Axon buyout will protect Infosys from U.S. slowdown: CEO

Thursday, 28 August 2008, 11:49 Hrs
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Bangalore: The acquisition of the Britain-based SAP consulting firm Axon Group is part of IT major Infosys' strategy to protect its business from a slowdown in the US and expand its global footprint.

"The buyout is part of our two-fold strategy. In the short term, it will de-risk us from the impact of tech slowdown in the US market though it will continue to be a major revenue contributor," Infosys CEO Kris Gopalakrishnan told IANS.

"In the long term, such inorganic growth will enable us to expand our global footprint in client-servicing and revenue generation," he added.

A day after Infosys announced the acquisition for 407 million pounds (33 billion or $753 million), Axon declared its revenue had increased 28 percent year-on-year to 123.9 million pounds (10.07 billion) for the first half (January-June) of this fiscal.

Additionally, its operating profit rose 19 percent to 16.5 million pounds (1.34 billion), while revenue from Europe, Middle East and Africa (EMEA) grew 58 percent.

Infosys had already factored the interim dividend of 2.25 pence per share in the acquisition price of six pounds per share in an all-cash deal, which will be completed by November. The interim payout for the 67 million shares will be 1.5 million pounds (121 million).

"We have been scouting for such a strategic fit in line with our global delivery model (GDM). Apart from increasing our revenue from Europe, Axon will be a new engine for growth worldwide," Gopalakrishnan said in an interview.

"The buyout will also enable us to pitch for large deals by cross-selling its domain expertise in SAP to our global clients."

Flagged as the largest overseas deal in value terms by an Indian IT firm so far, the Axon takeover will pitchfork Infosys into the big league and enable it to bid for projects that go beyond legacy or conventional technologies.

Infosys' hometown rival Wipro bought the U.S.-based Infocrossing for $600 million (24 billion) in August 2007.

With Infosys' U.S.-based subsidiary providing a host of consulting services across the board with about 2,100 consultants, the latest buyout will bring about a synergy in its offerings. The subsidiary services about 100 clients in 20 countries worldwide.

"The acquisition signals that the Indian IT industry is not only resilient in the midst of a global slowdown, but also very dynamic to sustain growth. It will spur a fresh wave of inorganic growth," Gopalakrishnan said.

Post acquisition, the $4.4-billion software major plans to offer consulting services in the domestic market too, where large firms across verticals will be able to enhance productivity and transform business by choosing SAP as their strategic enterprise platform.

SAP business accounts for 24 percent of Infosys' enterprise solutions revenue, with a cumulative average growth rate (CAGR) of 65 percent over the last three years.

For the first quarter (April-June) of this fiscal, consulting services posted revenue of $18 million but a loss of $2 million as the US subsidiary is still in investment mode. "This is the space where we have good growth and there is good demand for SAP services," Gopalakrishnan said.

Axon's buyout comes nearly five years after Infosys made its maiden acquisition of Australian IT services provider Expert Information Services for $22.9 million (1.05 billion) in December 2003.

In July 2007, it had acquired the three business process outsourcing (BPO) divisions of the Netherlands-based Philips NV for $28 million (1.1 billion).

The cough-up will, however, reduce the Infosys war chest to around $1 billion from $1.8 billion.

Infosys' chief financial officer V. Balakrishnan said Axon's revenue would be reflected in the fourth quarter (January-March) of this fiscal, necessitating a revision of its annual guidance upwards from $5.05 billion (216 billion).

"Axon is projected to post revenue of 250 million pounds by the end of its fiscal in December, which will shore up our topline by $500 million after the acquisition process is completed," Balakrishnan said.

On the hiring front, Infosys will retain all the 2,000 Axon employees and ramp up the strength to consolidate its presence in EMEA and foray into emerging markets.

Axon has 15-20 percent market share of SAP services in Britain and the rest of Europe. Some of its major clients are Vodafone, Barclays, British Petroleum, Pratt and Whitney, Cable and Wireless, PSC Energy, GE Capital, Motorola and Xerox.

"Retention will enable us to leverage their skills sets and provide a cultural fit for servicing Axon's clients in Europe and other countries. As a policy, we will continue to hire talent, which is multiethnic and near-shore," Gopalakrishnan affirmed.

Balakrishnan admitted Axon employees will continue to draw relatively higher compensation than Infosys' staff.
Source: IANS
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