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BW Businessworld

Shopping For Growth

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Last week, Infosys announced the acquisition of Swiss SAP consulting firm Lodestone Holding for $349 million (about Rs 1,930 crore), four years after it made an unsuccessful bid for the London-headquartered SAP consulting firm Axon, which was picked up by HCL Technologies.

The acquisition has created some positive buzz around the company, which, of late, seems to have been bogged down by inherent contradictions. Its obsession with margins has seen its growth fall below the industry average, and allowed its nimbler rivals, both Indian and multinational, to catch up. Internal leadership transitions and overall slowing of economic growth too have not helped (see BW, 28 April 2012, “Testing Times At Infosys”).

In fact, analysts had for long been hoping that the company would make use of its large cash pile — which stood at about Rs 20,500 crore at the end of June — for a big-ticket acquisition that would boost growth, especially given that its traditional IT services such as application maintenance and development or AMD, testing and infrastructure management services have all been slowing and getting
commoditised.

Lodestone, with its 750 consultants and 200 clients, mainly in life sciences, automotive and consumer goods, of which a majority are in continental Europe, is a good fit for Infosys, which gets just about 10 per cent of its revenues from continental Europe.

The acquisition will also help cut Infosys’s dependence on the banking and financial services industry (BFSI) as well as the US market, which account for nearly 40 per cent and more than 60 per cent of the company’s $7-billion revenue, respectively.

Describing the purchase price — which is 1.3 times Lodestone’s current year’s revenue — as reasonable, S.D. Shibulal, CEO and managing director of Infosys, said that Infosys would pay two-thirds of the price upfront and the rest at the end of the third year. Reason: Infosys is hoping to generate 3-4 times its downstream traditional IT business from Lodestone’s consulting work and, therefore, expects this acquisition to become earnings per share (EPS) accretive only by 2015.

Infosys would also be hoping to learn from Lodestone’s IDEA (insight, design, execute and achieve) framework to boost its own products, platforms and solutions business (PPS). It aspires to get a third of its revenues from PPS over the next few years; at present, it contributes just about 7 per cent to its revenues.

Infosys business process outsourcing arm also announced that it was acquiring the claims processing, call centre and accounting unit of the US-based insurance brokerage Marsh & McLennan. Infosys BPO had revenues of $495 million in 2011-12.

Although Infosys BPO did not disclose the acquisition price it is expected to add $10-12 million to the revenues.

Dipen Shah, head of fundamental research at Kotak Securities, said the Lodestone deal was a slight departure from Infosys’s earlier strategy of not looking at acquisitions that would dilute earnings in the short term. He, however, added: “It (the deal) is not likely to make any significant difference to the overall financials as the revenues of Lodestone are less than 5 per cent of Infosys’s projected FY13 revenues.”

Another industry analyst, who did not wish to be identified, says: “This is a welcome step, but it is too little and may even  be too late. Nobody is expecting a bet-the-company kind of acquisition, but Infosys still is too conservative in spite of Shibulal’s protestations to the contrary. Infosys needs to make bigger and bolder bets.”

(This story was published in Businessworld Issue Dated 24-09-2012)