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HCL Tech seals Axon deal - Views on News from Equitymaster

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HCL Tech seals Axon deal
Dec 16, 2008

India’s fifth largest software services company, HCL Technologies has completed the acquisition of Axon. Valued at US$ 660 m, this is the largest acquisition by any Indian IT company so far. It tops the US$ 600 m acquisition of US-based Infocrossing by Wipro last year. HCL snapped this deal from Infosys by bidding higher by around 8%. Infosys had earlier agreed to pay 600 pence per share price for Axon. This valued the latter at £ 407 m. HCL Tech then jumped into the fray and proposed a higher bid of 650 pence per share valuing Axon at £ 441 m – around 15.4 times the latter’s estimated 2008 earnings.

We had raised our concerns over a possible higher bidding by Infosys (Will Infosys up its bid for Axon?), which were addressed when the company stayed put with its original offer. Our concerns were with respect to the high valuations that HCL Tech was ready to pay for Axon.

Anyways, HCL has picked up a 10.43% stake in Axon from the open market for £ 42.3 m. The consideration will be paid by a loan that the company has raised from Standard Chartered Bank.

As per HCL’s management, this deal is in line with the company’s strategy of covering service innovation, pricing innovation, creation of new markets and technology disruption. This strategy has paid rich dividends with innovative partnerships and is expected to catapult HCL Tech in new league.

About HCL Axon
After this acquisition, a new entity has been formed by reverse merger of HCL’s SAP practice with Axon. The new entity will be known as HCL Axon. HCL Axon will be the SAP services division of HCL Technologies.

HCL Axon will be headed by Steve Cardell (former CEO of Axon). He will be the president. The company will have 4,500 consultants and it is estimated that the entity will garner revenues of about US$ 500 m to US$ 600 m. during the coming year.

What does this deal mean to HCL?
The acquisition of Axon will fill the capability gap which prevented HCL Tech earlier to address the full opportunity in the SAP implementation space. The company will be able to combined consulting and implementation capabilities of Axon with its global delivery based application and infrastructure management capabilities to deliver unique value to customers.

This acquisition will bring in Axon’s expertise in designing, implementing and supporting solutions for companies using SAP as their enterprise platform.

The acquisition will catapult HCL among the top 12 SAP services players globally. This will also help it move up the software value chain and expand geographical presence.

At present HCL Tech derives about 11% of revenues from its enterprise applications services (EAS) business. This acquisition will enable it to increase the contribution to 25%.

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