HCL RIVALS INFY’S AXON BID

INDIA’S largest tech acquisition bid just got bigger. HCL Technologies, the country’s fifth-largest tech firm, on Friday announced a counter-offer to acquire UKbased SAP consultancy Axon Group for about £441.1 million ($810.8 million) or 650 pence a share. This is an 8.3% premium over Infosys’ 600 pence-ashare bid for Axon announced on August 25.

Responding to HCL’s counter-offer, Infosys in a statement said, “Infosys is considering its position and urges Axon shareholders to take no action at this time. A further announcement will be made in due course.” Infosys’ offer was the largest ever tech acquisition bid by an Indian company so far.

What is it about Axon that has India’s leading IT firms slugging it out with each other?

“We chose Axon because it’s the only pure-play, large SAP consultancy firm in the world. It offers scale and size and has high-end consulting services,” HCL Technologies CEO Vineet Nayar said.

Analysts and investment bankers in the know feel that it is very likely that Infosys would make a counter offer, as HCL’s bid is higher only by about 8.3%. It’s understood that Infosys had factored in the possibility of a 15-20% hike in its offer price. The Bangalore-based IT firm is likely to sweeten the offer with the revised price anywhere between 670-710 pence per share.

HCL has signed an inducement contract with the Axon board on Friday that entitles it to get 1% of the bid amount if it failed to acquire the consultancy. It hopes to close the deal in the first quarter of calendar-year 2009. The timeline, however, does not take into account a counter offer to its own bid. Under the UK takeover laws, a counter bid to HCL’s bid would have to be made within the next 45 days.

“The fact that the Axon board has signed the inducement contract shows that they welcome our offer,” Mr Nayar said. HCL said it identified Axon as an acquisition target in the first quarter of this year and started discussions with the company in July. Merrill Lynch and Standard Chartered are the financial advisors to HCL for the bid. HCL Technologies said it will fund its bid for Axon largely through debt. Mr Nayar said the company already had £400 million worth of debt commitment from Standard Chartered. It also has about $570 million cash in its balance sheet.
£ 407m INFOSYS BID (AUG 25) £ 441m HCL’s COUNTER-BID (SEP 26) £ 29.5m AXON NET PROFIT (2007) £ 204.5m AXON REVENUES (2007) Buyout makes sense for HCL

Analysts said the acquisition would make strategic sense for HCL but stretch its balance sheet. “Axon has good capabilities and it makes sense for HCL whose ERP implementation capabilities are limited compared to its peers,” said Angel Broking analyst Harit Shah.

At the time of going to print, the Axon scrip was trading 6.94% up at 678 pence per share, following the announcement of the counter-offer. For the year-ended December 31, 2007, Axon reported profit before taxation of £29.5 million on revenues of £204.5 million. The 2,000 employee-strong Axon provides process consultancy services to large organisations that have chosen SAP as their strategic enterprise platform. It counts British Petroleum, Cable & Wireless, Xerox and Kraft among its clients. It gets about 61% of its revenue from Europe, Middle East and Asia. For Indian companies looking to diversify and reduce dependence on the US, which is reeling under the financial crisis, Axon’s geographic presence is also a big draw. Infosys, however, kept its cards close to its chest, not immediately revealing if it would pick up the gauntlet thrown down by. When contacted, Infosys CEO S Gopalakrishnan said: “We will look into this and decide.”

The Axon acquisition tale may take more twists as other potential suitors are seen showing interest. ET had reported earlier this month that Japanese majors Fujitsu and NTTSoft may enter the fray, too. Further, there is the possibility of some European IT majors and PE players wooing Axon. It is being speculated that Capgemini may make counter-bid. While there is no official comment from Infosys because its is in its silent period ahead of the announcement of its second-quarter results, sources at top levels in the company said the possibility of a counter-bid had been factored in and that it was reviewing the situation.

Industry observers say Infosys’ bid may succeed because of the irrevocable undertaking it has from the Axon management team, which holds an 18.1% stake.