After Tata’s takeover of Corus, Infosys gobbles up UK-based Axon for a staggering Rs 3,300 crore, India’s largest tech buy

INFOSYS, a declared suitor in the market for a long time now, has finally found a match. The company is set to acquire UK-based Axon Group, a SAP consulting services company listed on the London Stock Exchange, for about $753 million (£407.1 million) in an all-cash deal. This will be the biggest overseas buyout by an Indian IT company, eclipsing cross-town rival Wipro’s $600-million acquisition of Infocrossing last year.

Commenting on the Rs 3,237-crore acquisition, Infosys chief executive S Gopalakrishnan said, “We will leverage the capability (Axon), and with our global reach, this will help in large deals participation.”

Axon, with around 2,000 employees, provides consultancy services to MNCs with SAP as their strategic enterprise platform, and has clients such as BP and Xerox. The transaction comes at a time when India’s top five IT majors have been aggressively chasing crossborder M&A deals , as valuations tumble in the wake of a market slowdown.

Infosys has offered £6 per share, which is a 33.1% premium over Axon’s sixmonth average stock price and almost 19.4% over Friday’s closing price.

Interestingly, the deal also left a section of analysts wondering at the possibility of a counter bid for Axon by any of Infosys’ large competitors.

Infosys is making an all-cash offer to acquire Axon’s 100% shareholding, including an 18.1% promoter stake, in a move to take the company private. The Indian software services giant, with close to $1.8 billion in cash reserves, is hoping to complete the formalities by November 2008. The Infosys scrip closed marginally up at Rs 1,703.05 in a flat Mumbai stock market.

Axon reported revenues of £204.5 million for calendar year 2007 with a net profit of £20 million. It gets around 55% of its revenues from the UK with the remaining spread coming from the US and Asia-Pacific. It also has a delivery centre in Malaysia.

Axon has been looking for a possible suitor over the past one year, and Citigroup is believed to have offered the deal to most A-listers in the Indian tech sector with £350 million as sort of a floor price to talk a deal.

Reacting to the valuation of Axon, Infosys chief financial officer V Balakrishnan said the “pricing is fair”. Axon’s operating margin at 15% is nowhere close to that of Infosys’ 28-31%. But analysts and investment bankers pointed out that bagging an international acquisition target with a 15% operating margin is a rarity.

Add to this the fact that Axon has 15-20% share of the SAP services market in the UK, with a robust client base that includes Motorola, Vodafone, GE Capital and Barclays. It is believed that both Mr Murthy and Nandan Nilekani have been working on sealing a big buy for Infosys in the past 18 months. “This deal has their stamp on it,” says a banker who did not wish to be quoted.

SAP is a growing business segment for Infosys, accounting for 24% of its revenues with a CAGR of 65% over the last three years. Mr Balakrishnan said, “This is the space where we have good growth and there is good demand for SAP services.”
Infosys officials said the company would be able to provide the future guidance only when the deal is concluded. However, they felt there are excellent synergies between Infosys and Axon as the latter did not have the financial muscle, reach or scale to expand its business.

BIG-TICKET ACQUISITION

-This is the second acquisition by Infosys after it bought Expert Information Services for $22.9 m in Australia in December 2003

-This will be the largest acquisition by an Indian IT company, surpassing Wipro's $600-million acquisition of Infocrossing

-The deal with Axon is expected to be completed by Nov 2008 Infosys will pay a 33.1% premium to the six-month average stock price of Axon

-Axon reported revenues of £204.5 million in fiscal 2007 with a net profit of £20 million

Axon has around 2,000 employees across the UK and North America
Operating margin of Axon stands at around 15% and is much lower than Infy's 28-30%