Profitability is focus of Infosys’s M&A strategy
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Infosys Ltd’s M&A strategy under CEO Vishal Sikka highlights its changing priorities: gaining access to smart talent and futuristic technology that will eventually lift profitability rather than merely looking for revenue boosters.
India’s second-largest software services exporter made just seven buyouts between 1981, when it was founded, and 2014. It made its third acquisition of 2015 last week.
The aggressive buyout strategy spearheaded by Sikka mirrors the model adopted by Accenture Plc which has, over the past few years, bought over a dozen firms focused on new-age digital technologies to improve its ability to make sense of large data sets and boost its services in the consulting space.
“We look at acquiring companies that are a strategic fit and will contribute towards our goal of consistent and profitable growth,” said U.B. Pravin Rao, chief operating officer of Infosys, which last week announced plans to buy information management consulting firm Noah Consulting LLC.
Since the start of 2015, Infosys has spent $390 million in buying three companies, including $200 million on automation firm Panaya, $120 million on mobile commerce firm Skava, and $70 million on Noah Consulting.
Sikka, who took over as boss in August 2014, has set himself the audacious objective of more than doubling the company’s revenue to $20 billion; the company’s management expects $1.5 billion in incremental revenue to come from the companies Infosys acquires until the year 2020.
Infosys declined to put a number on the exact amount it intends to invest in acquisitions but as part of its capital allocation policy, the current management intends to spend half of its incremental cash flow on buyouts and other technology assets every year.
“We also need to make significant investment in infrastructure and in technology assets. Therefore, we need to spend 50% of our incremental cash flows on M&A and investment in infrastructure and technology assets,” Infosys former chief financial officer Rajiv Bansal told analysts after the company declared results for the fourth quarter of 2014-15 on 24 April.
Infosys generates over $500 million in cash every year, and it has already spent $390 million in buyouts in this calendar year; that means it could spend at least $1.5 billion in acquisitions until the year 2020.
Rao, however, said that it will be “incorrect” to put “spend targets” on acquisitions but many analysts believe that the strategy is more to improve profitability of Infosys itself than merely generate incremental revenue.
“The labour arbitrage-led segment of the market is maturing fast,” said Peter Bendor Samuel, founder and chief executive of Everest Group, a US-based outsourcing advisory firm. “Clients are asking for innovation in the form of intellectual property solutions. If Infosys has to grow faster than the market, without engaging in a price war, it must move a large portion of its work into the IP-led segment. Infosys does not have the time to build these IP assets from scratch and so is now looking to acquire (them),” said Samuel.
Over the past six months, Sikka has underscored the deals won by Infosys on the back of the two acquisitions of Panaya and Skava rather than highlighting the additional revenues brought in by these two companies. Panaya is estimated to have revenues of $40 million while Skava has annual revenues of $30 million, according to two executives at Infosys.
“We added 53 new clients on Panaya and won 20 deals jointly with other Infosys business units. More significant is that Panaya is now helping us with larger engagements where we are transforming clients enterprise package landscape,” Sikka told analysts on 12 October after the company declared a 6% rise in revenues in US dollar terms for the July-September period.
Sikka said that thanks to Skava platform, Infosys is chasing 50 opportunities, adding that “the synergies are in cloud, automation and in new digital areas.”
A few analysts, including at brokerage Ambit Capital, said that acquisitions are a “very important” part of Sikka’s strategy and that this approach mirrors the model of Accenture, which bought 38 companies in the past five years with half the firms being focused on new technologies.
“As the technology landscape is changing rapidly, acquisitions might help companies to quickly add new capabilities,” wrote Sagar Rastogi and Utsav Mehta, analysts at Ambit Capital, in a note dated 18 June, adding that it defined “new technology acquisitions” as the ones made in areas of digital, platforms and automation.
Additionally, analysts say that niche acquisitions will also help Infosys solve the problem of attracting talent—a major hurdle facing the company’s bid to transition into software designing. Traditionally, Indian outsourcing companies hired programmers from engineering schools across the country to offer services to its clients. With technology permeating businesses, these IT providers now have to hire the services of domain experts, who are few and far between, to help programmers code.
“Finding the right skills mix is not easy and acqui-hiring is a rage,” said Ray Wang, founder and chief executive of Constellation Research, a technology advisory firm.