That Infosys Technologies is a conservative blue chip is widely known and accepted. It is also well-understood that the IT major has been almost always risk averse, preferring to grow organically relying on its tried and tested global delivery model. But will its conservative strength become its biggest weakness over the next ten years? The period 2010-20 will be a crucial decade for the company as it plans to become a true global player, rivalling IBM and Accenture.
The 30 years of its journey have been punctuated by conservative forecasts and sober management commentary during every earnings season. Infosys has never shown any inclination to acquire companies by flowing against the tide and its decision not to challenge HCL?s successful acquisition of Axon is still fresh in everyone?s memory. As you know, Infosys had made the initial bid before retreating.
So every quarter, one is left wondering as to what Infosys is waiting for. It is now sitting on cash reserves of $3.9 billion. The firm is still reluctant to go in for big-ticket acquisitions, pointing to integration, provisioning and other costs involved.
Meanwhile, other companies like Cognizant have shown an appetite for acquisitions. Cognizant, which boasts a younger management, has been in the market for some time and has approached BPOs like Genpact. HCL is another company that has shown aggression. Against this backdrop, Infosys?s penchant for conservatism stands out.
At the same time, Infosys keeps talking about the possibility of a new acquisition. One has always heard its CEO Kris Gopalakrishnan talking about it, but never seen him getting down to the nuts and bolts of it. This season Kris has said that he is open to acquisitions in the US. With the protectionist measures adopted by the US threatening to choke Infosys?s volumes, the firm is seemingly looking at options in its largest market. Analysts are still unsure whether it would pull it off this time, but Infosys has nevertheless raised some expectations again in the market.
Kris says he is keen to acquire companies in the revenue range of $300-500 million. Clearly, he does not want to bite into a large ticket deal, and wants to take comfort in its slow and steady policy. Predictably, it has also not been very keen for a hostile bid. Kris has always talked about a friendly merger. The target company must want to be acquired?that is the thinking at Infosys.
Its performance in the banking, financial services and insurance sector has been creditable in the second quarter, driven largely by North America. Revenues from the continent grew 9.6% sequentially to 65.8% of the total sales of Rs 6,947 crore. This has been achieved although visa costs have gone up considerably, impacting its operating margins by 40 bps. This has raised some hopes about a possible acquisition in the region.
About seven years back, Infosys had acquired an Australia-based company, Expert Information Services, for $22.9 million. At that point, it was felt that Infosys would now go on to acquire a clutch of large companies and spread its wings. But that has not happened. Last year, Infosys acquired McCamish Systems, but that is yet to become earnings accretive. The management has clearly refrained from taking the big plunge and this has started to sow some seeds of doubt in the minds of the shareholders.
Last year, there was a rumour about Infosys wanting to acquire companies in Europe. There was intense speculation about Infosys looking at two acquisitions in the $500-million range. Companies in Germany and France were being closely watched, media reports said. But nothing much came out of that intense speculation phase. Europe has been historically averse to outsourcing, and labour unions there have been very vocal about it. But in the second quarter, it has pulled off some large transformational deals in the continent.
Infosys always worried about how to keep its profit margins going post-acquisition. Ideally, the company would like to keep a 20-25% margin, 3-4 years after the integration. Infosys has always wanted to protect its margins, and has always walked away from a deal if it felt margins would get eroded. The Australian acquisition saw Infosys double its margins to over 25% in 3-5 years. But that was a much smaller deal. Analysts believe that Infosys may have to work on lower margins in the initial years after acquisition, if it is indeed serious about going ahead with an acquisition in the US or Europe. Infosys, over the years, has worked on margins as high as 30%.
It is unlikely that Infosys will go in for a change in mindset at this juncture, but surely the other firms are trying to catch up. If India?s IT poster boy wants to keep its nose in front, it may have to dig into its cash reserves soon. A deal could well be in the offing, even if it?s a conservative one.
?dj.hector@expressindia.com
