Stand by for a big Infosys acquisition

Earlier this week, Wipro announced that it would acquire Nasdaq-listed IT infrastructure management firm Infocrossing for $600 million in India’s biggest software acquisition overseas so far. Wipro has long spoken of a “string of pearls” strategy for acquisitions, and that usually meant buying small overseas companies to either gain customers or competencies, which in turn could be linked to operations in India to provide cost-efficient services to customers.

But then, at 600 million US dollars, the latest pearl must be the size of a football. That big an acquisition is happening now because this seems to be the ideal time for an Indian company to go shopping abroad. And I do believe Infosys is ready to make a big purchase now.
Rumours have been rife in the markets for a while now that Infosys may try and get Capgemini to build its European market while Capgemini itself acquired US-headquartered Kanbay, which has a strong presence in India. London-based Xansa was also said to be an Infosys target, but is now being acquired by Steria, another European player.

The story is quite simple. Foreign companies who have missed out on the Indian software party are buying capacities to have a strong presence in India, while Indian players make Western acquisitions either to get juicy customers from the companies being bought, or to acquire specialised competencies and relationships with regard to technical skills or consulting capabilities.

Companies like Accenture and IBM have been hiring away in India, matching Infosys and Wipro in wooing skilled engineers. The job market is getting tight, with salaries going up and managers difficult to find. Meanwhile, the rupee has become stronger, eroding profit margins for software service exporters like Infosys.

Now, consider the fact that Infosys is hiring about 24,000 employees in the current fiscal year. This means it is building capabilities to execute orders. Infosys has often said that it does not propose to use acquisitions to build capacities. Being good at training and managing young fresh graduates, Infosys essentially looks for acquisitions to give strategic headroom to acquire big-ticket customers. In Australia, it paid about $23 million to buy Expert Information and last month, it said it would pay $28 million to take over the business process outsourcing (BPO) operations of Philips which would bring with it a $250 million outsourcing contract.

Infosys could do with some consulting muscle and more big-ticket customers.

The Bangalore-based company is sitting on a huge cash pile of about $1.6 billion (Rs. 6,350 crore)! Nandan Nilekani, Infosys’s executive chairman, has long maintained that cash is a “strategic asset” but at some point, I suspect it becomes a strategic liability.

Infosys does not invest in stock markets, its venture funding has not proved too good, and returns from bank deposits and liquid mutual funds are too low. The best thing for Infosys is to either return some cash to its shareholders, buy real estate to build facilities (which it is already doing) or else, go for acquisitions.

This week, the government clamped down on external commercial borrowings (ECBs) to stop the rupee from appreciating further. The rupee, which was 44 to a US dollar at the start of the year, is now at Rs. 40.5, and that means anything bought overseas is nearly 10 per cent cheaper.

This could be the best time for the company to shed its trademark south Indian conservatism and do some big-time shopping. I expect it to happen sooner than later.