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The acquisition will lead to an increase of 1.3%/2.7% to the FY13/FY14 revenue numbers for Infosys at disclosed revenue run rates while EPS impact is likely to be marginal, says Nomura
Infosys has agreed to acquire Lodestone—a management consultancy firm based in Zurich—for an aggregate enterprise value of CHF330 million ($345 million) in cash. Lodestone will operate as a subsidiary of Infosys named ‘Infosys Lodestone’ in Europe, according to an Infosys’ press release. BG Srinivas, head of Europe and global head of financial services and insurance, will be the chairman and Ronald Hafner (present CEO of Lodestone) will continue as CEO of the subsidiary, according to Infosys. The transaction will be effective October-end, post anti-trust clearance. Infosys will pay two-thirds of the consideration upfront, with the balance one-third to be paid after three years subject to certain conditions (undisclosed by company).
The positives for Infosys from the acquisition of Lodestone include: (a) It will strengthen Infosys’ consulting presence in Europe. Lodestone generates 83% revenue from Europe. Infosys on the other hand has only 10% revenue from continental Europe. (b) It will increase life-sciences contribution. Infosys has only a small presence in life-sciences vertical (3.7% of revenue or $260 million annualized run-rate). Lodestone generates 28% of revenue from life sciences ($60 million). (c) It will increase Infosys’ presence in CSI. The Lodestone acquisition will lead to Infosys having over $1 billion revenues annually from SAP-led offerings. Infosys currently has 31,000 people in consulting and systems integration (CSI) which includes 10,000 SAP consultants.
Lodestone advises clients on strategy and process optimization and provides business transformation solutions enabled by SAP. It has more than 200 clients across industries with a vertical mix of 28% revenues from life sciences, 17% from industrial manufacturing, 16% from auto and14% from consumer goods. It had FY11 revenues of CHF207 million ($220 million). It has over 850 employees including 750 consultants. It has had 18% revenue growth from FY09-11. It has 83% revenue from Europe (50% of total revenue from Switzerland, 23% of total revenue from Germany); 12% from APAC.
Nomura Equity Research views the acquisition to be expensive and largely neutral to the stock. The acquisition will lead to an increase of 1.3%/2.7% to the FY13/FY14 revenue numbers for Infosys at disclosed revenue run rates. On margins, however, the acquisition is likely to be dilutive to the extent of 30-50 basis points (bps) over the next two years. EPS impact is likely to be marginal, added Nomura.
While this acquisition does indicate increase in aggression at Infosys in terms of inorganic growth, Nomura expects the stock impact to be largely neutral as: (a) consulting continues to be soft in terms of demand, and (b) benefits are likely to be long-winded as results from cross-selling play out.
The concerns identified by Nomura include: (a) Infosys is losing market share in cost efficiency business, and (b) Infosys will have continued drag from higher discretionary exposure.