Infosys' acquisition of Switzerland-based Lodestone will provide the software firm some respite from its investors who have been demanding the company to tweak its strategy of walking away from deals that are earnings dilutive and use its unutilised cash balances to revive growth.
The technology firm today said it will buy the Swiss consulting company for CHF 330 million (or around $349 million) in cash. The deal is set to strengthen Infosys' consulting and system integration practice and will give the software outsourcer access to around 200 new clients, who are mostly based in the Euro zone region.
"We are positive on Infosys. The strategy seems to be focus more on growing volumes especially in Europe, where they have been losing out. The acquisition may dilute the company's margins in the near-term but it will pay dividend over a longer period of time. Infosys seems to be responding to the changing landscape of the IT industry, where competition is getting intensified," Dhananjay Sinha, co-head institutional research, economist and strategist at Emkay Global, said.
Analysts said the acquisition gels well with Infosys' aim of growing this business as part of their 3.0 strategy since Lodestone has clients across industries like manufacturing, automotive, life sciences, chemicals, and consumer goods sector. "Valuation-wise the deal is little on the higher side and the management has indicated that the acquisition will not be earnings accretive for the next 18 months. This marks a departure from its earlier strategy of not doing transactions that are earnings dilutive in the short-term. It bodes well for the company's growth," Dipen Shah, head of fundamental research at Kotak Securities, said.
Brokerage Prabhudas Lilladher reiterated its "buy" rating on the stock with a target price of Rs 2,850 per share following today's announcement. They expect Infosys to have consulting and package implementation revenues of over $1 billion post this transaction.
"Infosys has been looking for acquisition from a long time to strengthen its presence in consulting and package implementation domain. After losing-out on Axon acquisition, Infosys grew its consulting and system integration revenue at five per cent CQGR (compounded quarterly growth rate) over the last 20 quarters. We see this acquisition as much needed inorganic booster for the company," Shashi Bhushan, analyst with Prabhudas Lilladher, said.
Infosys expects to complete the deal by the end of October, 2012. The firm's cash reserve was at $3.24 billion (or Rs 18,031 crore) at the end of April-June quarter.
At 12:58PM, Infosys shares were up 0.1 per at Rs 2,498.85 on the National Stock Exchange.
