Infosys' dilemma: buy back shares or go for the kill?
There were times in the life of Infosys a decade ago, when some gushing shareholder would tell the then chairman, NR Narayana Murthy, at the annual general meeting of shareholders, that their money was safe in his hands.
The old shareholders were happy with the dividends they got and some, who had bought their Infosys share when it was a micro – fraction of the current price, used to hang on to their shares out of sheer loyalty.
Things have certainly changed this week, with two former chief financial officers of the technology services giant – TV Mohandas Pai and V Balakrishnan -- asking that Infosys dip into its cash chest of about Rs 30,000 crore to buy back shares using Rs 11,200 crore out of that. A share buyback would reduce the floating equity, thereby increasing the earnings per share.
The two gentlemen could have done this months ago, but the timing is ominous. Narayana Murthy has made way for Vishal Sikka as the new CEO, who is not even a week old in the job yet.
But the irony in their call is ringing. Here is why.
For more than a decade now, the cash chest of Infosys has been steadily growing while the company has been fighting shy of making big acquisitions that could have put the cash to use in core operations. As a matter of policy, Infosys does not diversify into or spend on non-core activities. A huge amount of money is often parked in low-yielding mutual fund or bank assets.
There is of course a joke in Bangalore that if software gets boring, the senior management has an alternative career in real estate. With several campuses (Pune, Mysore, Chennai, Bhubaneshwar, Mohali and Jaipur among others) in addition to its home base, and hiring employees by the thousands, Infosys always knew how to develop buildings.
Pai used to himself say that Infosys was a major customer for ACC, the cement maker.
All along, Infosys has avoided major acquisitions – either because the price was not right, or because it was not a “strategic fit”. Back of the envelope calculations can show that much opportunity can be lost when a billion dollars sits nearly idle in a low-yielding bank deposit, when the interest on it can help you buy small companies.
Infosys made a vain attempt to buy UK-based Axon Group in 2008 for about $750 million (Then around Rs 3,300 crore) but HCL Technologies outbid its way. In 2012, Infosys acquired Switzerland-based Lodestone for about $345 million – its biggest buyout so far. The rest of its acquisitions add up to less than $100 million, not counting business deals disguised like takeovers.
Now, here is why the buyback call from Pai and Bala seem less enchanting.
As a global leader in innovation, Dr Vishal Sikka has an eye on great products. He is the leading creator of HANA, the big data analytics product that helped Germany’s SAP wow the world. HANA was used by the German football team this year to learn about their rival teams and their patterns of play to win the championship.
Big data, mobile computing, social media and cloud analytics are dramatically altering the landscape of information technology. Sikka’s mind is capable of identifying world-beating opportunities and companies in these realms.
Murthy used to joke how Infosys was so careful about the value of money that acquisitions were not easy. Sikka is capable to making Infosys court worthy risks.
Is this time to buy back shares or is this the time to go for the big kill?
If Infosys does the former, the irony of the moment would be ringing.
Read: India Infosys shares rise on $1.8-billion buyback call