Finally Infosys goes for it

Finally, Infosys wants to acquire a company. After several years of refusing to acquire a company, Infosys has come out with a proposal to acquire Axon Plc, an UK based Consultancy Company.

        During last several years, Infosys denied the need of acquisition on the grounds of strong organic growth, lack of suitable companies that can be acquired etc but things seems to have changed now. With growing need to diversify business mix, reduce dependency on US market and better deploy 6000 crore rupees of cash pile up(on which Infy was earning 6% post tax return) and slow organic growth, Infosys seems to be thinking correct that time has come to grow inorganically.

        I remember asking question to Kris Gopalakrishanan, CEO Infosys, in one of townhall meetings regarding poor utilization of cash reserves and acquisition needs.  He wasn’t expecting such a question which shareholders typically ask in Annual general meetings and he did comment that this question is an AGM question. He answered in his conservative style that we don’t have to grow inorganically when we can achieve the same growth in organic way.

        By now internet is full of analysis on how good or bad the Infosys game plan is. People have reservations on this deal. They are worried about actual benefits out of this costliest transaction ever done by Indian IT Company. Some stock analysts have even downgraded infy stock on basis of likely downfall in Earnings per share in coming quarters.

        I think Infy management is one of the cautious, risk averse management among all Indian IT companies. I feel they would have taken several months to arrive at this conclusion. Infosys is famous for playing safe and I believe they must have exercised acute diligence in arriving at this decision. However, I feel there are several questions which could be raised against logic of the deal. Let me try to capture some of them over here:

Cash is precious:

When markets are slowing down, cash can be precious. When ypu have 100,000 employees and you promise to give them salary for one year without doing any business, 100% cash deal looks illogical. Why couldn’t have Infosys tried to raise debt on its balance sheet and partially fund the acquisition?

Expensive deal

Axon has generated profits of 37.4 million USD on sales of 378.3 million USD. So, Infy is spending 700+ million dollars to add just 37 million dollars to its bottom line. Doesn’t the deal look pricey? I guess this decision reflects the desperateness that Infy and other companies are showing to grow in Europe.

Other Markets

Japan is second largest market after US and Indian companies including Infosys derive very small fraction of their revenues from Japanese market. It would have been bold decision to acquire a Japanese company to penetrate in an impregnable market.

        We have witnessed many acquisitions happening in Indian markets. EDS bought Mphasis. Cap Gemini bought Kanbay. When market conditions are tough, it becomes conducive to make acquisitions in Indian market. There are too many Indian vendors small and big struggling to grow. I believe time has come for consolidation in Indian markets and Infosys could have tried to look inwards rather than outwards.

Margins

Infosys has always talked about preserving margins and maintaining them (27%) at highest level in the industry. How could you justify acquiring company which has margins of just 9.9%?

        These were some of questions which can make anybody skeptic about rationale of the deal. Let’s hope the deal goes through and Infosys achieves its goals of achieving lion’s share of big business transformational deals out of this acquisition.