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Has Infosys finally blinked?

Has Infosys finally blinked?
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First Published: Wed, Aug 27 2008. 12 29 AM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Wed, Aug 27 2008. 12 29 AM IST
Is the Axon acquisition a stroke of strategic brilliance or did Infosys simply blink first?
That’s the question that needs to be asked about Infosys Technologies Ltd’s big acquisition — the biggest ever by an Indian IT firm — and the stock markets seem to be getting around to doing this.
Illustration: Jayachandran / Mint
On many counts, the deal looks good — actually, very good. The valuation of Axon Group Plc. seems fair. Nor is it a big buy by current merger and acquisition (M&A) standards. Axon is a mid-size (tending to small) IT consulting firm which is very profitable (by UK standards).
The buy also removes some amount of money from Infosys’ cash-laden balance sheet. Infosys had $1.7 billion of cash on its books at the end of June and that amount will come down by around $750 million. It isn’t immediately clear how much of this amount was classified as reserves, but if a substantial bit was, then the buy will boost Infosys’ return on net worth. By spending this money, Infosys also appears to have finally listened to the advice of analysts who have been asking the company to return money to shareholders or spend it.
Infosys has listed several benefits of the deal: Increased contribution from Europe to its revenues, always a good thing for an Indian IT company that is hugely dependent on the US market (although the European economy faces pretty much the same problem the US does) and higher margins for Axon that will arise for the company now, being part of the very efficient profit making machine that Infosys is.
These are the known facts or the known possibilities, and on the basis of these, the Axon buy looks great.
Here are the unknown possibilities that need to be looked at.
First, is Axon the “cultural fit” Infosys’ senior executives have always said they were looking for? The desire for this ideal match has been behind the company’s conservatism when it came to M&As.
Second, given that it took Infosys a while and considerable effort to digest its smaller Australian buy, will the company be able to do so with Axon?
And finally, to what extent was the Axon acquisition driven by a new CEO, who has taken over in trying times, and who sees the buy as a way of proving himself in trying times. On truthful answers to such questions — some of which may take time to emerge — will the ultimate success of the Axon buy rest.
Will Infosys’ acquisition pay off? Write to us at views@livemint.com
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First Published: Wed, Aug 27 2008. 12 29 AM IST