Infosys to acquire Axon for £407m/600p

Indian Infosys has just announced an agreed/recommended bid for UK Axon ; valuing Axon at £407m/600p per share. This was a relatively modest 19% premium to Friday’s closing price. Indeed, at ‘just’ 13x 2007 EBIT and 2x 2007 revenues, the price Infosys is paying looks extremely reasonable. Maybe there was something in the interims to be announced tomorrow/Tuesday that might have shocked? Anyway I see that all the Axon founders – including Mark Hunter – have provided irrevocables representing c18% of the equity. So this is almost definitely a 'done deal'.

Axon had revenues of £204.5m in the year to 31st Dec 07; producing an operating profit of £30.6m and PBT of £29.5m. Ie an operating margin of 15%. Although this might seem rather good by UK/European standards, it's still appreciably lower than infosys' 22% margin. Axon makes 61% of its revenues from EMEA (the vast majority - 55% - from the UK), 34% from North America and just 5% from Asia Pac. Infosys claims that its SAP practice has 2100 employees (compared with 2000 at Axon) and services clients in 20 countries. The combined operation with Infosys’ existing SAP operations “will create a global SAP player”.

Despite the global (and IT) downturn, SAP-related services remains a high-growth area. Many players currently complain that their SAP services growth is supply constrained. Infosys claims their SAP practice is growing 65%+ CAGR; other Indians are seeing similar growth rates. It’s not new applications that are driving growth (though there is still some of this, but not much). It’s things like consolidation of multiple SAP platforms, plus upgrades to SAP’s latest releases (customers get penalised with higher maintenance charges if they linger on old versions!), and of course, moving application management offshore. In other words, it’s all about cost reduction. The Indians that are seeing their SAP practices grow fastest (compare Accenture at 30%, IBM at 10%) because they have the lowest delivery cost.

Axon brings another slew of clients to Infosys where it needs them most – in Europe. Infosys gets about 27% of sales from Europe, which should pan out to around £600-700m in ’08. The extra £120m+ of EMEA revenues that Axon brings will come in very handy, albeit at around half of Infosys’ margins.

So Infosys plus Axon is EXACTLY the kind of link-up I anticipated. The Indian players are really interested in buying companies with strong IPR/niche positioning where they can use the onshore expertise to ‘pull through’ the project and recurring revenue streams. This latter part is where the offshoring element comes into play creating the mother of all ‘blended delivery’ models.

As far as I can see this is not only the largest acquisition of a UK SITS company by an Indian player on record but probably the largest acquisition in the SITS space globally by an Indian player. I have, of course, been forecasting this for the last five years! As I have said on many occasions, Holway’s forecasts are usually correct – it’s just that he often gets his timescales wrong!

One of the potential problems I see in this deal is Infosys’ relative lack of experience in M&A. It is only Infosys’ second deal (the first was Expert Information Systems in Australia in Dec 03 for $23m). So as this is the first time for Infosys to integrate a sizeable acquisition, they will be learning on the job. We all know how tricky it is to integrate people-based companies when in the same country and culture, so this will be no picnic! Certainly Axon’s top consultants will have little problem getting jobs elsewhere if they feel uncomfortable with Infosys holding the reins. (I will refer readers to Mark Hunter’s infamous response to my question when I was chairing a public debate in 2007 “How do you intergrate acquired staff into Axon?”. His reply was “We tell them to FI-FO”. “What’s FI-FO?” asks an unsuspecting Holway. “Fit in or F*** off” was his reply)

Bluntly, I have thought that Axon getting swallowed up was inevitable after its founder, Mark Hunter, stepped down. As readers will know, I had great respect for the man and his achievements. See my 30th Nov 07 post - Mark Hunter steps down from Axon. But I have mixed feelings – to say the least – about yet another of our finest indigenous SITS companies going into foreign ownership. With the pace of public-to-private acquisitions showing no slowing of pace, I really do wonder if there will be any UK quoted SITS companies of any size left soon.

Footnote – I was an Axon shareholder but sold all my holding last year at c800p when Mark stepped down. Since then Axon share price had halved before staging a recovery in the last few months; possibly spurred on by a possible acquisition. Just for once, I therefore don’t have any regrets for this previous sale decision!