Infosys Ltd. (INFO), which has the most cash among India’s computer-services providers, said the number of European companies with “broken” economic models has risen, increasing opportunities for acquiring them.
India’s second-biggest software exporter is looking to buy companies that own intellectual property as well as niche consulting firms and corporations that will boost its interaction with clients in France and Germany, Chief Financial Officer V. Balakrishnan said in an interview yesterday in Bangalore, where the company is based. Any deal in Europe would be small, he said without elaborating.
Infosys had a war chest of $4 billion as of Dec. 31, double that of larger rival Tata Consultancy Services Ltd. (TCS) Indian software companies, after a decade of growth fueled mostly by the outsourcing of jobs from the U.S., are turning to acquisitions as a strategy to expand into Europe, currently the second-largest source of their revenues.
“Valuations of possible target companies in Europe were as low in 2008,” said Pralay Kumar Das, an analyst at Elara Securities India Pvt. in Mumbai. “Their economic models have been broken for a good three years now, and Infosys hasn’t been able to make a meaningfully large acquisition. The problem with Infosys is that they haven’t been aggressive enough with acquisitions, because of their focus on margins.”
The company declined 0.9 percent to 2,856.65 rupees at the close of trading in Mumbai, trimming the year-to-date gain to 3.2 percent. Tata Consultancy fell 0.2 percent and Wipro Ltd. (WPRO), India’s third-largest software exporter, slumped 1.7 percent. India’s benchmark Sensex Index (SENSEX) dropped 0.9 percent.
Companies and governments in France and Germany spent a combined $178 billion on information-technology goods and services last year, according to Forrester Research Inc. Together, that made them the world’s third-largest technology market.
“Today we get more M&A opportunities from Europe than in the past,” Balakrishnan said. “That means the local companies are in trouble -- their cost model is broken. It is not tuned for the environment.”
Infosys’s “comfort” is in dealing with smaller companies than large corporations, because it’s easier to integrate them, Balakrishnan said.
“If at all any big acquisitions happen, it will be in the U.S.,” he said. Also, reorganizing businesses after the takeover is easier in the U.S. than in Europe, he said.
While Forrester forecasts that western and central Europe will have the world’s slowest growth in technology spending in 2012, Infosys believes Indian outsourcing companies could benefit as businesses in Europe look to cut costs, Balakrishnan said.
“With all the problems in Europe, there’s greater focus on offshoring,” or the movement of some technology processes to lower-cost locations, he said. Indian outsourcing companies can provide IT services at prices that are 30 percent to 40 percent lower than U.S. and European service vendors, he said.
Infosys Co-Chairman S. Gopalakrishnan said in November the company would spend $700 million acquiring firms, and its mergers-and-acquisitions team looks at three to four targets at a time. Tata Consultancy is also seeking acquisitions and is willing to spend $500 million, Chief Executive Officer N. Chandrasekaran said last year.
Infosys’s cash and near-cash of $4 billion compares with $2 billion in cash each for Mumbai-based Tata Consultancy and Bangalore-based Wipro, according to the companies and data compiled by Bloomberg.
“Our focus is on getting some good front-end in Germany or France because those markets are opening up,” Balakrishnan said. “Today, if you look at European revenues, they’re mostly coming from the U.K., but France and Germany are two large IT spenders within Europe. If you really want to grow bigger there, you need a very good front end.”
In the year ended in March, about 65 percent of Infosys’s revenue came from customers based in North America, while about 22 percent came from customers based in Europe, according to the company’s annual report.
In 2008, Infosys walked away from a plan to acquire U.K.- based Axon Group Plc after its 407.1 million-pound ($645 million) bid was trumped by New Delhi-based HCL Technologies Ltd. (HCLT) In 2006, Infosys spent $115 million to buy Citigroup Inc.’s stake in Progeon Ltd., a back-office service provider controlled by Infosys.
Infosys, which builds software programs and provides back- office support to clients including BT Group Plc, was founded by seven engineers in 1981 with $250 they borrowed from their wives. In 1999, Infosys became the first Indian company to sell American Depositary receipts.
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