Axon jilts Infy for HCL

But Infy says it’s still not out of race

BAnGALORE: The British SAP consulting firm Axon Group Plc on Thursday accepted the HCL Technologies offer 441 million pound ($785 million), which is at a premium of 8.3% to Infosys’ bid of 407 million pound ($753 million).

Bangalore-based Infosys, however, has not yet given up on the UK firm.

V Balakrishnan, chief financial officer, Infosys, said, “We are evaluating options. Our stand is the same as that on Friday (when they said that they may consider countering HCL’s bid).”

In the event that Infy calls off the bid, it will get 1% of the final offer as inducement fee.
Meanwhile, Axon has decided to give its nod to HCL after the lapse of the deadline for altering its recommendation for Infosys.

“The board has withdrawn its recommendation of the Infosys offer and intends unanimously to recommend the HCL offer when it is made,” Axon said in a statement on Thursday.

Stating that Axon and HCL have enjoyed a “long standing relationship”, the UK SAP consultant said the board was pleased that HCL recognised the quality of the Axon business and has announced its intention to make an offer.

“The HCL offer values Axon’s existing issued and to be issued (fully diluted) share capital at approximately £441 million. The value of the HCL offer is at a premium of 8.3% to the value of the Infosys offer,” Axon said, justifying its decision to go ahead with HCL’s bid.

Meanwhile, ever since HCL has put in its bid, analysts have been debating on which of the two competing tech companies would benefit more from the acquisition.

Analysts Bhavtosh Vajpayee and Nimish Joshi of CLSA in their report brought out on Monday said that HCL makes a more aggressive suitor because of all its weakness of a new entrant in the enterprise solution space.

Delhi-based HCL Tech currently earns around $110 million from enterprise application services, half of which is from SAP and has deployed 2,200 people in this space.

Infosys, on the other hand, generates $400 million from ERP solution with 2,100 people.

Again, for Infosys to take its offer any higher than its current 600 pence per share would be EPS-dilutive. In contrast, even if HCL would offered 700 pence per share, it would still be 0.4% EPS-accretive.

CLSA’s Vajpayee and Joshi feel that HCL bid can go up to 835 pence per share.

In fact, the duo feels that the second-largest company is better placed to keep growing organically and achieve its target of $1 billion SAP revenue.

“Losing Axon may push it a couple of years back but overpaying for Axon could be equally risky,” they say.

Analysts Jayendran Rajappa and Jaspreet Chabra of Prabhudas Lilladher say if Infosys upped its bid to 650 pence per share, its EPS would erode by 0.2%, but at the same price HCL’s EPS would improve by 1.5%.

One of the reasons HCL’s EPS margins would remain intact is its decision to largely finance its buy through debt.

“We believe that liberal use of leverage to finance the acquisition is the prime reason for blunted negative impact on earnings with cost of debt trailing treasury yields,” said the Prabhudas Lilladher analysts.

According to them, HCL’s cost of debt, to be raised from Standard Chartered, is 7.5% and its treasury yield is 11%. Infy’s treasury yield is 9.5%.

p_sharma@dnaindia.net