Infy stock up amid US buyout buzz

Company said to be in advanced talks to buy a US firm for $500-600 million.

Stock prices of Infosys, India’s second-largest information technology (IT) services firm, went up an intra-day high of almost three per cent amidst the buzz that the company was in the final stages to buy a US-based IT firm. The size of acquisition was expected to be in the range of $500 million to $600 million, said sources in the know.

While the name of the target company could not be confirmed, sources familiar with the development said the target company had a presence in the healthcare and public services segment.

On being asked, Executive Co-Chairman S Gopalakrishnan said, “We don’t want to comment on market rumours.”

If Infosys succeeds in closing this deal, it will be one of the biggest deals for the company. So far, the Bangalore-headquartered company has done smaller tuck-in acquisitions that have given them either an access to platform or an entry into a new services line. For instance, in 2009, the company had acquired Atlanta-based McCamish for $58 million. This had given the company access to the insurance BPO (business process outsourcing) segment.

The stock price of the company at the end of the trading day was Rs 2,224.4 per share, up 1.2 per cent from the previous close.

Since its inception, the only big-ticket acquisition that the company did was in 2006, when it acquired Citicorp’s stake in Progeon for $115.13 million. The only other time that it came close to make a similar acquisition was in 2008. But the target — Axon — was finally acquired by Delhi-based HCL Technologies for around £441 million (Rs 3,144 crore).

The company with a cash and cash equivalent of about $3.8 billion (Rs 16,969 crore) had been a tad conservative, compared to its peers on to acquisition. But with TCS beating it on both the margin and growth parameters and Nasdaq-based Cognizant reducing its revenue gap with Infosys, growth thorough an inorganic route has become crucial.

“I am still not sure whether the company will pull off something like this. Until they don’t announce it, it’s difficult to guess. Simply because, Infosys has been conservative. But even if it does buy, I think investors will be happy, as finally the cash with the company is being put to good use,” said an analyst on condition of anonymity.

Another analyst from a leading foreign brokerage house said the timing was perfect for acquisition. “If you see the US markets, targets are available for a good discount. The valuations are certainly not hitting the roof. Moreover, this will help the firm to show growth,” said the analyst.

Some others also opined that if Infosys succeeded in the acquisition, it might impact its margins.

“Any acquisition impacts the margins. Looking at the size of the deal and assuming it is paying a 10 per cent premium, we think the margins might get impacted by 200 basis points. This will be over a period of time. But this might just help the firm, as it can then focus on growth and rework its margin story,” said another analyst.

Big-ticket acquisition might finally become a feature with the top IT players. India’s largest IT services firm, Tata Consultancy Services, is said to be evaluating Lufthansa IT systems, the captive unit of Germany’s Lufthansa airline.