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K. Murali Kumar

Big buy: Mr Kris Gopalakrishnan, Chief Executive Officer, Infosys, and Mr N. R. Narayana Murthy, Chief Mentor and Non-Executive Chairman, addressing a press conference in Bangalore on Monday. —

Our Bureau

Bangalore, Aug. 25 Infosys Technologies Ltd today said that it is buying UK-based SAP consulting company Axon Group Plc for £407.1 million or Rs 3,310 crore, in an all-cash deal to strengthen its SAP services offering.

The deal would close at the end of November this year. The payment would be made in December, and it would add to earnings from January 2009, India’s second largest IT services provider said.

This is Infosys’ second acquisition of an entire company. The first came in December 2003 when it acquired Australian company Expert Information Services for $22.9 million.

Shares of the company rose 0.47 per cent to Rs 1,703.05 Monday at the Bombay Stock Exchange. However, Infosys was trading 1.88 per cent lower at $40.78 at the Nasdaq at 8 p.m. IST.

Interestingly, the cost of acquisition is roughly twice Axon’s 2007 revenues of £204.5 million. Typical acquisitions in the IT services space equate the cost of acquisition to the annual revenues. The premium that Infosys might have paid here could be explained by the billing rates that consultancy offerings command.

Last year this month, Infosys’ competitor Wipro announced the acquisition of Infocrossing, a US-based services provider for about $600 million. Infocrossing’s annual revenues at that time were about $232 million.

Axon, which is listed on the London Stock Exchange, would be delisted once the deal is completed, Infosys added. Axon, which specialises in SAP implementation and consultancy, has clients across sectors including aerospace, retail, manufacturing and utilities. The company would add about 2,000 employees to Infosys’ strength of about 94,400 employees as of June 2008.

The object of the acquisition is to have global reach, scale and financial strength necessary to participate in deals that are transformational for client’s businesses, said Mr S. Gopalakrishnan, Chief Executive Officer and Managing Director, Infosys. (In short, this means that the combined entity would now be eligible for large deals.)

The acquisition price of £6 per Axon share is at a premium of 33.1 per cent to the six months average price of £4.51, and 19.4 per cent to the closing proice of £5.025 on 22 August, the company said.

Mr Gopalakrishnan said this is a space where Infosys sees good growth. There is opportunity in new implementations and also in fuller utilisation of the licences which sit on the shelf, he added.

Axon lacks financial strength and global reach, and Infosys would provide that, said Mr V. Balakrishnan, Chief Financial Officer, Infosys. He later told Business Line that Infosys was sitting on cash of about $1.8 billion. After this acquisition, the company would have roughly a billion dollars.

He said Axon is a UK-centric company but has made acquisitions in the US and has a global delivery centre in Malaysia.

Axon, which services clients in about 30 countries, has reported compounded annual growth rates of 42.7 per cent in revenues and 68.2 per cent in profits for the last five years.

Mr Balakrishnan said the operating margin for Axon in 2007 was 15 per cent. The operating margin for Infosys was 30.4 per cent in the quarter ended June 30.

Typically, the operating margins for an IT services company increases when it moves work to a low-price destination such as India.

Infosys is a global implementation partner for SAP, and has about 2,100 consultants servicing more than 100 clients in 20 countries. Revenue from the SAP practice grew by 65.5 per cent (CAGR over the last three years), it added.

Mr Balakrishnan said a third of the revenue from enterprise solutions for Infosys comes from SAP and that 19 per cent of the total revenue comes from enterprise services, he added.

Axon had reported net profit of £20.2 million on revenue of £204.5 million in 2007. About 61 per cent of Axon’s revenue comes from EMEA. North America contributes to about 61 per cent, and 5 per cent comes from Asia-Pacific, Infosys added.

More Stories on : Software | Mergers & Acquisitions | Overseas Investments | Infosys Technologies Ltd

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