The company recently bought 6.4 million shares of the LSE-listed firm at a price of £6.3 per share, while an earlier transaction saw it picking up 0.3 million Axon shares at £6.5 apiece. HCL Technologies is planning to acquire the UK-based firm for £441-million, the largest ever technology acquisition bid by an Indian company.

“HCL wants to acquire Axon at a fair price, fair valuation and the right time. There are things we have to do to ensure a positive outcome. One variable is price, which is 650 pence (price per share for HCL’s proposed Axon acquisition). So, we have bought this stake in Axon at a price lower than that,” HCL Tech CEO Vineet Nayar said. The company used its cash reserves to pick up the stake in Axon.

Asked about the impact due to the UK government’s takeover of banking firm HBOS, one of HCL’s top 10 clients, Nayar said, “We have not assessed the impact, if any, due to HBOS. I have spoken to the management (of HBOS) and they said there will be no change in the outflow going forward. So, it’s business as usual.”

A top 10 client like HBOS would have contributed over $40 million to HCL revenues over the last 12 months.

Talking about the deepening financial crisis and impact on IT spending, particularly after bellwether firm SAP reported an unexpected sales decline in the second half of September, Nayar said, “No one knows what is happening or what the impact would be. The recent drop in SAP licence sales came as companies are freezing their capital expenditure. If the same happens next quarter, I‘ll be concerned.”

The firm would also announce a big deal in the financial services space in the domestic market, he added.

Mohit Soapbox:
HCL seems to have won the bidding war for Axon.  Is it a good thing only time will tell but we believe that at a time when the opportunity to buy companies at great valuations getting into a bidding war over Axon may not have been the smartest way to spend cash.  

ARTICLE 

Axon Group Plc, the target of India’s first bidding war for overseas assets, will recommend a 441 million-pound ($780 million) bid by HCL Technologies Ltd. that trumped an offer by Infosys Technologies Ltd.

Axon, the U.K. business adviser for companies that run SAP AG software, has withdrawn its backing for Infosys’s 600 pence-a- share offer, preferring HCL’s bid of 650 pence a share, the Egham, England-based company said in a statement today.

HCL, controlled by billionaire Shiv Nadar, took on Bangalore-based Infosys, India’s second-largest software exporter, to gain Axon’s expertise in products developed by SAP AG, the world’s biggest maker of business-management software. The takeover would be the largest by an Indian technology company, according to data compiled by Bloomberg.

“Axon and HCL have enjoyed a long-standing relationship,” Axon said in its statement. “The board is pleased that HCL has recognized the quality of the Axon business.”

Axon rose 2.5 pence, or 0.4 percent, to 678 pence in London.

HCL rose 11.35 rupees, or 5.8 percent, to 205.8 rupees yesterday in Mumbai, valuing India’s fifth-largest computer services provider at about $3 billion. Infosys gained 51.25 rupees, or 3.7 percent, to 1,449.3 rupees. The Indian market is closed today for a bank holiday.

Mohit Soapbox:
It’s liking fighting over a box of chocolate in Hershey’s store! It seems fairly stupid to fight over and increase the valuation of a firm when this is a buyers market for companies with cash. I still don’t get it why would HCL and Infosys be in a bidding war over one company. Yes SAP package implementation is a growth industry, yes Europe is a good marketplace to get a foothold in but the options to choose today are many.

Good for Axon shareholders but a useless waste of time and resources for HCL, Infosys shareholders and management.

IT’s need of the hour

ARTICLE
The traditionally reticent Indian IT companies have transformed from being acquisition-shy to fiercely competitive in one seamless step.HCL Technologies’ £441m counter bid for UK’s Axon Group is raising many questions not only because of the size of the deal but also because the firm has taken Infosys Technologies, arguably the most respected Indian IT firm, head-on.

“Till now, HCL has been talking big, but has not done any major acquisitions,” said one senior investment banker. Infosys, on the other hand, has been extremely shy of the subject and has done only one minor acquisition of $23 million so far.

But overnight, the two firms have become locked in a pitched battle, and analysts say that if neither player backs out, the Axon acquisition could eventually be done through an auction process similar to what happened with Corus. Only this time, both bidders will be Indian.

“For sure, the bid will go up to 700 pence per share. And if neither HCL nor Infosys backs out, it could move to an auction process with several rounds and the bids going to 750 pence,” said head of research with a brokerage firm. What caused Infosys, with low-risk appetite, and HCL, which analysts say is taking a big risk, to attempt the deal? The reasons are not far to seek.

“Growth rates of Indian IT companies are sobering down. You will now see them make multi-million dollar acquisitions,” said Kotak Mahindra Captial Co Financial Sponsors Group executive director and head V Jayasankar. In the past, the biggest worry for cross-border acquisitions by Indian IT firms was margin dilution. Indian companies were enjoying margins far higher than their overseas peers, and any acquisition of size would have dented their margins and pulled profitability down.

However, in the last few quarters, the recession in the US made it harder for them to show the same revenue and profit growth. Some of their overseas rivals—IBM, Accenture and CapGemini—have expanded substantially in India and are able to offer similar advantages and win more transformation deals. “There is a need for growth and growing organically is getting more difficult,” said Forrester India country head Sudin Apte.

No doubt, these acquisitions will be tougher to integrate and probably take longer to conclude, but Indian service providers are realising that while small acquisitions are sweet, it really doesn’t give them to muscle to compete with the IBMs of the world.

“They have realised that the scale and experience that comes with an acquisition is also important. Acquiring a small firm Germany doesn’t necessarily put an Indian firm on equal footing with an European service provider with a large local presence,” said Ernst & Young transaction advisory leader Ranjan Biswas.

Mohit Soapbox:
Hmmm.. reminds me of kids fighting over ‘An Apple’ – in an apple orchard!  Why would HCL go after a firm and pay premium for  Axon when it can pick and choose a # of other players in the market and same or better valuations ?  I also wonder if HCL is ready to digest a large acquisition and can raise capital in this market.  It reminds me growing up that I wanted the same football which my big brother got even if I got my very own! 

The markets in Europe are growing and  the IT/ITES firms are looking to increase their market share. Packaged implementation is another area where a number of the firms are looking to expand and potentially leverage those relationship to offer higher end services. 

We still see challenges in post merger integration specially the larger ones for Indian vendors and will have to wait and see how some of the value is realized in the larger mergers.

ARTICLE

India Inc’s biggest overseas acquisition in the software space might just grow bigger as HCL Technologies is learnt to be offering 15% over and above Infosys’ bid for the UK-based SAP consultant Axon.

The Bangalore-based HCL Technologies is all set to counter Infosys’ offer of 600 pence per share announced late last month, people involved in the discussions told ET. According to them, an offer in the range of 690 pence per share would be made by HCL in the next fortnight, within the deadline for making a counter-bid. When contacted, a spokesperson for HCL said: “We have a policy of not commenting on speculation and, hence, I will not be able to answer (the questions).”

After HCL’s offer, Infosys gets a second chance to scale up its bid. In case Axon’s shareholders opt for HCL, Infosys stands to be paid 1% of the deal amount as inducement. After announcing its bid, Infosys had claimed that it had the backing of the Axon board, large shareholders and some key employees.

However, it was not immediately known as to how HCL, which witnessed a decline in its net profits last quarter due to global slowdown, plans to raise over $850 million that it plans to shell out for the acquisition. Sources said that HCL has appointed a couple of investment bankers and consultants based in India and the UK to look into such critical aspects.

While Infosys was positive it would seal the deal by November, HCL’s entry could postpone it. A source said: “The company has to make a counter-bid to Axon within 21 days. The bid would be made soon and HCL would raise the bid by around 15% above Infosys’ offer.” After a bid is made by HCL, Axon’s shareholders could vote in favour of either of the bids. Shareholders, however, have a prerogative to vote in favour of Infosys despite their bid being lower than HCL’s, an analyst explained.

The London Stock Exchange-listed Axon has over 2,000 employees currently. If Infosys bags the deal, it is slated to give it a major boost in the SAP space. However, analysts are not certain as to how HCL—whose turnover from the SAP business is pegged not to be more than $150 million—would gain out of a deal like this.

Why the deal (Infosys reasons): Entry into Europe, Higher margins ( Axon is profitable with good margins), Specialized SAP provider capabilities to work on transformation deals ( The Infosys consulting despite all the rhetoric has failed to be a money maker for the organization and this provides a different entry point).

19% of revenues for Infosys come from packaged implementation ( 1/3rd of those from SAP)
2X revenues and 20X times earnings valuation for Axon.

Axon:
Founded in 1994, Axon earned revenues amounting to 204.5 million pounds in 2007. 
55  %  revenues from Europe
2,000 employees. 
Gross profit of 56.3 million pounds in 2007
Operating margin was 15 per cent in 2007, which is considerably lower than Infosys’.

Key Personnel:
Steve Peck – CEO and President
Ian Greenhalgh – EVP Sales & Marketing
Beau Ross – EVP for Operations and Delivery
Chris Sapka – CFO
Todd Crandall – EVP Strategic Industries
Jason Zintak – EVP Sales

Mohit Soapbox:
This is one of Infosys largest acquisition in the recent years. Infosys is building their SAP practice and potentially leveraging that to get into tranformationa deals and also gain a foothold in the European markets. Infosys and other Indian vendors are looking to get into a) Transformation deals b) Expand their footprint outside of US to derisk slowdown in the US markets.

ARTICLE

Infosys has acquired Axon Group, a UK-based company, for Pounds Sterling 407.1 million . Infosys says the Axon Group deal would be completed by November. The Infosys management said the deal is at 33% premium to the six-month average price of Axon. 

In a Press Conference, it said that this deal would accelerate the realization of the company’s aspirations. The CAGR (Compound Annual Growth Rate) of the company is at 42.7% and Axon’s operating margins is at 15% and the net margin is at 10%.  It said that the Infosys would offer six pounds for per share of Axon. It said that the purpose of this acquisition is to create a leading SAP service provider. It added that Axon is a zero balance company. The management said that it would give its guidance for Axon once the deal materializes.

Axon’s auto clients include Maruti, Honda, Ford, Nissan and Mercedes and its pharma clients include AstraZeneca, Novartis Pharmaceuticals and GSK (GlaxoSmithKline). Axon’s financial services clients include GE Capital, Barclays and BankMuscat and its telecom clients include British Telecom, Vodafone and Motorola 

Axon Group offers consultancy services and has 2,000 employees and it reported revenues of Pounds Sterling 204.5 million in 2007 and a PAT of Sterling Pounds 20.2 million.

V Balakrishnan, CFO, Infosys said that this is the largest acquisition done by any Indian company in the IT services space. “Axon is a great company, they have great management. They have more presence in UK. SAP is the fastest growing segment for us. SAP is also doing well and is seeing great growth and demand. So, I think we have done the right acquisition in the right space at the right time,” he said. Reacting to the fact that whether the price offered by Infosys is a little higher, Balakrishnan said, “The economic uncertainty is still there. SAP as a product is doing well. People are making the right moves, spending more money on transformational deals. Axon is doing a lot of transformational deals in the SAP space and is seeing good growth. They have decent profits. With this combination, we will provide them with a global reach, the scale and the financial stability. They have high-end consulting, which marries our high-end consulting. It will be a great thing to look at because in the long run we want to improve the revenue productivity by moving up the value chain. This is one great investment in the consulting space, which will help us move there.Regarding the possibility if Axon’s founders offering their shares for the Infosys buyout, Balakrishnan, said, “In an uncertain environment like this, cash brings certainty to the shareholders of Axon. We believe that the shareholders may approve it. It is a full and fair value. We believe that shareholders will be happy with it. Balakrishnan sees a time frame till the end of November for the deal to complete. “So, when we give the guidance for Q4, we will include these numbers in it if this Scheme becomes effective,” he added. Earlier,  Kris Gopalakrishnan, CEO, Infosys addressed a Company Press Conference, to announce the deal. Excerpts from the Presser:This meeting is to announce an offer that Infosys has made to acquire the shares in Axon Group PLC. This transaction is to acquire the entire issued, unissued, and to be issued shares of Axon. Axon is one of the leading SAP Consulting and Services company based in UK with operations in many countries. It is listed in London Stock Exchange.Last year Axon had revenues of 204 million pounds with a Profit After Tax (PAT) of about Pounds Sterling 20 million. The entire consideration, is payable in cash, so it is a cash offer. This is an acquisition through a scheme arrangement. The offer is for Sterling Pounds six per Axon shares, which was up to a premium of 33% over the average price of the last six months and a premium of 19.4% over the closing price on August 22, which was last Friday of 5.025. The fully diluted equity value is around Sterling Pounds 407 million. The will take time and the closing is expected to be on November 2008.The objective of this transaction is to create a leading global SAP Consulting provider. It will allow us to leverage the capabilities and strength of both the organizations to have global reach, scale and financial strength to participate in deals that are large.

There is a strong global demand for SAP services and with this combination we hope to be able to take full advantage of this opportunity.”

V Balakrishnan, CFO, Infosys spoke at the same Presser:

Infosys’s revenues in the last 12 months was USD 4.4 billion; we are up 40% five-year CAGR (Compound Annual Growth Rate), net income USD 1.2 billion, we have 94,400 employees as of June 30. Our market cap today is USD 24 billion. We have 40,000 sales officers, 52 global development centres operating in 23 countries. We are an end-to-end service provider starting from high end consulting all the way to BPO (Business Process Outsourcing). Our policy is we should move up the value chain; move into consulting space. We have made a lot of investment in space and this investment is the continuity of the journey.
This is about our SAP practice; we are the global implementation partner for SAP, we are servicing more than 100 clients, we have more than 2,100 consultants, we are servicing our clients in more than 20 countries. Today 24% of our revenue comes from consulting and that is a very high end of the spectrum and our SAP practice grew by 65.5% in the last three years on a CAGR basis. So this is one area that is very high growth for us. Even if one looks at the results of SAP, they are doing extremely well; that’s seeing continued demand in the market place. So I think we have made a right investment at the right place at a right time. About Axon; they have founded in 1994; it’s a leading standalone SAP company. Their strategy is to become a global player in the SAP space, they have global presence, they have most of the revenues coming from UK but they have also increased their presence in US and other countries. They have close to 2,000 plus employees. They have a good set of Management. They are very enthusiastic about the whole deal. They are servicing clients in 30 countries and they are listed in London Stock Exchange.This is about Axon. This is revenue from continuing operations. They have some discontinued operations in 2003 from the Middle East – we exclude that. Their revenues grew by 42.7% in the last five years on a CAGR basis. Their reported net profits grew by 68.2%. This is based on their reported numbers. They are having a very high growth in the margins are decent for that market and we believe that the combination will help us to enhance our growth in the SAP space.This is more of a detail. Last year their reported revenue was 204.5 million pound. Their gross margin was 27.5%. The operating margin is 15% with a net margin of close to 10%. Looking at the last five-years – they have a very strong revenue growth and a very strong profit growth.This is more on the segmentation of the revenues. Today 20% of their revenues come from high-end business consulting. 12% comes from application management and 68% comes from system implementation. If one takes a look at the geography – EMEA constitutes 61%, North America is 34% and Asia-Pacific is 5%. They are also present in a lot of verticals. Some of the verticals are very small today. Like public sector and energy and utilities we can leverage this to grow much faster in those casesThe balance sheet side is Pound Sterling 140 million. They have close to 25 million pounds in cash and cash equivalents. This is the December 2007 numbers. The total is around 54 million pounds. They have a very strong balance sheet with zero and they and enough cash to run the operations.If you look at the valuations – they are offering six pounds per Axon share, which includes any interim dividend, which they may declare. They are having their earnings announcement tomorrow, so they may declare a dividend. They normally declare interim dividend. This six-pound per share includes any interim dividend they may declare. This valuation gives a 19.4% premium to the closing price of Axon as end of Friday. It is a 31.7% premium to the average price for the last three months and 33.1% premium for the average price of last six months. We have the commitment from the board, the board has unanimously recommended this offer, we have the large shareholders, founders and some of the key employees giving hard irrevocable in our favour and this is a full cash offer and Citi, which is a banker for Axon, they also strongly recommended this offer. With all this we believe that the offer is full and fair for the shareholders of Axon.The expected timetable in September – there could be a Court hearing we are going to hear the scheme process. After that, the court hearing Axon has to send a scheme document to all their shareholders and after that there will be a shareholders meeting for the shareholders approval. There will be two court hearings on this; then the scheme would become effective. The whole process could take to end of November 2008 so there is a long process, which we have to go through we are making the offer now.Our financial advisor for this transaction is ABN Ambro, legal advisor are have put a 2.5 Agreement to the public – that is a legal document. Because of the regulatory constraints, we can’t talk much about the target apart from what is there in the document; there are takeover regulations in the UK