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Will Infosys up its bid for Axon? - Views on News from Equitymaster
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Will Infosys up its bid for Axon?
Oct 3, 2008

In the race for Axon, HCL Tech seems to have outbid Infosys as it seems currently. Axon has accepted the bid offered by the former and has recommended the same to its shareholders. As a matter of fact, HCL Tech had topped Infosys’ bid last weekend by offering 650 pence per share (amounting to US$ 785 m) for Axon. This bid was 8.3% higher than Infosys' bid of 600 pence per share announced late August. However, despite Infosys not making a counter bid to HCL, the deal cannot be seen as sealed. Infosys can make the counter offer over the next 45 days.

The question that arises now is – will Infosys offer a counter-bid for Axon with a higher price? Or will it drop out of the race? If one were to look at the valuations at which Infosys had bid initially, there seems to be some indications that Infosys might not offer a higher counter-bid.

  • Also read – Infosys bids for Axon

    Infosys had earlier agreed to pay 600 pence per share price for Axon. This valued the latter at £ 407 m – or 14.2 times its estimated 2008 earnings (as shown on the company’s website). The valuation we believe were fair. Anything above that would have been an expensive proposition.

    HCL Tech then came into the picture. It proposed a higher bid of 650 pence per share valuing Axon at £ 441 m - or 15.4 times the latter’s estimated 2008 earnings. Then there were reports in several leading business dailies that Infosys was thinking on a counter bid of around 720 pence, which the company has not actually announced.

    At 720 pence, Axon would have been valued at 17 times its estimated 2008 earnings.

    This valuation definitely seems higher considering that Infosys itself is trading at around 14.4 times our estimated FY09 earnings! Moreover, Infosys already derives a large chunk (around 24%) of its sales from consulting and enterprise solutions, which are the core businesses of Axon. This acquisition would have taken the share of these businesses to Infosys’ total sales to nearly 42%.

    On the other hand, HCL Tech’s desperation to get hold of Axon can be understood from the fact that the former derives just around 11% of sales from these businesses. Axon’s acquisition would take this share to 30% - a relatively bigger transformation than Infosys’.

    On the other hand, buying a business that is expected to generate 45.03 pence as earnings per share in 2009 for more than 650 pence would have meant that the earnings yield for Infosys would have been 6.9% (Axon’s EPS divided by Infosys’ bid price). This is lesser than the 8% plus yield that Infosys gets on the cash it holds currently as short term investments.

    We understand the fact that Infosys had planned to derive synergies from Axon’s acquisition if it were to come by. However, a higher counter bid will make the deal expensive. Given the concerns surrounding the global IT industry and the fact that a whole host of IT companies are available for attractive valuations worldwide, we believe that a higher counter-bid by Infosys for Axon will be an action to be concerned about.

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