Indian IT firms go for overseas acquisitions

by Editor 9/29/2008 4:47:00 PM
Indian IT company HC Technologies has trumped a bid from Infosys Technologies, offering £441.1 million in cash for Axon. If Infosys wishes to stay in the running, it needs to counter the bid within 45 days.

India’s second largest provider of software services has asked Axon shareholders not to make any definite decisions on the counter offer yet and wait for an announcement.

Following Infosys Technologies and HCL Technologies’ bids for the Surrey-based consultancy, Indian information technology firms are expected to make at least six similar acquisitions in the next 12 months.

Credit Suisse analysts say that more than half of the 11 IT companies that provide revenue guidance may not achieve their target this year. The new estimates are lower for Infosys, Satyam and Mindtree. Economist do not think that the worst period has started yet, which could translate into a longer period of slowdown for the firms.

Forrester India analyst Sudin Apte points out that there is a flip side to the situation, saying that, since valuations are low, Infosys, HCL and other IT companies will try to “buy the top line to meet guidance figures.”

He adds: “We will be surely seeing more such acquisitions as companies see a dip in client business. Besides the SAP practice, the IT sector will see more such sizeable ticket acquisitions in verticals such as retail, healthcare, telecom, and media.”

Hanuman Tripathi, CEO and managing director of Infrasoft Technologies, agrees: “Opportunity of covering the gap expected in the financial guidance and lower PE multiples already given, there could be certain large-scale western buy-outs that Indian software companies may opt for before March 2009.”

Indian IT firms have climbed up the value chain in recent years and are now competing with such global giants as Accenture, IBM and Hewlett-Packard (EDS). The boost in value has been effected in part by the acquisitions, which provided the Indian companies with “complementary skills, added capability besides business transformation (when IT becomes a critical part of the business model) capabilities,” explains Apte.

Infosys Consulting has been increasing investments and is currently in the red. The deal with Axon would help boost the company’s revenues.

Axon’s revenue comes primarily from SAP implementation services (about 80 percent) and high-end consulting (about 20 percent). The buy-out is expected to improve Infosys’ margin from the current 15-20 percent, because some of the work can be outsourced, and also to help Infosys’ operations in Europe.

The Axon deal will also bring around 2,000 employees to whichever Indian IT firm acquires it. Axon employees are very skilled at business consulting and transformation and have a lot of experience to bring to the table.

Both Infosys and HCL stand to profit from the acquisition. If HCL gets Axon, it will become the 12th biggest global provider of SAP implementation services. Infosys, on the other hand, will leap to the 10th position if it counters the bid successfully.

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