Sunday, 28 September 2008

HCL tosses its hat (and £440m) into the ring for Axon

We wondered whether Infosys’s bid for Axon would tempt other predators out of their lairs (see Infosys to acquire Axon and related articles) and so it came to pass late on Friday afternoon. Much smaller rival HCL Technologies declared its hand with a 650p per share bid, trumping Infosys by 50p. Infosys (or another bidder) has till Monday to raise or bust. On the concall, HCL management put forward what it felt were the many compelling reasons why Axon was a great fit and, to their great credit, refused to diss Infosys, leaving it to shareholders to decide.

Although HCL is much smaller than Infosys, it is possibly better known in the UK, having won high profile deals such as with BT and Dixons Stores Group, and, more recently, acquired the financial services arm of UK BPO player, Liberata (see HCL buys Liberata’s Life & Pensions BPO operations and related articles). Frankly, I could get into a very deep and meaningful analysis as to whether Infosys or HCL is the better home for Axon. I have followed the fortunes of the major Indian players for several years and paid special interest to their enterprise applications services (EAS) practices, and can wax lyrical on the subject. But why bother, as in the end we should expect Axon’s shareholders to go with the highest bidder.

But I will say this. Infosys and HCL are very different companies with very different strengths. HCL's strong suits are BPO and Infrastructure Management, these two comprising 27% of total revenues, compared to 12% at Infosys. On the other hand, Infosys trumps HCL’s EAS revenues five times over. Indeed, HCL management admitted back in April that they had the wrong EAS strategy and were going to fix the problem. This is a heck of a fix! In fact, both HCL and Infosys would benefit immensely from taking on Axon (and look at the revenue and profit per head in the table!). In HCL’s case the acquisition would look more like a reverse take over of its EAS practice, which is roughly half the size of Axon’s business. And HCL will be borrowing most of the cash if they win the deal, whereas Infosys still has plenty of cash headroom for a much higher bid should it choose (though the company is not known for rash moves, especially in M&A).

No bets on who will win the prize. Some analysts are talking about a bidding war up to 900p (Axon’s shares jumped 8% to 682p on Friday) but we wouldn’t presume to predict the outcome. It’s certainly going to be an interesting week!

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