By making a friendly takeover bid for the UK-based Axon, Infosys Technologies has at last done what it has been expected to do for years, make a substantial acquisition which will deploy a part of its cash hoard. The deal will give Infosys higher-end consulting capabilities, and enable it to grow in a non-linear fashion. Till now Indian IT leaders have mostly grown their top line by adding to the headcount, the former being a multiple of the latter. To move up the value chain, an IT service provider has to get out of relying on maintenance and development, and offer management solutions that address clients’ business needs and define their processes as also IT architecture. It is easy to see where Axon fits in by comparing its revenue per employee ($200,000) with that of Infosys ($88,000). Additionally, the deal will enable Infosys to acquire some global names as clients and improve the Indian major’s footprints in Europe at a time when Indian firms need to reduce their dependence on the US market.
Till now, Infosys has been conservative about acquisitions, preferring to grow via the organic route. That changed when it acquired a chunk of the outsourced work of Philips. Now it has made a $753 million acquisition (far bigger than its Australian acquisition), which takes it to the top of the league among India’s IT majors. Infosys’ conservatism so far has been vindicated by the contrast in its performance with that of other Indian IT leaders which laid greater store by inorganic growth. They had initially posted quick post-acquisition growth, only to suffer declining margins later. In fact, Infosys’ managing director, Kris Gopalakrishnan, had pointedly observed that around 75 per cent of acquisitions don’t deliver and the results of Indian firms’ acquisitions are decidedly “mixed”.
The acquisition will give a boost to Infosys at a time when India’s IT industry is under pressure, in the wake of the US slowdown and the crisis in its financial services industry. The latter is the most important vertical for Indian software providers. The jury is still out on whether the impact of these global developments will be severe, but there is the widespread expectation that the Indian IT industry will slow down its recruitment and post lower growth. At such a juncture, it makes sense to look for inorganic growth by taking over businesses. The Axon acquisition has been well received by the analyst community as Infosys is perceived to have paid well for a worthwhile asset which fits in well with its own profile. If the bid succeeds, Infosys will emerge stronger and bigger.
