HCL raises stakes for Axon bid

29 September 2008

The competition among leading Indian IT firms for European acquisitions is heating up. At the end of last week, HCL Technologies, the fourth-largest Indian offshore services player, made a counter bid for Axon, the UK-based SAP-focused consultancy and services provider. The bid values Axon at £441 million, an 8.4% premium on Infosys’s first bid.

Axon in the acquisition sweet spot

It’s no surprise that Axon is courting such attention from the Indian offshore players. Axon has all the important traits that typically acquisition-shy Indian firms look for. It has fast-growing revenues (up 49% last year to £407 million), and for an onshore business it has strong margins (14% before tax) meaning it’s not overly dilutive to a high-performance Indian firm’s numbers.

It also brings with it around 2,000 ‘high-value’ onshore consultants (mainly in the UK) which are vertically focused and have in-depth knowledge of their clients’ industry sectors. These skills are invaluable to Indian services firms looking to move up the value chain by engaging clients in a more strategic manner. Finally, the business is focused on one market – SAP-related services – and primarily in the UK, although it does sell into the US as well. The upshot is that a company like Axon is seen as a relatively straightforward addition to existing businesses.

Which is a better fit – HCL or Infosys?

For all the reasons above, Axon would be a good addition to either HCL’s or Infosys’s business – and both are right to be interested in acquiring it. But acquisitions are only successful if the integration of the two companies’ cultures, sales strategy and client interaction is smooth. And this is even more important when acquiring a consulting-led business such as Axon, where the value is in the actual people. For this reason, compatibility between the businesses is of prime importance in this acquisition.

As it stands, it can be argued that Infosys has a more applications services focused culture and therefore is more compatible with Axon than HCL, which has significant engineering and BPO services arms. The counter to that argument is that Axon will better complement HCL as there is less chance of overlapping business, and therefore more opportunity for cross-selling.

In reality though, Infosys and HCL’s balance of business are not different enough to differentiate either of them as a better fit for Axon. That’s why we believe a deal will be based more on bid price and the ability of the management teams to negotiate a good deal. In that regard we’d have to favour HCL, not only because it has made the higher bid, but also because its management has significantly more experience of acquisition than Infosys.

But it’s not over yet. We’ll find out by the end of business today if Infosys has made a counter offer, and whether Axon’s board favours one bid over the other. There could be many more rounds before the final bell rings on this fight.

Either way, offshoring wins

Regardless of the winner, this proposed acquisition is likely to accelerate the European acquisition plans of Indian services firms, as second-tier players such as HCL attempt to displace Wipro, TCS and Infosys from their top-three positions. Pressure on Indian firms to acquire onshore has been building steadily over the past three years, and now economic uncertainty is spurring on even the most cautious Indian firms to accelerate their search for acquisitions and become more serious about securing significant footholds onshore.

In addition, such acquisitions will only increase the pace at which IT work is offshored to lower-cost locations outside of the US and Europe. It’s worth noting that if successful with its bid HCL says it could offshore up to 40% of Axon’s work. That’s much more offshoring than Axon could ever have done alone, and would be implemented in a fraction of the time by an Indian parent.

Whoever wins this bid for Axon (and there is still time for a third or fourth bidder!), the loser(s) will be left with an even more voracious appetite to acquire onshore – especially in Europe where growth prospects are much stronger than in the US. Axon might be the biggest acquisition by an Indian IT company to date, but it certainly won’t be the last. We expect many more acquisition announcements from Indian IT services firms, particularly around those companies in Europe that are in the same mould as Axon: focused, fast growing, high value and close to customers.

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