)
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 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.
