Panaya shows Infy's drive to move up the value chain

The $200-million acquisition of the California company has been done primarily to free Infosys employees from the drudgery of doing repetitive tasks

Until Infosys announced last week that it was acquiring California-headquartered automation technology provider Panaya for six times its revenue, a buyout at such high valuation was unheard of in the IT outsourcing services space. Normally, the purchase price is one-and-a-half to two times the revenue, though an amount as high as tenfold is not uncommon in the software product category.

Many feel that Infosys was too generous in shelling out $200 million, a sentiment similarly expressed last September when Cognizant bought Colorado-headquartered TriZetto for $2.7 billion, a price that was 3.8 times the revenue of the healthcare solutions provider. It isn't surprising, therefore, that at the analysts' teleconference on February 16 to announce the Panaya acquisition, many participants felt they didn't get convincing replies to their queries. Some asked about the number of clients that Panaya would bring. Others wanted information on the potential contribution of Panaya's largest client, while still others wondered how the overlapping of clients of the two companies would affect the Bengaluru-based Infosys's business. Among the many replies, the Infosys bosses let it be known that this acquisition was not for scale, but for improving the internal efficiencies and for capability building.

In many ways, therefore, the decision of Infosys to acquire Panaya breaks the mould of the prevalent practice in the IT services industry where a firm is purchased primarily to grow revenues, to get access to new markets or specific customer bases, to gain entry to newer segments or to fill the technological gaps in the existing offerings. Analysts thus view the acquisition aimed at using its technology for internal improvement in service delivery as pathbreaking.

For Infosys, this was the first chance to put in place its new strategy under Vishal Sikka, the first non-founder chief executive & managing director. After assuming charge at Infosys, Sikka has been advocating the need for software professionals to enhance clients' works instead of doing the same work that the clients could do. He had made two things absolutely clear. One, it was necessary to enable the employees to avoid routine repetitive activities through automation so that they could focus on value addition and innovation. And two, it was equally important to improve revenue per employee, which, though higher for Infosys compared with other Indian IT services firms, was still way behind the norm for global software companies.

Rolling out a new plan
Most of his thoughts and vision were formalised in a new strategy for Infosys that was unveiled in October last year. Its objective is to position Infosys as a "next generation services company" with dual imperatives: "renewal" of the core and innovation in "new" areas. While the company conducted "design thinking" workshops in partnership with Stanford University's Design School to train the employees in the new scheme of things, Sikka, a doctorate degree holder in artificial intelligence from Stanford University, also made it clear that Infosys would aggressively look at buying-out "technologies of tomorrow". These would be areas, he highlighted, where the company would pursue active inorganic growth opportunities, including artificial intelligence, automation, Internet of Things, robotics and big data and analytics.

While undertaking the first acquisition to supplement this strategy last week, Sikka made it clear that he was not going to stop with Panaya but would consider more such buyouts in the days to come.

INFOSYS’S BUYOUTS SO FAR

A COSTLY GAME?

• Panaya’s valuation of six times of its sales makes it one of the most expensive acquisitions by any Indian IT services company
• TriZetto, which was acquired by Cognizant in September 2014, was valued at 3.8 times its revenues
• Most of the acquisitions of pure software companies are valued at over six times their sales. For example, SAP SE paid $3.4 billion, close to 12 times the sales of SuccessFactors when buying the provider of human capital management software in 2011
• Taleo, acquired by Oracle in 2012 for $1.9 billion, was valued 6.5 times its trailing 12-month sales
• Experts say Infy’s costly acquisition of Panaya is justified given that it is acquiring pure software assets

WHAT IT BRINGS TO THE TABLE

• Around 156 employees, most of them in core software R&D, primarily located in Israel
• Platform to automate quality testing work traditionally carried out by humans
• A cloud-based service that cuts down the risk, time and cost required to deliver changes to enterprise software from the likes of  SAP, Oracle, JDEdwards and Salesforce.com
• The potential for Infosys to introduce SaaS-based automation to its service lines, thus significantly reducing delivery time for clients

WHAT INFOSYS’S PREVIOUS ACQUISITIONS HAVE BROUGHT

• Australian IT services provider Expert Information Services, bought in 2003 for about $23 million, gave Infosys access to a relatively new market
• Captive BPO operations of Dutch consumer electronics giant Philips for $28 million came bundled with a multi-year business commitment of $250 million
• US-based insurance and financial service back-office service provider McCamish, bought in 2009 for $58 million, enhanced Infosys’s capability to provide end-to-end BPO solutions for insurance and financial industries
• Australia-based Portland Group, acquired for $(A) 34 million in December 2011, enhanced BPO capability in strategic sourcing and category management services areas
• Consultancy firm Lodestone Holding, which came to the  Infosys fold for $345 million, strengthened its consulting capabilities by bringing in 750 SAP consultants and over 200 clients

"Panaya is a very interesting acquisition, and represents a two-for-one for Infosys. It fits two of the key themes that Sikka is emphasising," says Peter Bendor-Samuel, founder and CEO of Everest Group, a global management consulting firm. "One, it fits into the strategic direction to change how services are delivered and positions Infosys to move faster into a nonlinear or automated service delivery model without paying exorbitant rates to other software firms. Two, it provides Infosys a leading position in a fast moving space which it can cross-sell to existing clients and use as a spearhead into new clients." Bendor-Samuel describes the high valuation of Panaya as "a recognition of the fact that Infosys is buying a true software company, not consulting tuck-ins".

Why is Panaya so important for Infosys? The main attraction is its flagship product called the CloudQuality suite. The platform automates the quality testing activities that are traditionally carried out by humans. So the first value Infosys derives from using the platform is the introduction of Software as a Service (SaaS)-based automation that can dramatically reduce delivery time for clients and thus reduce the costs. The platform is quite vital for SAP (systems, applications and products) customers as it does away with reworking while customising for individual requirements.

The values that Panaya brings were best elaborated by Sikka. "The Panaya acquisition will help amplify the potential of our people, freeing us from the drudgery of many repetitive tasks, so that we may focus more on the important, strategic challenges faced by our clients."

Moving on from outsourcing
The acquisition is a clear indication of Infosys's focus on moving to automation technology and driving non-linear growth strategy rather than just IT software outsourcing business, where growth is dependent on people, says Raja Lahiri, partner, Grant Thornton India. "Infosys's strategy to invest in software product and process automation technology is also demonstrated through this acquisition," he adds.

The acquisition of Panaya, which has most of its 156 employees located in Israel, a country known for its innovative start-up ecosystem, also points to the new-found risk-taking of Infosys, otherwise perceived as a conservative player in the merger and acquisitions (M&A) space. Infosys is "running the marathon like a sprinter," says Shashi Bhusan, a senior research analyst at equity research firm Prabhudas Lilladher, after the buyout, highlighting how the Bengaluru company had gone "from one of the most conservative to one that did the most expensive acquisition."

Since its inception, Infosys has been involved in just five acquisitions, the largest being Lodestone, a Switzerland-based management consultancy firm that it bought in September 2012 for about $345 million. In 2008, Infosys had offered to buy UK-based SAP consulting company Axon Group for about $753.1 million, but backed out after HCL Technologies bid a higher price.