You are the Chief Strategist of Infosys Technologies. What kinds of firms will you look to acquire? Why?

Question

Additional Information:

Since your core business growth is slowing down (industry maturation and the rising rupee), you decide that future growth will be fuelled by M&A

Greetings from Team AIMS, IIM Kozhikode!

We thank all the participants for showing a great deal of enthusiasm and sharing your enlightening views with us on the issues which are of immense importance for the IT industry of India. The thread for 7th November, 2007 is hereby declared closed for further entries.

Just keep in mind a few points while airing your opinion on the issue…..

The word limit has been set to 250 words which is to be followed by all the participants. In case you exced the limit, only the first 250 words will be considered for evaluation. If you are taking some of your ideas from a web page, mention the source of information. Plagiarism will make your entry void.

Happy Answering!!

Hitesh Bansal
Quiz Master and Member
AIMS Organizing Committee
+ 91 9388453510

Answer 1

A boost of life -

The off-shoring life cycle is still to reach maturity because it has received a boost by the slow down in US economy. Due to the slow-down, the off-shoring is likely to increase as even with the current exchange rate the cost differentials are still high. So no problems in carrying on with the global delivery model.



Small is beautiful -

However, it should go companies with annual revenue in the range of 100-200 million. The company has never acquired debt and if it takes the debt route now then it will send negative cues to the market so it should avoid going for the larger companies. The likely sectors will be Financial service providers, billing service providers etc.



Going Global -

The second issue is to increase the global footprint by acquiring companies operating out of European countries (most likely Ireland and Poland) because one is close to UK and the other will give them proximity advantage to countries like Germany and France.



Natural Hedging -

These acquisitions will also give them natural hedging advantage as the costs and expenses will be in the same currency.



So it should go for small and mid size companies operating in Financial services & BPO in the short run and then can widen the net slowly to acquire bigger companies for increasing its consultancy business. The company should also look forward to increase its footprint in retail as well as SaaS area which is going to be the tomorrow's bread winner.

Answer 2

Over the past few quarters there has been a slowdown in the core business of Infosys due to the industry maturation and the steep rise in Rupee w.r.t. dollars. Thus the company should look for inorganic measures (M&A) to fuel its future growth.

The acquisition strategy should look for companies which can fill the strategic gaps the company have either in services or geographic or technology area. Also the acquired companies should provide sufficient diversification to the Infosys portfolio, providing a hedge against possible slowdown or currency appreciation of any single market.

Looking at the current scenario US (63%) and Europe (27% UK primarily) constitutes majority of the company’s revenues but more and more new business is coming from Europe now than the U.S., with the United Kingdom fueling the strongest inroads. Also more than 43 percent of revenue comes from non-application development, i.e. BPO ventures.

Thus Infosys’ acquisition strategy should be focused on acquiring companies

• To increase its offerings in BPO sector targeting the European region.

• With strategic products which fit with its current domain and service offerings. This will provide the necessary diversification and will also provide a boost to its consulting business (being a one stop solution provider), thus moving up the value chain and getting better margins.

• To shift development base to US thus protecting against further weakening of dollars

Also while selecting the target the Infosys should not only look for a strategic fit, but also its alignment of values, culture, and ethics.

Answer 3

For survival of any kind of industry the most important things are customers and profit margin. As the profit margins are shrinking, Infosys is also looking forward for new avenues to keep up the momentum. I would recommend:

1. To acquire BPO & IT firms in European countries because

a. The market is not yet developed and

b. It will provide hedging against the rupee appreciation

2. China is another market which has huge growth potential and can provide safeguard against appreciation problem

3. We are also in the convergence phase, if Infosys can purchase companies which provide services in the related but different fields, and then it can use its technical capabilities to greater effect. Examples is to purchase a billing software company and provide end to end billing capabilities to the telecom companies in US and other markets.

4. Another growing market is online advertising field. Infosys already has brand recognition, it can purchase a yellow pages company to get more information regarding this field and build a complete package for advertising. With its existing linkages it can establish partnerships to promote this. Considering that in next 20 year around $150 billion advertising industry is going to move online, it is the next in market.

5. And last but not the least, Infosys needs to look for more than just providing services. It has the capability to build a full product. Or it can acquire an existing product based company operating in a niche market.

Answer 4

If Infosys wants to acquire firms, we need to first decide what should be the long term objective for such an acquisition:

1) It should help it to move up the value chain in terms of being seen as a ‘partner’ to its clients rather than a mere "vendor". This is needed to move away from "margin war" and enter an altogether different market where premium can be charged based on expertise. It will thus allow Infosys to move towards to the top end of the services market and challenge old warhorses like IBM and EDS.

In order to fulfill this objective, the characteristics of the target firm should be:

1) Small firm with business consulting capabilities in specific domains but which otherwise need years of innovation and talent development to build and can’t be replicated in a short time.

2) Firms having deep existing customer relationships and have a proven track record in their domain rather than some new start-up.

3) Firms which are not specifically focused on particular geographies, rather which have a diversified customer base but focused in terms of their domain.

4) The firm should already be providing consulting at the higher/highest level of the customer organization involving key decision makers of the company at a strategic level rather than at the middle- operating level.

6) The firm should have the potential to scale up in terms of size, market, employees and the culture must be innovative yet collaborative.

Answer 5

Infosys Technologies should always acquire firms to access new markets and skills. An acquisition has to be done very carefully as it involves lot of risk. According to reports, 70% of acquisitions fail to deliver value. Acquiring small firms ($ 500 mn) will better to integrate quickly and to fill the gap in capabilities.



As a Chief Strategist,



1. It should acquire a financial software firms abroad which covers the full breadth of money market, foreign exchange, fixed income and full range of derivatives to target Wholesale & Investment Banking segment and to serve the clients in Europe, Japan, Switzerland and UK.

2. Firms with strong focus in providing the services to telecom sector. Telecom sector is growing at very fast rate in india-on an average 8 million customers are adding monthly. Total mobile subscribers have crossed 220 million.

3. Acquiring the firms which have the core competence in Data mobility offering, Data Storage, virtualized information technology environments which can help clients to increase the flexibility, efficiency and reliability in moving data to respond to market need quickly.

4. Acquiring the firms which provide the Legal Process Outsourcing(LPO) Services. According to Forrester, value of LPO services rendered from India is $4 billion by 2015. By providing these services, it will help Infosys to develop long-term relationship with clients making them a strategic partner.

5. To reduce the affect of international influences like rupee appreciation, US economy slowdown etc it should acquire the Indian firms which are serving the domestic market.

Answer 6

To minimize the impact of a US market slowdown Infosys must expand its presence in newer geographies like Eastern Europe, North Asia, South East Asia and Australia. Another approach is to grow Consulting Services to help clients meet ever increasing business challenges. Infosys can expand its services that range from traditional strategic business planning for stakeholders to designing and developing end‐to‐end processes which deliver lasting value for its customers. In doing so, Infosys would be positioning itself against the traditional strength area of global players. As banking & finance remains the most popular vertical serviced by all the major Indian IT players, acquiring niche players in this space can help augment their solution offerings. While a strategic fit must evaluated when considering an M&A scenario, the cultural fit is also a vital factor that needs to be looked at. Apart from these organizational design issues, sales autonomy and people’s attitude to succeed and grow fast in an acquired company must also be given due weight when finalizing an acquisition. Infosys can also consider acquiring IT companies offering niche services in the retail sector, insurance sector, telecom sector as well as health care services sector. The synergy in the acquisition should bring benefits for Infosys either in terms of reduction in costs or improvement in revenue. Infosys could also consider going for LBO’s of those companies whose sum of parts is greater than the firm itself and earn increased ROE due to the greater risk involved.

Answer 7

With dollar appreciating at fast pace, it is bound to affect the highly export oriented IT services companies. Following are few options Infosys can look into:

1) Currently Infosys’s presence in domestic market is limited mainly to its product Finacle. It should look to increase its foothold here by acquiring firm/s which cater to domestic clients. Eg. TCS has a good presence in domestic market because of its stake in CMC.

2) Telecom sector is another lucrative area which offers good growth potential. Banks, travel companies etc. are looking at new and innovative ways to serve their customers on the click of mobile. Infosys should look to acquire some company which has expertise in developing products and services for this sector.

3) Finacle has been a revenue earner product for Infosys for long time. It should look to acquire company which has a good product and leverage using its existing global presence to market it.

4) With cut throat competition and decreasing profit margins, innovation is the key for growth. It should look for a company which has a strong research setup which will help Infosys to stay ahead of the rest.

5) Quality, processes, best practices are gaining very high importance. Infosys should look to acquire company which provides industry recognized certifications in such areas.

6) It should also look to decrease its dependence on US market and look to foray into other markets like Europe and need to acquire a firm which has a good presence in Europe.

Answer 8

The problem, as stated is the slowdown of growth. We first need to answer whether this slowdown is permanent. Yes, the rupee shows all signs of continuing to strengthen. But has the industry really matured completely?



The first wave of consolidation after the software industry boom of the early 2000's has already happened. As one of the industry leaders, Infosys can do two things.



Firstly, Infosys should look for medium companies whose major business comes from only one or two niche services or products. These companies have loyal customers who, most of the time, are big firms trying to cut costs by buying software from smaller players.



Secondly, as far as maturity of industry is concerned, it depends on the scope of definition of “industry”. For example, a software company that provides programs for embedded systems could invest in firms that use embedded systems, and go on to acquire them by gradually moving up their value chain. Similarly, for any software-critical sector that Infosys caters to at the moment, there is scope to go beyond providing software and enter their core business. This is because software firms already have extensive functional and domain knowledge of the sectors they serve. This is specially true for financial services firms, products that use embedded systems, mainframes, precision instruments and the likes. By acquiring firms like these, Infosys can employ its domain specialists to improve their offerings and initiate IT-enabled growth.



These two strategies can provide additional markets and revenue streams to Infosys.

Answer 9

Even though Indian-IT industry is facing the subprime crisis, it also comes as a golden opportunity ,courtesy absence of Leverage Buyout firms .The subprime crisis in US which has led to a liquidity crunch which has further resulted in the lenders turning of the taps for cheap debt..Hence these LBOs are no longer able to outbid strategic Indian IT buyers with the same ease as they used to do. Hence making overseas assets has become cheaper, provided Infosys capitalizes this one time opportunity without any-waiting





Although the rising- Rupee has had a big bearing on exports, a,it presents an incredible opportunity for Infosys as the target acquisition have come down by millions of dollars.

As Chief Strategist of Infosys my acquisition strategy would be to look for companies which fill the strategic gaps in Services,Technologies and Geographies





•Strengthen presence in China,México,Brazil & Eastern Europe





•Invest in skills & not in numbers,





•Globally Engineering services projected to increase to $1.1-trillion by 2020.Manufacturing sector is growing rapidly in India, hence acquiring niche-skill based companies in EIS makes lot of sense.





•The global-IT budget related to Basel-II is expected to be $22 billion, which would be spent on software and services in the run up to compliance with the norms. Products catering to this will be in high demand in EU,US. Hence lot of potential acquisitions in this sector





•Acquire Telecom,Embedded Software as Indian semiconductor projected to touch $18-bn





•Consolidate Infosys-Consulting globally by acquiring niche Consulting-companies



.

Answer 10

The acquisition decision elements include

Financial

Privately held firm preferable for acquisition, as no market valuation benchmark exists, private negotiation easier, no threat of takeover battle among acquirers, all resulting in lower premium paid.

For public companies,

- Low P/E ratio as compared to peers causing undervaluation (can negotiate favorable exchange ratio, premium on a depressed price)

- Low debt level

- Fragmented holding

- High liquidity on exchange



Strategic

- Located in Eastern Europe, U.K., Australia etc.(natural currency hedge and accessing newer markets)

- Either a niche product firm or a services firm having sales and distribution infrastructure (to complement Infosys’s brand presence and strong technical capabilities and broaden its services line; revenue synergies; may take 2-3 years to materialize, risky)

- Overlapping functions such as a large technical team, training and development infrastructure (can be eliminated to generate cost synergies which are much less risky to achieve, can be achieved in about a year)

Operational



- For midcap and largecap companies, stock exchange transaction preferred because the risk of realizing synergies is shared between both companies’ shareholders. Secondly, if the company is undervalued/Infosys can drive up valuation, stock transaction may be cost effective. Thirdly, Infosys needs to maintain a high cash balance to guard against technological downturn/for acquisitions as most assets are in form of human capital

- For small cap/privately held companies, cash transaction preferred as there is significant scope of driving up valuation, exclusively accruing to Infosys shareholders. Infosys has the required bargaining power.

Answer 11

It seems that there was a problem with the Yahoo! Answers server yesterday and the Link for the second question was deleted as a result of it. We have posted the same question again.



People who had already submitted their answers on the earlier link are hereby requested to upload their answers on the new link again. We regret the inconvenience caused. To make up for the time lost, the entries would be accepted till 23:59 hrs tonight.





The results of the first question would be declared by 23:59 hrs tonight both on the Yahoo Answers and the AIMS 2007 website.

Answer 12

The focus should be on 2 primary drivers for growth through acquisitions



1.To make the company less volatile to US economic/market fluctuations by acquiring companies with a strong presence in EMEA, China



2.To expand Global Competitiveness and Responsiveness to predicted changes in IT/ITeS industry by carrying out operations where they are most cost-effective and make most sense



With company performance indicators and access to resources being severely impacted by the appreciation of the Rupee, it is imperative for Infosys to ensure diversification of its client portfolio across regions. Since Europe and China will see increased investment by firms in IT, companies with a strong European and SE Asian footprint can be leveraged for first mover advantage. Within these, the focus should be on CRM, Mobile Enterprise/Remote Access Solutions as these are emerging as the key technologies for client-companies.



With continual increase of IT costs in India, there is a long-term risk that India might loose its attractiveness as a hub for cost-effective IT operations. Since India is also far behind the US in terms of the quality of work (contribution) of individual IT professionals, it is critical for Indian IT firms to be able to leverage cost-effective processes wherever in the world. With China’s increased investment in English and IT education, it is strategically important for Indian IT firms to gain entry and strategic advantage through technology transfer and training. The mantra should be acquiring companies with high cost-effectiveness in their particular vertical and area of expertise.

Answer 13

Happy Diwali to all of you, its a bit late but still :)



Thanks for your enthusiastic participation!!



The acceptance of entries for the second question is now closed. The winner would be declared after 48 hrs both on the Yahoo! answers and the AIMS 2007 website.



It was very difficult for us to choose the winner for the first Question given the excellent points all of you brought to the table. But after hours of discussion and brainstorming, we came up with the Winner.



We feel immense pleasure in congratulating Hafeez Mohammad Abdul for winning the prize for the first best answer in the series of Yahoo! Best Answers.



I request Hafeez to please mail me his personal details and Address at [e-mail], so that we can expedite the cheque dispatch process :).



The other participants came up with very good points indeed and the decision was tough. So you don't need to lose heart because still 8 questions remain to be answered.



Remember the Grand Prize of Yahoo! Best Answers will be given to the person who gives the maximum number of Best Answers.



So participate regularly. I am sure you will put in your best.



The link for answering the third question is :





https://answersrip.com/question/index?qid=20071109105630AAjnXJY





Wishing all of you Best Of Luck....



Hitesh Bansal.

Quiz Master and Member,

Organizing Committee, AIMS 2007.

[phone]