Infosys' mammoth cash pile may attract global suitors

Is Infosys, once the bellwether of the Indian information technology sector and a widely respected firm now a potential acquisition target?

For some of its global peers which have plenty of cash on their books, the opportunity may be quite tempting. Consider this: Nearly a fifth of Infosys’s market cap is now represented by cash and liquid assets on its books after the slide in its stock price last week in the wake of its dismal quarterly results.

The larger proportion of cash aggregating over Rs 22,000 crore reduces the enterprise value of companies such as Infosys, which do not have any debt burden, thus making them attractive takeover targets. The Infosys stock has lost over 21% since Friday after the company reported its lowest quarterly operating margin and provided for a guidance for a revenue growth rate that would lag the industry average for the second consecutive fiscal.

The steep erosion in the valuation of India’s second largest software exporter has catapulted the proportion of cash and equivalents to 17% of the company’s total market capitalisation of over Rs 1,34,000 crore. The ratio for TCS was 2.2% and for Cognizant 12.5% at the end of December 2012. The cash-market cap ratio has increased sharply from 9.7% two years ago and 4% in the March 2006 quarter, reflecting the rapid erosion of the value of the company’s core business.

Infosys reported cash and equivalents of Rs 22,436 crore including liquid investments. The presence of cash reduces the enterprise value or the price that an acquirer would put on a going concern by an equal amount which would mean that Infosys is valued at over Rs 1,00,000 crore or approximately $20 billion.

Who could be the potential acquirers? Multinational IT giants including IBM, Accenture and HP, have for long attempted to build an effective offshore presence in low-cost outsourcing destinations such as India. A company such as Infosys with a ready-to-deliver staff of more than 1.5 lakh skilled software professionals and a battery of 800 active client accounts will certainly be a good fit. IBM, for instance, has a cash pile of $11.1 billion and a market cap of $236 billion while Accenture has a market cap of $50.2 billion with $5.6 billion in cash and equivalents.

Unlike some of the other larger local IT firms such as Wipro, or HCL, and perhaps TCS, what could make it also attractive is the widely dispersed shareholding of Infosys.

The Bengaleru-based company's promoters control a little over 16% while institutional investors have a stake of 56%. The largest among them are Life Insurance Corporation (6%), the sovereign wealth fund --Abu Dhabi Investment Authority (2.2%), and Oppenheimer Developing Markets (2.1%), besides Franklin Templeton Investments (1.8%). Despite a below-par show over the past few quarters, institutional investors have progressively raised their holdings in the company from 40% in December 2007, reflecting perhaps the premium it attracts for its top corporate governance standards.

The recent show may have led to more questions now being raised about the management’s ability to deliver more especially with peers such as TCS and Cognizant reporting far better numbers during the last few quarters. So far institutional investors have shown great faith in the ability of Infy’s management buits leadership will have to get its act together faster before there is an erosion in its core support.