 86 crore) in the outfit and hired veteran rainmakers. Four years later, Infosys gets around a quarter of its revenues from this business, even as it looks to transform itself into a high-value player.

Clearly, Infosys’ quest for consulting is, as yet, work-in-progress.

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