Axon Group shares rise on counterbid buzz

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New Delhi, Bangalore, Mumbai, Aug 26: A day after Infosys Technologies said it is acquiring British SAP consulting services company Axon Group in an all-cash deal amounting to £407 million, shares of the latter, listed on the London Stock Exchange, soared on Tuesday on expectations of a counterbid.

Axon shares were 20.9% higher at 607.5 pence by 12:19 pm, above the 600 pence a share cash offer, agencies reported. Infosys’ stock, on the other hand, closed 0.32% down on the Bombay Stock Exchange on Tuesday, at Rs 1,697.60.

Some analysts said that they were expecting a counterbid, not just from Indian firms, but global companies too, while some others did not believe so. Gaurav Dua, head research of Mumbai-based broking firm Sharekhan said, “Since Infosys has consent for only 18.8% stake and the rest of the equity is widely distributed between the public and institutions, there is a huge possibility of a competitive bid.” He added that there could be a possibility of Axon getting better bids from not only Indian but also international IT companies.

But Anand Lavi - executive director of investment advisory research company Tholons felt a counterbid was unlikely. The stock price of a company being acquired rising is a common phenomenon, he said. “This company has been on the block through investment bankers for a while. So most Indian and other companies who are interested to shop would have already seen it. Besides, Infosys would be protected, because in the agreement, there is mentions of a 1% price pay back by Axon in case a counter offer is accepted by it,” he added. The only risk - for Infosys’ shareholders - is, how soon and how well Infosys can integrate the transaction, and bring up Axon’s profitability of around 15% to match its own profitability of over 20%, he added.

Axon’s shareholding pattern is fairly fragmented, with the institutions holding more than 45% stake. However, Infosys has approached and has received consent from the founding promoters and some key employees, who hold 18.1% stake. Hence, institutional consent is now important for Infosys to acquire the required majority stake in Axon. Infosys’s management seemed confident on the same and is in fact looking at acquiring 100% equity in Axon. Meanwhile, Axon chief executive Stephen Cardell said the board had a duty to consider any higher offer for the company.” There are about 20 companies worldwide who are working in our market who could possibly bid, but the Infosys offer is the only one on the table and the one the management are backing,” Cardell told Reuters.

He said the 600 pence a share offer from Infosys was ‘a good price’, but acknowledged some shareholders may be disappointed after the shares hit a high of 955 pence earlier in the year. “Six hundred pence is still a 33% premium to the average price of the stock over the past six months and it’s in cash,” he said. Kapil Dev Singh, country manager, IDC India, said, “Considering that valuations have come down in the last few quarters, the valuation by Infosys is good. The price by earnings ratio is 20, which means that for a bottomline of Rs 1.6 billion they are paying Rs 32 billion. Compare that with the P/E ratio of some of the companies listed here and it is way below.”

About whether Infosys should up the price in the event of a counter bid, he said, “It depends on how much Infosys is willing to pay for it and how desperately they need it. Just because they are sitting on a huge cash flow doesn’t mean that they will splurge.”

Frank Hancock, MD, ABN AMRO Asia Corporate Finance, said that given the growth profile of the company, it is a ‘decent’ price that Infosys has offered. However, he added, “It’s possible that another bid will emerge for the company.” But Sudin Apte, senior analyst- Forrester research, exuded optimism. “The deal is neither too small to be inconsequential, nor mammoth one impossible to manage,” he said. “Forrester believes that the deal, involving more than 2,000 people and continuation of current Axon management, will not fall apart at least on the ground of high leveraged and client-connected staff leaving,” he said.