Infosys has put the $2 billion worth of cash on its balance sheet to good use by snapping up the UK-based Axon Group for £407.1 million ($753 million). At just under two times CY07 sales and a trailing price-earnings multiple of around 18 times, the acquisition may seem a tad expensive. That’s because the £200-million Axon is nowhere as profitable as Infosys; the former’s operating profit margin (OPM) at 15 per cent is way below that of Infosys’ 30.5 at the end of the June 2008 quarter.
However, looking at it another way, the cash would have earned Infosys about 5-6 per cent. Even if the dividend yield from Axon and its earnings per share (EPS) are only marginally positive at present, they can be made to grow.
But it’s probably not a bad time for a buyout because share prices have come off sharply. Axon has yielded about 30 per cent since the start of the year to close at £502 last Friday.
More importantly, the firm has a strong SAP and consulting practice, something Infosys probably misses. Among its peers, Satyam Computers has a good presence in SAP. That apart, Infosys will also inherit some marquee clients and even if some of them are already working with it, there should be an opportunity to cross-sell products.
Also Infosys currently earns about 29 per cent of its revenues from Europe—this buyout should push up the exposure to the continent to around 35 per cent.
The acquisition is not a very large one and that will probably help Infosys digest it better. Compared with about 100,000 people at Infosys, there are only 2000 employees at Axon. Rather than buy up a big company with thousands of employees and try to bring down costs, Infosys has chosen to buy a reasonably profitable smaller firm with a specialisation.
That is probably the best way to go about it especially at times like this when the environment is challenging. The Street should be satisfied that Infosys has at last used up some of its cash.
