Axon buy to boost Infosys' European exposure
Infosys can leverage its size and global presence along with Axon's consulting expertise to win big deals in the US and Europe. IT service megavendors
By Santanu Mishra, ET Bureau |
The proposed acquisition of Axon, a UK-based SAP consultant, is apt and opportune for Infosys, even if it appears rather expensive at the moment. Infosys, the second-largest IT exporter in India, has agreed to pay $753 million in cash to acquire Axon. This is 13 times the latter���s annual operating profit.
There are three reasons why the deal makes huge sense despite its skewed valuation. First, the deal provides Infosys a ready access to the existing market of Axon in Europe. Historically, Indian companies have struggled to find a foothold in this market. The acquisition helps Infosys to take advantage of Axon���s capabilities and brand presence in Europe. Creating its own brand would have taken Infosys a significant time and effort.
Secondly, Indian IT companies cannot remain competitive without venturing into the high-end consulting business. Axon provides an edge to Infosys in this regard. The SAP implementation and consulting business of Axon is growing at a rate of 60-70%. Further, a conservative estimate of 50% growth in topline and 20% operating margin reveal that Infosys can recover the acquisition amount in four years.
Thirdly, Infosys can leverage its size and global presence along with Axon���s consulting expertise to win big transformational deals in the US and Europe. This makes sense for Axon, given the stiff competition from bigger players like Capgemini and Accenture in these markets.
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However, the deal comes with its own challenges. First and foremost is the dilution of operating margin of Infosys. Its current margin of over 32% will take a knock once it consolidates its revenue with Axon as the latter currently operates at 15% margin. However, the management of Infosys has hinted that part of the incremental revenue would be offshored to boost margins. The second challenge is that of cultural integration.Download
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