An acquisition or new biz model: What does Infosys need?

Even though Tata Consultancy Services is the largest software services provider in India, IT bellwether Infosys sits atop a cash pile of around Rs 20,500 crore, which is twice that of what TCS has.

Some of that cash may soon be put to use as the company said it was looking at deploying around$500 million on a single European acquisition.

According to this Bloomberg story, Infosys is once again turning to acquisitions in its second-largest market - Europe – in order to achieve its sales target of 40 percent from the region, up from around 22 percent currently. The companymight also attempt a number of smaller purchases worth about $30 million to $50 million, Chandrashekar Kaka, Infosys’ global head of business IT services, told the news agency.

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The company’s last acquisition was that of US-based BPO firm McCamish Systems for $38 million in 2009 in an all-cash deal. However, in one of the largest foreign buyouts by an Indian company, HCL outbid Infosys in buying UK-based Axon for $658 million in late 2008.

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Investors have long been urging the company to use its bulging cash pile more effectively. Infosys handed back a portion of its cash pile to investors as a special dividend on Friday. The company declared a final dividend of Rs 22 per share for financial 2011-12, which is 440 per cent over its par value of Rs 5 per share.

Despite being a strong name in the global IT business, Infosys has been lagging behind its peers TCS and Cognizant in terms of growth in the recent past. Not only has the company forecast a lower-than-expected revenue guidance of 8-10 percent in financial year 2013, it had also promised zero growth in dollar revenues in the January-March quarter of 2012 for various reasons, in particular, the uncertain prospects for global growth.

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But the real problem seems to be the company’s reluctance to let go of its business model, which emphasises high business margins. As Firstpost said earlier , “The company’s singular focus on short-term margins to the detriment of long-term topline. Growth is probably being sacrificed for bottomline.”

If Infosys’ doesn’t want to get knocked off its long-held bellwether perch, it’s time for it to rethink its strategy.