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.

SUNNY SIDE UP IN TARO WAR

Israeli Court Tells Taro Owners To Sell Out

IN A victorious move for Sun Pharma, the Israeli district court, in a ruling on Tuesday, ordered the promoters of Taro to sell their stake in the company for $7.75 per share. The Tel Aviv Court also rejected Taro’s contention that Sun Pharma should have conducted a special tender offer under Israeli law. Sun Pharma is now in a position to complete the tender offer following which all conditions for the option agreement to acquire the shares held by the controlling shareholders of Taro will be satisfied and the controlling shareholders will have to deliver their shares.

Judge Michal Agmon-Gonen J of the Tel-Aviv district court ruled that it was disingenuous for Taro’s directors to claim now, over a year after they approved the transaction, that a special tender offer was required. The court stated that the directors should have studied the agreements prior to their being signed, and should have confirmed then that they were in the company’s best interest. The court stated that the directors cannot claim now that they suddenly decided a special tender offer is necessary.

In a statement issued by the company, Sun Pharma chairman and managing director Dilip Shanghvi said: “It is clear, based on the ruling, that the lawsuit by Taro’s independent directors was part of a calculated effort by (Taro chairman) Barry Levitt to avoid living up to his obligations under the option agreement. It is time for Mr Levitt and his family to live up to the contract and do what is required of them under the option agreement.”

After the deal goes through, Sun Pharma will raise its stake from 36% to 48% while its voting rights will increase to over 60%. Option to appeal open
TARO founders and Templeton Asset Management have the option to appeal against this decision in the Supreme Court in Israel. Whether they decide to exercise that option is not clear. An official query to Mark Mobius, head of Templeton Asset Management, however, received no reply

The two companies (Taro and Sun Pharma) have been at loggerheads since May this year, after Taro cancelled the merger agreement signed between then a year ago.

Taro’s main bone of contention was that the price offered for Taro’s shares was ‘too low’. Taro had filed a case in the Israeli court to prevent Sun from taking it over at such an under-valued price. In retaliation, Sun filed a case in the Supreme Court of New York against Taro for breaking their agreement. It also commenced a tender offer for all outstanding shares of Taro which expires on September 2.

Earlier, international reports quoted Taro chairman Mr Levitt stating that there are a number of companies that are willing to buy Sun’s share in Taro for $10.25 a share and even more. “Sun has to be willing to sell.” he said. This question, however, does not arise now as Sun will have a majority stake in Taro. The court also stated that the directors, who are also shareholders, benefited from Sun’s investment, which saved Taro from collapse.

Sun has announced that its tender offer will now close a day later on September 3. Sun Pharma’s stock closed at Rs 1,481.65, down 0.53% from its previous day close.

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%