Infosys CEO SD Shibulal may be a conservative lungi-wearing Malayali at home, but the latest Swiss intervention in his life may peel off some of that stigma. For a few quarters now, analysts have been hounding the 57-year-old gentleman for not parting with some of that $3.7 billion reserve cash. And last Monday when Infosys announced the acquisition of Swiss technology consulting firm Lodestone for $350 million, it finally pulled the curtains down on the ?inorganic? suspense. FE was the first to report about the deal on July 14, when we said Infosys was engaged in talks to buy Lodestone for $300 million.
Shibulal can now lean back and afford a smile. ?It?s time you started de-linking the word conservatism from Infosys,? he declared after announcing the acquisition. This is Shibu 2.0, chasing Infosys 3.0.
Deep inside, Shibu should know that one buy alone can?t shake off that conservative image. After all, it is just the third acquisition in 30 years. That does not indicate a risk taking approach by any stretch of imagination. But the fact was, for most part of its journey, there was no need for the company to operate on such a route. That was for lesser mortals. Infosys needed no such crutches.
The Lodestone deal is likely to dilute margins in the near future but analysts are anticipating it to deliver good returns over a longer time frame. Infosys has chosen Lodestone for a couple of reasons. Firstly, it wanted a former grip in continental Europe, traditionally a tough market to penetrate. Lodestone generates most of its revenues from Switzerland and Germany. Secondly, it wanted to shore up its consulting business. Lodestone with revenues of around $210 million and in-depth expertise in consulting can help Infosys ride this wave well. Lodestone will add 850 employees to Infosys? 1,50,000, including 750 consultants. It will also increase Infosys? client base to more than 900 from its present 700.
There are some early signs of recovery in Europe in terms of outsourcing. New companies are looking to outsource to cut costs. Infosys is bound to win some exciting clients as a result of this acquisition, leading to some good downstream revenues. In many ways, Infosys needed to balance its portfolio. Higher value services are what the company is gunning for, and in Lodestone, it has got a good platform to do so.
For most part of this year, Infosys was fighting an uphill battle. It missed sales targets, slipped down the ladder in terms of market share, postponed its annual pay hike for employees, not to mention getting hammered on the bourses. Many analysts felt that the IT major was struggling to achieve a balance between profitability and scale. Infosys has traditionally operated on high profit margins and never wanted to to succumb to pricing pressure. It was quite willing to let go deals that did not offer a near 30% margin. In tough times, such a model could be challenged. And in the case of Infosys, the pressure to change its business strategy, had assumed great proportions in recent times. But the company held on gamely. Critics said Infosys was fighting for credibility and that the firm was losing its plot. But the fact was Infosys was suffering from certain client specific issues and it own re-structuring.
The company?s plan was to divide the business into three major service lines?consulting and system integration, products and platforms and business operations?the backbone of the Infosys 3.0 strategy. Setting this up, took some time.
The good part is, from Shibu?s point of view, the Lodestone acquisition will brand him as an aggressive CEO. A year ago that was unthinkable. He has a very able ally in CFO V Balakrishnan who is increasingly becoming the decision-maker at Infosys. They are beginning to make a very good team. The possibility is that Infosys will keep an open mind in acquiring further assets in the coming quarters. A start has been made now, but Infosys has to ensure that it does not lose its new-found momentum.