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Wipro’s Infocrossing acquisition: Our view - Views on News from Equitymaster

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Wipro’s Infocrossing acquisition: Our view
Aug 7, 2007

Wipro has acquired the Nasdaq listed Infocrossing Inc. for US$ 18.7 per share, pegging the enterprise valuation of this IT infrastructure management services firm at US$ 600 m, including US$ 60 m debt, in an all-cash deal. Here is our take on the deal. About Infocrossing
Infocrossing is a leader in IT outsourcing solutions. Its services are designed to provide customers with the ability to strategically outsource non-core IT operations and IT-driven business processes to reduce costs and improve performance without the risk or loss of control associated with wholesale outsourcing engagements.

Infocrossing's IT outsourcing solutions are focused on four practices:

  • IT Infrastructure Outsourcing - Comprehensive management of mainframes, mid-ranges, open-system servers and networks.

  • Healthcare IT and BPO Solutions - Advanced solutions for Medicare, Medicaid, and managed care transaction management.

  • Managed Services - Managed protection for enterprise email systems, bundling anti-spam, anti-virus, content filtering and other key security technologies.

  • Enterprise Application Services - Outsourcing and management of industry-targeted ERP applications.

What’s in the deal for Wipro?
To start with, this is Wipro’s first acquisition of a publicly held company, despite the fact that the company has been on an acquisition spree for the past three years. In FY07, Wipro had acquired 4 companies in the IT services space but these were not publicly traded. They are:

Acquired entity Acquisition price Acquired during Revenues Domain of expertise Verticals served
cMango US$ 20 m upfront, as well as earn-outs based on the achievement of financial targets April-06 US$ 13 m Infrastructure consulting Banking and financial services, pharma, hi-tech, retail, public sector
Retailbox BV NA June-06 NA IT Services Retail
Saraware Oy 25 m Euros (US$ 31.6 m) upfront, including debt takeover, as well as earn-outs on achievement of financial targets June-06 14 m Euros (US$ 17.7 m) Wireless design and engineering services Telecom
Quantech US$ 10 m July-06 US$ 12.7 m CAD/CAE services Automobile, aerospace, consumer goods

Infocrossing is the company’s first acquisition in the IT services space in FY08 and the biggest till date. Earlier, Wipro’s largest IT acquisition was the US$ 100 m buyout of Spectramind (now Wipro BPO) in FY03, while the biggest overseas buy was the US$ 59 m acquisition of NewLogic (in FY06).

As per the management, Infocrossing’s acquisition process is likely to end by December 2007, and the acquired entity will be merged with Wipro’s subsidiary in US - Wipro Inc. This buyout will brings in revenues of US$ 232 m along with 900 people spread across five locations in the US. What is more important is that this acquisition goes in line with the company’s long-term strategy of focusing extensively on technology infrastructure services (TIS). The current global IT infrastructure market is estimated to be around US$ 150 bn and of this US$ 70 bn is offshorable. In FY07, Wipro’s TIS business generated revenues of US$ 260 m (10% of total revenues) and recorded a growth rate of 75% YoY. The TIS segment has more than 300 clients. Besides the infrastructure management services, Infocrossing also brings in additional capability in the healthcare sector. Wipro has paid a 13% premium to the last six months average price of Infocrossing.

This deal assumes importance mainly because Wipro is a clear market leader in the TIS space in India and wants to compete with EDS, IBM and Cap Gemini. Infocrossing has 5 data centres in the US and currently operates them at little more than 50% utilisation level. Secondly, in the US, when a large TIS deal takes place, it primarily goes to the service providers who have established data centres in the country. Thus, for Wipro there is huge potential to tap.

Key concern
The main concern apart from the post merger integration is that of maintaining margins. Infocrossing’s current operating margins are little less than 14% and Wipro has an operating margin of above 19% (1QFY08). Though prima facie this looks like the deal will be margins dilutive, the company has indicated that they will be able to negate this impact in 2 to 3 years.

What to expect?
At the current price of 460, Wipro’s stock is trading at 12 times our estimated FY10 earnings. In the past few weeks, the stock has been hammered in the bourses primarily because of a weak 1QFY08 results and negative sentiment the entire IT pack owing to appreciation of the rupee against the US dollar. This is Wipro’s twelfth acquisition in the IT space and the ninth in the past 2 years. The benefits of acquisition shall take time to reflect in the bottomline and we firmly believe that this acquisition will help company to move up in the value chain. We maintain our positive rating on the stock from a long-term perspective.

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