1. Strategic shift: Why Panaya is a good fit for Infosys

Strategic shift: Why Panaya is a good fit for Infosys

The acquisition signals the start of Infosys’ transformation into a full-fledged technology player

By: | Published: March 23, 2015 12:05 AM
Infosys, Vishal Sikka

Last month Vishal Sikka-led Infosys announced the acquisition of Panaya—which brought to the table over 150 technologists and a significant presence in Israel. (Reuters)

The latest acquisition by India’s second largest IT services exporter—Infosys—of Panaya for $200 million may seem a small buy for a company with over $8 billion in revenues. But this signals the start of Infosys’ transformation into a blue-blooded technology player, the vision of the company’s chief executive officer Vishal Sikka.

Last month Infosys announced the acquisition of Panaya—which brought to the table over 150 technologists and a significant presence in Israel.

And Sikka is excited about its unlimited possibilities. Talking to analysts, Sikka said Infosys wished to acquire companies with unique technologies such as this one because they could help the company renew itself.

“This means that we improve the productivity of our service lines to bring in more automation, more AI or Artificial Intelligence capabilities to our existing services. So if you look at Panaya, the ability to automatically manage software and software related changes is a great ability,” Sikka explained.

Sikka’s entry into Infosys as the first non-founder CEO was always expected to usher in changes and mergers & acquisitions (M&A) was certainly very high on the agenda. That process seems to have begun and there could be many more buyouts as the company looks to fill the various gaps in its technology offerings. “Clearly, the company has a few offering gaps that it needed to fill. This was expected given the recent announcements by Vishal on his intent to be focused on acquisitions to help the company make significant progress on non-linear growth,” Sanchit Vir Gogia, chief analyst and Group CEO, Greyhound Research told FE.

Infosys-horizon

Panaya’s core expertise lies in enterprise package systems management through its automation technology but Infosys clearly sees its use in its other service lines like application maintenance, software verification, BPO or infrastructure management.

The Panaya acquisition may have appeared a tad expensive—at around six times its revenues—since the deal will turn EPS (earnings per share) accretive only over the next 12-18 months. However, Sikka defended the valuation saying his team had looked at it from multiple perspectives and it seemed appropriate. “We had an independent group of bankers from Deutsche Bank look at the valuation of Panaya and we feel very comfortable,” he said.

Sikka has ushered in the “renew and new” strategy at Infosys which talks about a new business and paradigm at the IT major. The “renew” focus will be largely internal where it has the big focus on employing technologies of automation and artificial intelligence which will lead to productivity improvement.

On the other side, the “new” will focus on themes like design thinking, open source platforms which will tell its clients how they could employ software in a more innovative way.

As Ray Wang, principal analyst, Constellation Research said, “Acquisitions such as Panaya are important to making the shift from a services driven player to a software driven player. Panaya’s strength is utilising hard core math to solve problems such as upgrades, extensions, testing, etc. The acquisition means Infosys is serious about software driven solutions.”

The Panaya acquisition also signals how the $146 billion Indian IT industry, with close to $100 billion in exports, is going to move forward; it’s unlikely current business models are going to sustain in the medium to long term.

Pradeep Mukherji, president and partner, Avasant, an offshore technology advisory firm believes concepts like the digital wave and robotic automation will force IT firms to change the way they work.

He feels the conventional model of hiring resources to maintain and operate software systems may undergo a change with the coming in of these newer age technologies impacting the Indian outsourcing industry.

Sikka has, on numerous occasions said, that Indian IT companies have not been agile enough in responding to the changing technology needs of the marketplace and he is now hoping that it will get off to a quicker start.

Sanjoy Sen, doctoral researcher,

Aston Business School, UK points out that over the last few years, Indian IT and ITeS organisations have been focused on reinventing themselves from being Indian offshore IT companies to global business solutions providers. “This includes not just a change in image and perception but also in their core strategic competencies aligned to client business needs at the highest level. During this time, the focus on
innovative, agile and cost effective strategic solutions based on emerging technologies such as the Cloud has emerged as a strategic business issue with Board and C suite sponsorship,” Sen observes.

While acquisitions like Panaya hold promise, making them work can be challenging.

As Sikka put it, it’s not about buying revenue or market share but about capability-building and about “augmenting our capabilities wherever possible in smaller ways”. That’s what buyouts should be about.

In the kitty

Past acquisitions of Infosys
2003: Australia-based IT service provider Expert Information Services for $23 million
2007: Takes over Philips’ captive BPO units for $28 million as part of a seven-year deal worth $250 million
2009: Infosys BPO buys US based McCamish Systems for around $38 million
2011: Infosys BPO acquires Australia-based Portland Group for 37 million Australian dollars
2011: Acquires software solutions business of New Zealand’s Gen-i for an undisclosed sum
2012: Acquires US-based Marsh BPO for undisclosed sum and taking over around 87 people
2012: Acquires Lodestone Management Consultants for $345 million

The Panaya advantage
* Originally founded in 2006
* Has a large presence in Israel with over 150 employees
* Provides software automation technologies in the space of enterprise package systems
* The key investors:  Benchmark Capital, Hasso Plattner Ventures and Battery Ventures
* It counts Coke,  Bosch, Mercedes Benz and GSK among others as its clients

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