UK-based SAP software consultant Axon Group Plc has recommended to its shareholders to accept the offer from HCL Technologies and to reject an offer from Infosys. Noida based HCL has offered to pay about 441 million pounds ($780 million), or 650 pence per share, in cash to Axon. This is much higher than 407.1 million pounds ($720 million), or 600 pence per share, which was what Infosys offered to pay Axon on August 25. The shares of Axon were trading at 678 pence with a market capitalisation of 436 million pounds.
Axon said in a regulatory filing that “the Board has withdrawn its recommendation of the Infosys Offer and intends unanimously to recommend the HCL Offer when it is made.” The statement also added that “The HCL Offer values Axon’s existing issued and to be issued (fully diluted) share capital at approximately £441 million. The value of the HCL Offer is at a premium of 8.3 per cent to the value of the Infosys Offer.”
A WSJ report says that Infosys has factored in an upside margin of 10%-15% to its initial bid and will make a counter bid within the next 15 days. VC Circle could not independently confirm the development. There are also talks of a third player, a European firm that may enter the fray for Axon. Japanese firms, Fujitsu Software and NTTSoft, looking to expand their presence in Europe may also put in their counter-bids for Axon.
This is indeed an interesting time to test the ambitions or rather the desperation of the Indian companies. By this time it is indeed clear that both HCL and Infosys want to foray into software consulting, a high margin business that will diffferentiate it from other Indian software services exporters. Then what makes Axon, not a pure play consulting firm so tempting ? It is it’s uniqueness of being a software firm with a consulting arm, which is small enough thereby making it affordable and easily digestible.
The Battle for Axon
This battle marks a new behaviour pattern among Indian IT outsourcing companies to diversify their clients base away from the ailing US market (that still represents 60% of their overseas turnover with the bulk in financial services), and seek to move up the value scale, away from low margin outsourcing into high margin IT consulting services.
Considering the kind of consulting contracts that Axon has, something which Infosys lacks, analysts believe that valuation of Axon is still not out of range. Axon is rated No.12 globally in SAP consulting by independent vendors. With consulting contributing to 20% of total revenues of Axon , and implementation at 68%, Axon’s consulting franchise seems deep rooted in execution, says the CLSA report. Infosys has built scale in Oracle, while SAP comes No. 2 in its ERP portfolio and is still in the investment mode, while HCL has no consulting business to talk about.
Further, the meltdown in the US is forcing Indian outsourcing companies to reinvent themselves if they want to survive. “There is a strong pressure on costs with increasing wage inflation amid a shortage of skilled labour, and international competition has increased in the low end of the business or the back office application maintenance and support jobs from countries such as Vietnam, Ukraine, and the Philippines”, said a senior IT research analyst with a Mumbai based broking firm.
While Infosys is 62% North America, Axon is 64% Europe, says the CLSA report. There was also a dismissed rumour on Infosys acquiring Capgemini, a heavyweight in the European IT consulting industry, an year ago.