Lodestone buyout: Has Infosys paid a tad more in return compared with HCL Tech-Axon deal?

With the acquisition of enterprise solutions specialist Lodestone, Infosys may finally be able to put behind it the loss of opportunity to acquire Axon that was snapped up by rival HCL Technologies in September 2008. This time, however, Infosys appears to have paid a tad more in return for perhaps lower value compared with the HCL Tech-Axon deal.

Infosys has paid over $349 million or close to Rs 1,930 crore to purchase Zurich-based SAP specialist Lodestone, which has over 750 consultants. It works out to be over $465,000 or Rs 2.6 crore for each consultant. Contrast that with HCL Tech, which paid over $263,000 or Rs 1.5 crore to acquire the 2,500 strong consultancy practice of Axon.

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The Lodestone deal also looks marginally expensive, considering that Infosys paid 1.6 times Lodestone's latest annual sales of over $211 million. HCL Tech had paid close to 1.3 times for Axon.

The Indian IT firm expects Lodestone's acquisition to improve its presence in the European market for enterprise IT solutions based on the SAP platform. However, its impact on the parent's financials will be far more limited when compared with the magnitude of benefits that HCL Tech enjoyed through Axon's merger.

The relatively tiny size of Lodestone's operations is a major reason for this. Lodestone's annual revenue is just over 3% of Infosys' trailing 12-month top line of $7,075 million or Rs 35,865 crore. In contrast, Axon was more than one-fourth in size when HCL Tech acquired it. In addition, at the time of acquisition, Axon was more than double in size and with a head count that was three times more compared with the current revenue size and employee base of Lodestone.

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Industry trackers reckon that the Lodestone acquisition is, at best, a step in the right direction, but may not be adequate to end Infosys' current struggle to grow revenues. "The deal will improve Infosys' European footprint. But given the small size of operations, it doesn't look as aggressive as Axon's takeover by HCL Tech," said Angel Broking's IT analyst Ankita Somani.

The profitability of the acquired business will be another sore point for Infosys investors. Though Infosys has not mentioned the operating margin of Lodestone, SAP-related business derives a margin of less than 10%, according to industry watchers. This compares with a near 30% operating margin of Infosys.

"The margin gap shows that Infosys may have increased its focus on generating more volumes rather than simply protecting their profitability," said Dhananjay Sinha, co-head of institutional equities, Emkay Global Financial Services.

However, Lodestone's lower margins will not impact the parent's profitability much due to the smaller size of operations. But growing concerns over the deteriorating economic scenario in the Eurozone may create some challenges for Infosys once it gets ready to cross-sell solutions to Lodestone's existing clients. The deal may prove to be a good long-term strategy without much influence or impact on the near term fortunes of the erstwhile IT bellwether.

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