Infosys on Monday offered ú6.00 per share to buy 100% of Axon's equity with the aim of delisting the company from the London Stock Exchange where it currently trades. The price represents a 19.4% premium to Axon's closing price on August 22, the last trading day before InfosysÆs announcement, and a 33% premium to its average closing price in the past six months.
AxonÆs share price has fallen from ú9.28 as recently as one year ago. But analysts are bullish about the company, which is the worldÆs largest independent consultancy within systems, applications, products in data processing (SAP), and laud its recent efforts to enhance margins and diversify its revenue stream across a large roster of clients. Axon has effectively used M&A to grow its business and this year it has itself announced three deals. In July it bought US-based SCM and Australia's Consulting Principles. Those two deals followed the acquisition in May of EnterSys, a provider of SAP consulting services to the North American oil, gas and chemical sectors.
The price represents a multiple of 13 times 2007 Ebitda and twice revenues. Immediately after the deal some analysts expressed surprise that Axon had agreed to be sold so cheaply and speculated that AxonÆs half-year results could hold some unexpected surprises.
But yesterday Axon declared better-than-expected results for the first six months of 2008, with revenues up 28% year-on-year to ú123.9 million and operating profit up 19% to ú16.5 million. Consensus research estimates for Axon peg full-year revenues at ú244 million and recurring Ebitda at ú40.7 million. Based on those forecasts, the agreed price represents a multiple of 1.67 times forward revenues and 10 times forward Ebitda, making this an even more attractive deal for Infosys.
"This is a landmark transaction for the Indian IT industry as it reflects the tremendous growth of the industry,ö says Madan Menon, country head of global banking and markets for India at ABN AMRO, which is advising Infosys. ABN AMRO is part of the RBS group.
Infosys has already cornered 18.1% of Axon's shares in the form of binding agreements to acquire the 17.9% shareholding of founders Mark Hunter, Donald Kirkwood and Paul Manweiler and another 0.2% from Axon directors and certain key employees.
Hunter founded Axon in 1994 after resigning from software solutions company SAP. He presided over its growth for the next 13 years, including its initial public offering in March 1999. In 2007 Hunter severed all executive ties with Axon, stepping down from its board, but even before that he had been selling his shares. Indeed, it is speculated that the overhang of his shares is responsible for some of the pressure on AxonÆs share price.
The deal was done on a negotiated basis between Infosys and Axon, say sources. The next 30 days will be critical for Infosys as this is the period during which a competing bid could be tabled. In the event that Axon accepts a competing bid Infosys is entitled to a break fee of ú4 million.
However, Axon's board of directors is recommending the deal to shareholders. The board is advised by Citi, which, along with Panmure Gordon, is also corporate broker to Axon.
As of June 1, institutions owned 63.8% of Axon's shares. Some key shareholders are Blackrock with 7.1%, Standard Life with 7%, AEGEON with 6%, JPMorgan AM with 4.8%, Scottish Widows with 4.3% and Barclays Global with 4.1%.
The deal, which is intended to be effected through a court-sanctioned scheme of arrangement, consolidates the Indian technology majorÆs position within SAP consulting. On a trailing basis, Axon's $378 million of revenues for calendar 2007 add 9% to the $4.2 billion of revenues Infosys posted for the fiscal year to March 2008. In the SAP consulting space specifically, the two companies are comparable with around 2,000 employees each, although Infosys's SAP revenues are smaller than Axon's.
AxonÆs 15% operating margin compares favourably with a number of its European peers but is considerably narrower than InfosysÆs margin. Infosys's top managers acknowledged on an analystsÆ call discussing the acquisition that it has a clear focus on improving AxonÆs margins, but Infosys's shareholders seem nervous. Its share price fell half a percent yesterday (the first trading session since the deal was announced) to close at Rs1,698 ($38.68).
But the benefits of geographical diversification for Infosys are indisputable. Axon derives 61% of its revenues from Europe, the Middle East and Africa, 34% from North America and just 5% from the Asia-Pacific. Infosys currently derives less than 30% of its revenues from Europe and the potential to better penetrate the continent is a key driver of the deal, say sources. And SAP is clearly one of the growth areas within information technology, even in the more difficult operating environment for IT companies which has prevailed since the beginning of the current credit crunch.
Axon resumed trading yesterday after a bank holiday in the UK on Monday and gained 21% to cross the offer price and close at ú6.06.
Some bankers suggest that this deal will herald a slew of large acquisitions by Indian firms. Indian IT companies are sitting on cash piles making it easy to finance such expansion ambitions. To the dismay of a number of lenders in India, Infosys is unlikely to raise any debt financing for this deal, relying on its $1.75 billion war chest of cash.
Meanwhile, valuations in subprime-affected markets are throwing up attractive opportunities.
However, a "slew" seems unlikely to materialise. Wipro spent $600 million to acquire Infocrossing in 2007 and is said to be actively looking at Capgemini. Other IT players which could consider acquisitions larger than half a billion dollars are limited and include Tata Consultancy Services. And although subprime may have depressed valuations of targets, it has reduced the ability of Indian companies to use stock as currency as their share prices are also down.
For Infosys, this is its largest acquisition to date and it seems unlikely that the company's risk-averse management will be ready to do any further deals until it has fully integrated this one. And the challenge in integrating knowledge-based businesses is large, as it hinges upon people retention.
What does seems clear though, is that outbound M&A from China and India will continue to be a driver of revenues for global investment banks in 2008, as it was in 2007.
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