Column Infy goes shopping

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: Infosys Technologies’ announcement to acquire the UK-based Axon Group has once again reinforced India Inc’s appetite for inorganic growth. It would put some vigour to the Indian IT industry, which is witnessing a slowdown because of reduction in IT budgets of various US companies. The slowdown is making it difficult for Indian IT companies to get more business as many of their clients are facing huge losses and write-downs

Given that Infosys made its last acquisition five years ago, such an announcement came as a surprise because Infosys doesn’t have a long track record of making acquisitions abroad, as other technology companies in India have done. Though the valuation of $753 million may appear to be on the higher side, the synergies that can be derived from the acquisition are potentially significant. It will enhance the company’s capabilities in the SAP domain, increase its share of European business and provide notable client that include British Telecom, BP, Xerox, among others. The acquisition would also significantly boost Infosys’ topline.

The Infosys-Axon deal also sets the trend of Indian IT companies moving up from the low-hanging maintenance kind of services to high-end domain services that could add more to the bottom line of the companies.

Axon Group, which recorded 68% increase in profits from 2003 to 2007, specialises in providing consulting for customers of business-software maker SAP. Its software helps large corporations keep track of their processes. Axon enjoys 15% market share in the SAP implementation market in the UK and the company’s top 10 clients contribute around 64% of the revenue. The transfer of ownership to Infosys is expected to be completed by November this year, subject to the Scheme of Arrangement becoming effective.

The acquisition comes at a time when, for the Indian IT industry, the European market still remains under-penetrated. Moreover, unlike the US, the European companies have been slower to outsource and offshore due to various reasons like labour laws, culture and language differences. However, given the pressures on the bottom line, they can now be expected to increase their focus on outsourcing, which would open up new opportunities for Indian IT companies and offset the slowdown of US outsourcing to India to some extent.

The other important advantage of onshore presence of Indian companies in Europe would be to tap the local market. To get a larger pie of the European market, Indian IT majors will continue to pay premiums for Europe-bound acquisitions. And to gain a larger footprint beyond the English-speaking market, Indian IT companies will have to focus on developing their non-English language capabilities. In fact, many Indian IT majors are increasingly attempting to move up the value chain. Taking advantage of the global slowdown there would be many Indian IT companies who would increasingly take the M&A route not only to position themselves as value-added consulting companies, but also to add geographical reach and front ends. Also Indian IT companies would have to gradually work towards reducing their over-dependence on the US banking and financial services industry, which is passing through a volatile phase.

Apart from the European market, Indian IT companies would have to aggressively look at the Asia Pacific markets, before other low-cost locations such as Mexico, China and Philippines gear up to reap the benefits of the global delivery model.

Finally, for the Infosys-Axon deal what is now needed is a growth trajectory. Infosys does not have a long track record of successfully integrating large companies. The company could face a challenge in retaining the high end consulting talent of Axon, given that in some earlier acquisitions by other Indian IT companies the retention record has had not been very impressive. For Infosys, this would indeed be a big challenge, given that 90% of its workforce is Indian.