Infy buys consulting co for $350m

Acquisition Of Swiss Firm Is IT Major's Biggest Buyout In Three Decades

Bangalore: Infosys on Monday announced two acquisitions that reversed some of the negative perceptions built in recent times on account of its lackluster performance in comparison to its peers, and its seemingly non-aggressive approach towards acquisitions. 
    The first was the acquisition of Lodestone Holding, a Switzerland-based global management consultancy firm, for an enterprise value of 330 million Swiss francs ($350 million or Rs 1,930 crore) in cash. About two-thirds of the amount will be paid now, and the remaining will be paid after three years, subject to retention of key employees, including five managing partners and 26 partners. 
    The other acquisition was a small one, by Infosys's BPO arm. It acquired the Voluntary Group Life Insurance business of USbased Marsh BPO. Infosys did not disclose the transaction value but said the buyout would give Infosys an additional annual revenue flow of $10-15 million. 
    Lodestone advises international companies on strategy and process optimization, and provides business transformation solutions enabled by SAP. Lodestone will strengthen Infosys's consulting and systems integration capabilities, by bringing more than 850 employees, including 750 experienced SAP consultants to the company. Lodestone will add more than 200 clients across industries, including manufacturing, automotive and life sciences, to the Infosys pool of over 700 clients. Lodestone had the equivalent of Rs 1,200 crore in revenue in 2011, and that is expected to rise to Rs 1,500 crore this year. The acquisition value is 1.3 times the 2012 revenue, which Sundararaman Viswanathan of Zinnov Management Consulting said is the price one would normally pay for an enterprise applications company. 
    Under the 3.0 strategy, the company is seeking to reduce its dependence on the traditional application development and maintenance business, where margins are tending to fall, and increase its presence in consulting and systems integration, and in 
products and platforms. In 5-7 years, it wants a third of its revenues coming from each of these three segments. Currently, about 31% comes from consulting and systems integration, 6% from products and platforms and the remaining from traditional areas. "A balanced portfolio will help us enhance revenue productivity and get the best margin in the industry," said V Balakrishnan, CFO of Infosys. 
    Most analysts felt the acquisition may not benefit Infosys in the short term, because of the state of the European economy, but would benefit it in the long term. Dipen Shah, head of fundamental research at Kotak Securities, said the acquisition would enable Infosys to increase the depth of its expertise and also help it in penetrating existing clients more, apart from getting into new accounts. 
    Zinnov's Viswanathan said most companies would have in the current environment gone for a "revenue buy". "But Infosys, because of its history and DNA, has gone for building capabilities and investing for the long term. It's also a strong reiteration of its 3.0 strategy, and whoever thought there was dissonance in the management about this strategy, may have to think again," he said. Ray Wang, principal analyst at Constellation Research, said Lodestone's methodology and culture would transform Infosys. 'Stop using conservative, Infosys in same sentence' 
Bangalore: The acquisition of Lodestone may well keep Infosys CEO S D Shibulal's critics at bay for a while. Excerpts from an interview: 
Having parted with a small fortune from your $3.2-billion cash pile, do you 
think you've shed your conservative image? 
It's time to stop using conservative and Infosys in the same sentence. Acquisition is not the only non-conservative thing a corporation can do. We are charting new strategies for the IT industry. We believe a strong products and platforms play, consulting services and IT assets will add value to clients. That's the only way to create high-quality growth that is in line with our strategy outlined in the last 12-18 months. As for acquisitions, you know we are comfortable with acquisitions up to 10% of our revenues. So we have the scope to make multiple acquisitions. 
How will Lodestone help? 
The Lodestone acquisition is at the intersection at two of our strategies — consulting & systems integration, and Continental Europe. In fact, when we wrote our cover strategy for Infosys 3.0, we were very clear we needed tobuild a sustainable corporation that can address some of the industry challenges like scale, commoditization and value creation. Hence, we needed to create a balanced portfolio. The acquisition will put us in a sweet spot for transformation programmes in Continental Europe. Our revenue from Continental Europe is only 10% of revenues and we see great potential. 
You're shifting gears when European clients are wary of spending… 
Europe is in turmoil, but so is the rest of the world. Currently, our market share in the European market is very low. Last year, our business from Germany grew by 26% even as the company grew by 16%. The year before that, Germany and France grew by 45% for us. This year, we expect Germany to again grow above the company average.

ONE-ON-ONE S D Shibulal | CEO & MD, INFOSYS