Infosys – Axon: Deal in the right direction

Infosys has offered $753m to acquire UK-based SAP consultancy service provider Axon Group. This breaks Infosys’ conservatism and provides option to move up the IT services value chain. Further, this deal marks the first significant step of offshore providers to become a “transformation agent” and compete better for larger deals.

Deal positives

• Infosys has tabled a rational bid for Axon, pricing it at 600p per share. However, Indian analysts believe that Infosys might have over paid on the lesser margin potential consideration. In my view, even if Infosys has over paid, it is justified by better revenue per employee of Axon. Infosys garners 24% of its revenue from consulting and SI, within this 33% was from SAP services. Infosys employs 2100 people to generates c.$330m from SAP related services meaning $156k per employee. With 2000 employees, Axon generates $410m meaning $205k per employee.
• This acquisition will provide access to new verticals (public sector) and extend Infosys’ capabilities to high-end consulting and integration services.
• Infosys is trying to break the linearity of revenue growth. Axon’s revenue grew 53% last year.

Deal risks

• Axon is UK focused company which might not cater to Infosys’ pan European expansion ambition. Certainly, Infosys doesn’t need an inorganic formulae to grow in UK as it has been growing at 80-100% in UK over last 5 years.
  
• SAP demand has been relatively unscathed by the current macro economic environment. However I believe this is restricted to the SAP integration services, the consulting demand still remains a threat
• Obviously there are sensitivities associated with retaining consultants (employees) under an Indian offshore brand.
• Offshore vendors are used to 20+% margin, which Axon cannot deliver proving the acquisition to be dilutive.

Some credibility in expecting counter-bid

• Axon shares have closed above the Infosys’ offer price of 600p on the expectation of counter bid at higher price.
• As Infosys hasn’t provided any targets on revenue and cost synergies, I think the level of discussion between Infosys and Axon hasn’t been very intense. This makes me believe that Axon might be talking to other bidders also.
• Global market analysts believe that Infosys has under-paid for Axon suggesting that 600p doesn’t fully reflect the potential value of Axon and also considering the Axon’s share price levels reached in September 2007 (900p).

Some moot points

1. Why hasn’t other offshore-based player bid for Axon?
2. How are other offshore providers going to react to this deal?

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Tags: Axon, Infosys, IT Services