Infosys Technologies, the country’s second largest software services provider, has decided not to outbid HCL Technologies' 650 pence a share bid for the UK-based SAP firm, the Axon group.
Infosys had bid at 600 pence a share for the UK company.
"After careful consideration, the board of Infosys has concluded it will not increase the price of its original offer," the Bangalore-based company said.
Infosys will get the one per cent inducement fee that Axon has to pay to the party unable to close the deal.
Analysts at Emkay believe that the Axon acquisition could hit HCL Technologies' earning estimates by around 2-5 per cent for FY09 and FY10. There is a buzz doing the rounds that a third party may enter the race for Axon.
This third vendor, as analysts say, might be a European company and most likely to bid at 670 pence a share for the UK firm, 3.07 per cent more than the HCL offer. “The third party is most probably a non-US entity, but this is only a market rumour,” says Vinu Kartha, principal, Tholons Consulting. Any counter-bid by Infosys will raise the acquisition cost and accentuate the negative impact further.
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In a scenario that the third vendor offers 670 pence, then HCL may have to up its bid to 680 pence, which may be its final offer. Though HCL is more inclined towards the deal, its debt situation has already hammered down its share price.
HCL Technologies, which has around Rs 2,800 crore cash in hand, plans to raise around Rs 3,280 crore. It can raise more funds either by issuing additional stocks, which is an unlikely proposition, or it can raise more debt. The second option is equally difficult, given the falling share price of the company, opine analysts from Tholons Consulting.
Kartha said the competitive bidding price will be 700-720 pence and the bidding might end there. The top end of the deal will be 700 pence and 720 pence is only speculative as the deal is already overpriced from a pure financial point, he added.
“It's a good decision to back off from the Axon deal. Anyway, the deal is expensive. Besides, the enterprise business will be impacted in the long term as Oracle and SAP have registered low sales in this quarter. So, in a way, if the deal did not work out, it's fine.” said an analyst on condition of anonymity.
“The Axon deal is a good one. The acquisition would have helped Infosys grow its SAP practice faster as Axon has some specific offering that none of the Indian IT firms has and cannot be replicated easily,” countered an investment banker. Emkay Research analysts note that Axon could be a prized asset for HCL Tech as compared to Infosys, given that the company has lagged behind its peers in the enterprise applications space and thus could close the gap with Axon in its fold. They add that SAP, Oracle applications continue to be strong growth areas despite street/ investor concerns/ worries on a slack in overall demand in the segment.
They added that main challenges emanate from cultural integration, employee retention although the HCL management underplayed these challenges citing its track record with acquisitions/ takeover of smaller captives from Deutsche Bank, British Telecom, etc during the investor/ analyst call.