Infosys buys ‘Swiss Axon’

They missed out on the ‘real’ Axon almost exactly four years ago (see Infosys leaves Axon to HCL), but second-ranked Indian offshore services firm, Infosys, has bought a Swiss one instead! They are paying up to CHF330m cash (£220m/$345m) to acquire Zurich-based ‘leading management consultancy’ (read ‘SAP shop’) Lodestone.

To put this deal into context, Infosys offered £407m to buy Axon back in August 2008, twice Axon’s prior year revenues and 13x EBIT, a 15% operating margin. But they were trumped by Chennai-based peer HCL with an offer 10% higher and walked away. It is a moot point whether either Indian firm made the right decision at the time!

Lodestone turned over CHF207m (£136m/$216m) last year, half from Switzerland, which puts the acquisition at a seemingly modest 1.6x revenues. Infosys does not expect the transaction to be earnings accretive (and that’s in non-GAAP terms, i.e. ‘adjusted’) for 18 months. I am assuming that Lodestone is less profitable than Infosys’ peer-leading 29% operating margin; whether they can get Lodestone’s margins to match Infosys’ may be a challenge. Infosys’ revenue is some $7b.

Infosys is also to merge its European ‘management consulting’ practice into Lodestone, which will run as a subsidiary. This in itself speaks volumes about the successthat Infosys (and peers) face in trying to break into ‘real’ management consulting. Whether Infosys will achieve the ‘revenue synergies’ it hopes for from such a set-up is highly contentious. On this very point Infosys management would do well to learn from the erstwhile Satyam’s experiences acquiring UK-based financial services consultancy Citisoft (see OffshoreViews– Q3 2011).

Infosys has over $3b cash in the bank yet is the least acquisitive of its peers, more usually targeting small BPO companies. Management has been 'talking the talk' about acquisitions for yonks; this is one of those rare occasions it is also 'walking the walk'.