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September 07, 2008

Analysis of the Infosys/Axon deal

Businessworld has an analysis of Infosys' $750 million acquisition of UK-listed Axon.
The timing of the acquisition is also attracting attention. “Why acquire Axon now?” asks Peter Schumacher, CEO of Value Leadership, a US- based IT consulting company. “With the world economy softening, the IT services sector in Europe is expected to slow and valuations decline further. Did Infosys become impatient and pay too much?” A look at the size of outsourcing deals from European companies makes his question a valid one. This year not a single outsourcing deal in the range of $100 million or upwards has gone to the country’s top three IT majors, including Infosys. Majority of the deals have been in the $5million-10 million range, leading one to conclude that there are no big ticket deals at present in Europe.

However, Indian IT majors who have traditionally been getting about 70 per cent of their revenues from US are slowly gaining foothold in Europe, albeit with small deals. “Given that over 60 per cent of Axon’s revenues are derived from Europe, we expect Infosys’s consolidated revenues from Europe to move from the current 28 per cent to 28.6 per cent and 30.4 per cent in FY 09 and FY 10,” says Shah of Prabhudas Leeladhar.

Europe is an attractive growth market but one that Indian firms have found hard to break into. And the Infosys-Axon deal meets most of the strategic intent that Indian firms need to pursue. Says Avinash Vashishtha, CEO of Tholons, “Axon plugs a significant gap in Infosys’ geography diversification and presence in a high-growth market.” Adds Forrester’s Apte, “The deal brings, we estimate, over a hundred new clients and missing industry verticals such as public sector to Infosys’s fold.” He adds that despite Axon’s substantial employee base in Europe, it is Infosys that is better equipped to address the much-wanted European client demand of a “combination of local Europe presence and offshore scale”. According to Manoj Mohta, Head of Crisil Research, “When an Indian Tier-1 player makes an acquisition in the European market, which in turn leads to part of the work being offshored to India, it can lead to a 4-6 per cent improvement in margins through that acquisition over 3-4 years.” If Infosys could capitalise on this, its margins — which are already better than most domestic IT majors, should see an uptick.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.