Why Infosys is dead pleased about Lodestone buy

Infosys’ Lodestone acquisition is not only a much-needed inorganic booster for the IT bellwether but also addresses investor concerns over utilisation of excess cash. But will this all-cash deal finally silence the critics who have time and again called upon the company for being excessively conservative when it comes to making big ticket acquisitions?

While one acquisition alone cannot make the difference, analysts are upbeat that the Swiss buy is a strategic move in enhancing the company’s consulting business and a step in the right direction as it would yield benefits over a two-five year horizon. This, however, is a slight departure from Infosys’ earlier strategy of not looking at acquisitions which would dilute earnings in the short term.

Even the management seemed pleased with its ‘cultural fit’.

[caption id=“attachment_451138” align=“alignleft” width=“380”]  AFP[/caption]

“It’s time you started delinking the word conservatism from Infosys,” Chief Executive SD Shibulal said at a news conference announcing the deal, while Chief Financial Officer V Balakrishnan assured investors that Infosys has a lot of appetite for buying companies which will fit its strategic needs.

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While the $350 million Swiss acquisition may strengthen Infosys’s presence in Europe, it will not improve the prospects of the erstwhile Indian IT bellwether in the near term.The deal is also in line with its strategy of focusing on consulting and systems integration, which together account for 31% of the total revenue.

In the current environment, the consulting segment is witnessing sluggish growth. JP Morgan Chase believes that Lodestone will provide Infosys with increased traction in Switzerland, which is a fairly significant, but hard to penetrate market.

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The acquisition might have come at the right time given the sinking growth for Infosys but any short term benefit would be hardly visible as the acquisition falls into consulting and SI space which being discretionary in nature would be affected by current macro slowdown, said Shweta Malik of MSFL Resaearch.

“Though in the near-term, this deal is likely to be margin dilutive (EPS neutral), the synergies and flow through benefits should follow over a period of time,” brokerage Jefferies said in a report today.

Even though Lodestone’s sales of around $211 million is only 3% of Infosys’ FY12 revenue, Lodestone enhances Infosys’ presence in the consulting & system integration (CSI) space, something that the company has been articulating as a part of its 3.0 strategy.

With over 10,000 consultants,Infosys’ revenue from SAP-led offerings will be more than$1 billion. Moreover, Lodestone derives nearly three-fourths of its revenues from Switzerland and Germany, which are the relatively resilient European economies.

“If you look at economic indicators of Switzerland and some other markets, things are still very good. And what we are experiencing with our clients is exactly this. I think we have a unique opportunity to exploit this,” Lodestone chairman Ronald Hafner told Mint in an interview.

Retaining talent and ability to cross sell deals will be the key for success, said Citi in a note. Infosys expects to grow Lodestone’s presence in the European region by selling its solutions to the existing clientele of the latter. But, it would take some time for Infosys to achieve that. However, the company believes since there is only a marginal overlap between clients of Infosys and Lodestone, the task would not be so difficult in the medium term.

That said, this one small acquisition in consulting does open the window for Infosys and ends its three-year M&A drought.