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January 14, 2009

How HCL outsmarted Infosys on the Axon acquisition

In an interview to Outlook Business, Vineet Nayar, CEO of HCL, explains how his company managed to snag Axon at a price lower than what rival Infosys had originally bid for the UK-based IT Services firm.

There were three smart things we did. First, we borrowed the money. Second, we took a dollar loan; we could see that the US dollar was falling against the pound. When we made the bid, it would have cost us $786 million; today, it’s $650 million. We saved $136 million in the dollar-pound conversion alone. Third, we bought 10.43% Axon equity from the market. We knew that whatever we did, we could always buy the stock at much lower rates in the market. Our ceiling was 650 pence, but we bought from the open market at 600-630 pence. Putting all this together, the total cost of ownership for HCL is significantly lower than what Infosys had bid.

...We had thought out our moves well. It was important for us that analyst reactions were negative. We did not want the deal to look attractive to a third party. The more negative the industry was about the deal, the less chance of a third party coming in. Analysts were talking about $780 million. It ultimately came to about $650 million. Why did we acquire 10.43%? To demonstrate our aggression to the third party—that we were there to stay. As per the contract, Axon was supposed to inform us if a third party approached them. The moment that happened, we would have upped the 10.43% to 26%, forcing the other party to get 74% votes to acquire the company.

...We worked with (Axon’s management) to explain their roles and responsibilities within HCL. We explained that there would be a reverse merger of the HCL SAP practice under them. They understood that they would be twice as big after the acquisition. They also saw that they would have HCL’s balance sheet and 400 sales guys selling for them, plus an additional 250 customers to sell to. All this enthused them, especially because their brand would remain. The unit will be called HCL Axon and they will be independent.

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. Email the author at