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Infosys acquires Axon: Our view

Aug 26, 2008

In its pursuit of moving up the software value chain and expand geographical presence, India’s second largest software firm, Infosys Technologies (Infosys) has made its second inorganic growth move in a span of 5 years. The company has acquired the UK-based Axon Group (the deal would close by the end of November this year) in an all-cash deal of US$ 750 m. This makes it the largest ever acquisition by any Indian software company and dwarfs the US$ 23 m acquisition that the company had made way back in 2003 (of Expert Information Services, Australia).

  • Also read - Consolidation in IT

    About the deal
    It is an all-cash deal worth around Rs 33 bn (£ 407 m or US$ 753 m). The acquisition price of £6 per Axon share is at a premium of 33.1% to the six months average price of £4.51, and 19.4% to the closing price of £5.025 of the company on 22nd August. The cost of acquisition for Infosys is roughly 2 times Axon’s 2007 revenues of £204.5 m (around US$ 375 m).

    About Axon
    Axon is a leading SAP consulting company based in the UK, and has clients across sectors including aerospace, retail, manufacturing and utilities. The company was founded in 1994. Axon is listed on the London Stock Exchange. The company employs 2,000 people and serves over 200 clients across 30 countries, which includes big names like BP, Xerox and PSL Energy. During the period 2003 to 2007, Axon grew its sales and net profits at compounded annual rates of 43% and 69% respectively.

    Axon's details
    Key numbers (2007) £ m
    Revenue 205
    Operating Profit 31
    Operating Profit Margin (%) 15%
    Net Profit Margin (%) 10%
    Geographic spread  
    North America 34%
    EMEA* 61%
    Service spread  
    Business consulting 20%
    Application management 12%
    Solution implementation 68%
    Source: Infosys' presentation;
    * EMEA - Europe, Middle-East and Africa

    What’s in the deal for Infosys?
    The rationale Infosys' management has assigned for this deal is to get a stronghold in the IT consulting business as also increase its share of business from the European markets (Axon earns around 55% of revenues from Europe alone compared to Infosys’ 27%).

    As for the valuations, considering that Axon earned revenues of US$ 375 m in 2007, the acquisition has been valued at 2x sales, which we believe is fair considering the benefits it will bring to Infosys’ in terms of high domain competency (and subsequently better billing rates) and geographical spread.

    Currently, Infosys employs close to 2,100 consultants for its SAP practice, which contributes about a third of its enterprise solutions revenue (10% of Infosys’ global revenue comes from enterprise solutions). Further, the company itself has over 100 clients in the SAP space spread over 20 countries. The acquisition of Axon will bring 2,000 employees with capabilities in business consulting and business transformation, which will be beneficial for Infosys in the long run. Although, considering that Axon earns net margins which are less than half of Infosys’, there might be some dilution that the latter has to report in its profitability before it tries to increase the same by bringing some of Axon’s work offshore. Overall, we view this acquisition as a long term positive for Infosys. We maintain our view on the stock.

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