Infosys opens the doors of Europe

Directed at a high price, the acquisition of Axon Group, a service company specializing in SAP consultancy, will primarily enable Infosys to strengthen its presence in Europe, a strategic target at a time when the U.S. economy slows down. But this is far from being the sole interest in this record breaking transaction for an Indian IT company.

Part of Infosys City, in Bangalore.

Part of Infosys City, in Bangalore.

It is a record so far: no Indian IT company has had the luxury of an acquisition in the West for such a huge amount; nearly 510 million euros. This high price represents twice the revenue of Axon Group, and 20 times its profit in 2007. But for Infosys, the acquisition of Axon Group, a british IT company specializing in SAP consultency, has multiple interests.

The Indian investors got it right: in the stock market in Mumbai, which opened down 1.1% this Tuesday, August 26, Infosys shares gained 1.3% to 1,725 Rs. Harit Shah, an analyst with Angel Broking broker, quoted by Reuters, considers that “this acquisition seems to be very good in the long term. It will accelerate [Infosys] growth in Europe and give it access to a very good customer portfolio.” As a result, more than an expenditure, the operation is analysed as a smart use – with good prospects for return on investment – of part of the pile of available cash that Infosys is seated on.

Grow faster in Europe

On average, since 2007, North Amercia accounts for about 61% of Infosys revenue, compared to about 27% for Europe. The Indian IT company made no secret of its interest in the Old Continent: it intends to produce, ultimately, 40% of its revenue over there, and bring along North America to the same ratio. In late July, we met Kris Gopalakrishnan, Infosys CEO, in Bangalore. On the occasion of an interview, while the acquisition of Axon was not yet known, he discussed the challenges of conquering the European market and the strategy adopted by the Indian IT company (see the video clip below).

Axon Group fits in well with the strategy of targeted acquisitions detailed by Kris Gopalakrishnan: the British IT company enables Infosys to earn 2,000 employees over thirty countries; Axon Group produces 61% of its revenue in the EMEA region. The employees of Axon Group in North America will simply strengthen those Infosys already has on the spot.

But the bride is not perfect: Axon Group has no offices in continental Europe. As a result, Infosys might interested in the network of independent SAP consultants, Axon International, run by Axon Group. Among the members of this network, one would notice the French GFI Informatique. Asked about their plans regarding the Axon International network, the leadership of Infosys declined to comment before the conclusion of the acquisition.

Dominique Raviart, an analyst with Nelson Hall, considers that the Axon International network may be of interest for Infosys, in order “to achieve additional sales in Europe.” But he does not anticipate an immediate threat to a company like GFI Informatique: “the impact of such a buy out would be too important for the operating margin.” But Dominique Raviart still expects some “targeted takeovers in France.”

To strengthen SAP consultancy

But there is more than just the European issue. With Axon Group, Infosys also seeks to develop its high value-added activities to reduce the share of software development in its revenue, an activity in which the pressure other countries in Asia began to be felt.

Sid Pai, an analyst with the firm TPI (specialising in the choice of providers), India, explains that Infosys “already has SAP and software development expertise; Axon provides complementary expertise in the deployment in response to the needs of many vertical industries.” Dominique Raviart adds that “in the field of ERP, developments can be offshored but consultancy must be done on site.” Precisely, Axon Group brings to Infosys staffing requirements in Europe.

The Indian IT company already claims a hundred customers on SAP projects in over 20 countries and more than 2,100 specialized staff, all with a revenue up over 65% on average during the last three years. But, overall, consulting and enterprise solutions represent only 24% of the revenue of Infosys. At Axon, the consultancy represents only 20% of the activity, but the implementation of enterprise solutions account for 68% of the revenue.

A good financial opportunity

Finally, the acquisition of Axon Group allows Infosys to find an appropriate use for its cash. To achieve this acquisition to more than 500 million €, the Indian IT company will actually dip into its immediately available cash estimated at more than $ 1.7 billion by the end of the second quarter of 2008.

Thus Infosys answers to critics who accused it to leave its money to sleep. The good news is that Axon Group is doing rather well: its net profit before taxes rose from £ 4 million in 2003 to nearly £ 30 million in 2007, while its revenue increased by 49 to £ 204 million. But a challenge remains for Infosys: to bring up the operating margin of Axon Group to a level consistent with Infosys tradition, namely close to 30%. For the moment, it is only at 15%. But hope largely remains: the Axon Group operating margin was only 7% in 2003.

The acquisition must be effective by the end of November.

Version française ici.

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Un commentaire pour “Infosys opens the doors of Europe”

  1. Le 31 août 2008 à 14:09

    LeMagIT Blogs : Vite lu dans la presse indienne dit:

    […] du 25 août, on revient bien sûr la stratégie de croissance externe des SSII indiennes, après le rachat d’Axon par Infosys. On parle aussi campagne présidentielle aux US, suicide à Bangalore, inflation, énergie, […]

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