A McKinsey study on the last slowdown of 2001-2002 showed the companies that emerged successfully from the downturn were those that used their cash, did lots of mergers and acquisitions, and stepped on the accelerator. HCL has done just that by going ahead and acquiring UK-based SAP consulting firm, Axon. Along the way, it outbid Infosys Technologies. It’s the largest overseas acquisition by an Indian IT company. Given the global slowdown, many believe that HCL has bitten more than it can chew. However, Vineet Nayar, its chief executive officer, tells Leslie D’Monte there couldn’t be a better time to do it. Edited excerpts:
Why did you choose to go ahead and acquire at a time when the financial turmoil is pegging everyone back, including information technology companies?
It’s all about management philosophy. There are companies that have ambition and hunger, and adopt a growth-oriented strategy. There are others that prefer to live in a comfort zone. What one company sees as an opportunity, the other views as risk. If you take a look at financial models, you will come up with the same argument. However, no company should live from quarter to quarter or year on year.
These are cycles where one high leads to a downward curve. Unless you invest during a slump, there is a likelihood that you will not be able to survive the next cycle. During a downward trend, some companies reduce their pace while others prefer to build a new house. Conserving cash when the times are bad is typical manufacturing parlance. Indeed, if you invest in growth, like we did with Axon, you will take longer to recover from a downturn. But our view is that we have to invest in new businesses that will help us grow.
From 2005 onwards, we have adopted the Blue Ocean strategy, which prompts us to invest in spaces that are not populated by most Indian IT services providers. Application, development and maintenance is a Red Ocean (very competitive, which leads to bloodletting, and therefore associated with the red colour).
But look at our strategy. We were the first to invest in engineering outsourcing services, which is now growing at twice the rate of the industry. We were also the forerunners when it comes to remote infrastructure management, which is growing at 50 per cent more than the industry rate. And now the SAP practice.
...but why Axon?
It’s only logical that we would want to invest in SAP capability (Systemanalyse und Programmentwicklung, or System Analysis and Program Development) which is another Blue Ocean. It is a $27 billion market, of which $7.3 billion can be done offshore. Of this, the share of Indian IT service providers is only $1.5 billion. So there is plenty of headroom that we want to exploit.
However, in terms of our SAP capability, there was a huge gap. A recession is an ideal time to address such capability gaps. We tried to address the gap organically, but could not do so. With Axon, we are now three times bigger than our nearest Indian competitor. But your other competitors, IBM and Accenture, are much bigger than you in this space.
True, they are three times larger than us. But we have an offshoring advantage in SAP over them.
Does the deal make financial sense, given that your debt is increasing?
Of course, it’s for this very reason it makes more sense than using your own cash, which can earn us 11 per cent interest. Taking debt from Stanchart made immense sense to us, since we got an almost 5 per cent arbitrage on the interest rates. Moreover, we bought a lot of Axon stock from the open market, too, which saved us money. Last, but not the least, the GBP (British pound) had depreciated by almost 20 per cent to the US dollar. Since we are paying in dollars, this was an added advantage.
Tell us a little about Axon’s integration with your company.
Axon will exist as a separate entity called HCL Axon. The current CEO of Axon Group, Steve Cardell, will be its new chief. We expect this new structure to contribute $600 million — about 30 per cent of our revenues. The October-December quarter will reflect 15 days’ revenue from the new entity. From 2009, the entire revenue will start getting reflected.
...but how do you convince the markets that Axon is good for you?
The markets have a mind of their own. There’s little one can do about it other than stating one’s reasons.
What about the domestic market?
The Indian market is yet to mature. Negotiating this turf is very cumbersome. Investing in IT should be not just to reduce costs, but to enhance value and efficiency.
What’s your take on the global IT scenario and its impact on Indian IT firms?
There’s no denying that some customers, some centres and some industries have been affected badly, which has triggered a panic reaction, and hence the predictions of lower IT spend. Besides, all currencies have fallen against the US dollar, and since we report our revenues in dollar terms, the currency fluctuation alone will result in our growth falling by around 8 per cent year on year. Existing customers, too, are finding new avenues — other low-cost destinations, price renegotiations, more high-end work for the same price, and so on.
The positive, though, is that more companies, more industries and more countries (Germany, Sweden, Scandinavian countries) are opening up offshoring work to us. Besides, more services are being offshored as companies attempt to squeeze costs following the hit they’ve taken in this recessionary period.
