Investors will be let down by the size of Infosys Ltd’s latest acquisition. Rumours of a large acquisition had sent the Infosys stock soaring last week. Even though the acquisition of consulting firm Lodestone Holding AG is the company’s largest till date, it will add merely 3% to the company’s revenue.

The company said on Monday that it has valued Lodestone at $349 million, or about 1.6 times its revenue in financial year 2010-11. The Swiss company advises companies on process optimization and provides business transformation solutions enabled by SAP. The acquisition is in line with the company’s strategy of focusing on consulting and systems integration, which together account for 31% of total revenue.

Infosys Campus. Photo: Hemant Mishra/Mint

This is not to say the acquisition doesn’t make sense. Lodestone generated revenues of $219 million with a 750-strong consulting team, which implies a robust per capita income of $292,000. It has around 200 clients, which can be sold other offerings by Infosys. The acquisition will also strengthen its presence in continental Europe. Analysts at JP Morgan said in a note to clients that Lodestone will provide Infosys with increased traction in Switzerland, which is a fairly significant but hard-to-penetrate market. They added it will invest Infosys with consulting capability in specific segments such as auto, industrial manufacturing and life sciences.

Of course, investors would have been more excited if the acquisition was larger and helped the company address near-term growth concerns. But large acquisitions come with large integration issues, which may have distracted the top management from their focus on the primary business. “In this case, the acquisition risk gets ameliorated as Lodestone is of manageable size and risks," JP Morgan analysts said. “Also, the consulting and system integration practice at Infosys is large enough to absorb Lodestone’s size."

Its good news that Infosys is trying to utilise its excess cash and is open to inorganic growth. But as far as the company’s shares go, much of this has been priced in, with the scrip now back at its pre-earnings announcement level of 2,500.

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