The Hindu Business Line : Acquisition is a responsibility, not a victory: HCL chief

New Delhi, Oct. 12 For a man who is scripting the largest and one of the most talked-about acquisition in the history of Indian IT industry, Mr Vineet Nayar, the CEO of HCL Technologies, appears relatively relaxed as he sits in his office a day after Bangalore-rival Infosys Technologies pulled out of the race for the UK consulting firm Axon Group.

“Acquisition is an art,” says Mr Nayar, whose company has decided to implement its £441-million offer for Axon through a neat Scheme of Arrangement – the deal itself is to be completed by December-end, if all goes well.

Not ruling out the possibility of a new suitor jumping into the fray, Mr Nayar says HCL still has a few aces up its sleeves, which will be revealed in the coming days.

Business Line caught up with Mr Nayar to chat about Axon, its price tag, and the future strategy that would be critical in integrating the acquisition into HCL’s larger plans.

Given all the market speculation that Infosys may sweeten its offer for Axon, did their decision to withdraw from the race come as a surprise to you?

We decided to pursue Axon in March and we approached them in July. So we were walking our own track. Our view was that it was a significant strategic fit for us, and a transformational deal. Moreover, Axon management was hugely supportive of the HCL bid, and the cultural fit between the two companies was compelling. With these arguments, I will be surprised if for anyone else it would be viable to go on with it, unless they found significantly higher strategic fit than HCL. And therefore my view is that the pursuit goes on… It is still a pursuit and it is possible that someone with a larger strategic objective with higher win could ultimately do the deal. Till that time, we remain positive and will logically approach this.

You started the pursuit of Axon in March this year. Did Infosys’ 600-pence-a-share offer late August take you by surprise? Or were you expecting it?

We were expecting it. I think by the time this deal is done and people understand all contours of the deal, they will understand why it makes sense to be the second, third, fourth or even the last one… understand why it make sense to create a competitive differentiator using funding, which gives you a 7 to 8 per cent bidding advantage. By the time we finish this transaction, you will understand that acquisition is not merely about making a bid, and certainly not about making it first. It is about making the right bid, at the right cost and the right time for the right reasons. So far you have seen only three aspects of our bid — the timing, pricing and cost. There are some other contours that we will share in the coming days.

Could you elaborate on these other contours?

You will see it in the coming days. For instance, look at the cost of doing the bid. The interest cost is just one element. There could be others. I believe Axon, as a pure play SAP player, is a very attractive company for anyone who can see it as an opportunity, and so it is essential for us to play it out completely.

HCL announced that it has tied up £400-million loan to part fund the deal. Could you talk about the interest cost for the company?

The interest cost for us is between 6.4 and 6.7 per cent, as Libor keeps varying. This is 300-basis point over Libor. The 300 basis point is all inclusive.

What is the tenure for repayment?

Overall, we are hoping to switch this over into even a lower cost debt structure. Our purpose of doing the debt was to not only win the 3.5 per cent bid advantage — which goes away eventually once you have won the bid — but also to reduce the cost of the debt. When we say 6.4 to 6.7 per cent, the interest cost could go up or down based on Libor, but the 3.5 per cent differential with the treasury income will remain. Right now you are looking at it from a differential point of view. After a while we will have to switch it and you will see it from an absolute cost point of view.

I think there will be lot more attractive options available post-December-January. We have a lot of time. Let’s say we have taken the loan over a five-year period, we have a lot of time to switch the loan into a lower cost loan, which is our purpose.

Could you elaborate on that?

Let’s not set targets. In the competitive bid process we are in, it is wrong for me to share such information. All I am saying; we are looking at a competitive differentiation but that’s not all, we have to look at it in absolutes also. Our attempt, going forward, will be to lower the cost of the debt further.

What about the possibility of a third player coming into the fray?

Sure, there is a possibility. One will be foolish to discount such a possibility in an open acquisition process. In theory, new players could walk in within 45 days from the day we post our scheme document.

Is there a possibility for Axon and HCL to bilaterally work this out to close the acquisition quickly, keeping in mind the ‘strategic fit’ between the companies?

I will not comment on it. There are lots of possibilities. Acquisition is an art. It is not about a bull run where you make a bid and announce the acquisition and it is done. There are multiple permutations and combinations. We are at a very interesting stage in the acquisition process. I think the industry will be proud of the way we close it, if we emerge successful.

In case a new suitor joins the race for Axon how far are you willing to go in your pursuit?

We have to play this by the ear. There is the whole issue of cost of acquisition, which continues to be open. I obviously cannot answer how much headroom we have beyond the 650-pence offer we have made.

On October 8, HCL EAS acquired 3.01 lakh shares of Axon, which is 0.47 per cent of its current issued share capital. How did that come about?

I am allowed to do that. You should check the price at which we picked it up. My objective is to win. There are multiple elements at play here which I cannot talk about. You win by turning more fixed elements into variable elements. No one thought cost of finance and time of the bid were variable elements – we opened two new variables. I believe that there are at least two more elements that we are playing on, as we speak.

What are your plans for investment and expansion of Axon, if you emerge as the successful bidder?

In my view, acquisition is a responsibility, not a victory. We are clear that when we do an acquisition we are assuming an additional responsibility. Therefore, integration and what happens post-acquisition is far more critical that the act of acquisition itself, and that is the reason why at HCL we are not sending out mails congratulating each other on moving from one stage to another. We understand post-acquisition is where the real story starts.

We have done intense due diligence and the reason we took longer than usual was because we answered question like what happens post acquisition, to IT, culture, people, structure, customers, businesses – to all elements.

There are three parts to our strategy. First, it will be very essential for us to demonstrate early wins from cross-leveraging customers. Secondly, it will be essential to go for integration of the two companies; and that is the reason I use the word merger and not acquisition. The third most critical aspect will be the long-term strategic direction, on how you make two plus two to be eight.

The first two parts of the strategy are 0 to 12 months steps and the third is 12 to 48 months. So the strategic intent will be the defining success of our future relationship.

Once you clinch Axon, is there any part of the work that can move offshore?

Axon is into technology consulting and implementation. None of this work can be done from offshore and that is the reason we want to merge this with our SAP practice, because the SAP practice does a large amount of work from offshore. So the combination of the front-end technology consulting and implementation with the back-end operations will give full cycle support to our customers.