Infosys Technologies Limited one of India’s leading pack of IT providers announced it is to acquire the UK-based SAP consulting company, Axon Group plc in a deal valued at £407.1 million. The deal which is expected to be consummated in November this year confirms the steadily increasing trend for Indian Software houses to branch out onto the world stage through acquisition. It is a high risk strategy as Gary Simon, FSN’s managing editor reports.
In a headline catching move Infosys one of India’s golden trio of IT providers is to acquire Axon Group a SAP implementation business more fashionable positioned as a business transformation consultancy. Axon, which will de-list following completion of the deal, specializes in large organisations who have selected SAP as their strategic enterprise platform.
Formed in 1994, Axon has been particularly successful, trading through the purple period for business transformation and SAP which has spanned the last two decades.
It has grown to around 2,000 employees, has offices in the United Kingdom, North America, Malaysia and Australia, and for the year ended 31 December 2007, it reported profit after tax of £20.2 million on revenue of £204.5 million.
Interim results announced last week appear to show continued strength as, Stephen Cardell, Axon’s CEO announced revenues up 28% as well as new delivery centres in China, Penang (Malaysia), India and Puerto Rico which now account for 33% of total headcount.
Infosys is also performing well and in July announced a 21 per cent jump in quarterly profits in spite of the US economic slowdown. The company which employs around 94,000 employees projects global consolidated revenues for 2009 of around $5.0 billion – a jump of about 20 percent.
On the surface, the deal although relatively small – adding about 2 percent to global headcount - gives Infosys a number of strategic advantages. Like many Indian software services providers Infosys is heavily reliant on the US market. North America accounts for about 61 percent of revenue. A weakening US dollar coupled with rising domestic costs in the IT industry in India makes for a potentially unpalatable combination.
Infosys only derives about 27 percent of its revenue from Europe and so the Axon acquisition strengthens its foothold in the Eurozone and beyond. (Axon’s derives just 42 percent of its revenue from North America). So geographically the acquisition appears to provide a good fit. But the real value underpinning the deal for Infosys may relate more to the character of the business it is acquiring than the financials which are unlikely to have a profound impact on the consolidated results of the group.
For many years Indian based IT providers have set their sites on travelling up the value chain from basic provision of software development and outsourcing services to more strategic business transformation and consultancy. Infosys relies heavily on ‘bread and butter’ services such as application development and maintenance, software testing and infrastructure mangement. Consulting services and package implementation together account for about 23 percent of revenue and business process management a further 6 percent as at 30 June 2008. Whilst it is not possible to strip out pure advisory services it is clear that an up-market consultancy business makes an attractive acquisition. Axon could increase Infosys’ presence in more sophisticated service areas such as supply chain optimization, process improvement and change management.
With an increasingly challenging trading environment cost reduction expertise could also prove vital. Infosys’ Gopalakrishnan, CEO and Managing Director, remains bullish. “Although the global economic environment continues to remain uncertain and could impact IT spending in the short term, we see several opportunities for growth as customers relentlessly focus on improving efficiency,” he said.
Axon, which counts, BP, Buckinghamshire County Council, Cable and Wireless, Kraft Foods, Transport for London and Xerox amongst its client base could also take Infosys into larger assignments in its $10 million to $90 million sweetspot. At the moment just 10 of Infosys’ active customer base of 567 customers (30 June 2008) account for 30 percent of revenue – Axon has the potential to add some welcome higher end accounts.
But there are risks around buying a business largely focused on blue chip SAP clients. Results coming through now relate to business won several months if not years ago. The full impact of the credit crunch has yet to impact the software sector but few large companies will have an appetite for large scale IT spending. The focus will likely be on cost reduction and the mainstream services on which Infosys built its reputation. Large ticket business transformation projects around SAP may be far and few between.
At the end of the day, Infosys is buying 2,000 skilled people that it would be difficult to acquire in other circumstances. It must be gambling on the fact that SAP inspired projects hold up in a faltering global economy and that it can keep a large number of employees gainfully employed. If its gamble pays off and it can hang on to the workforce then Infosys’ will be in a stronger position to compete when there is a market upturn – especially against those business forced to make redundancies.
But the deal is more interesting from a broader perspective. It puts down a marker that the Indian software industry has commenced a new phase of its development and is branching out on the global stage. However, it remains to be seen if the management skills which have underpinned the sector’s growth for the past two decades enable it to play at the same table as the global consultancies such as Deloitte, IBM and Accenture, with whom it may increasingly compete.
