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Infosys Makes British Acquisition

The Indian IT company will buy consultancy Axon for $748 million, allowing it to consolidate its position in Europe

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India's leading software firm, Infosys Technologies, will take over UK-based consultancy firm Axon for £407.1 million ($748 million) in India's largest outbound information technology M&A deal and Infosys's largest M&A deal ever.

Infosys on Monday offered £6.00 per share to buy 100% of Axon's equity with the aim of delisting the company from the London Stock Exchange where it currently trades. The price represents a 19.4% premium to Axon's closing price on August 22, the last trading day before Infosys's announcement, and a 33% premium to its average closing price in the past six months.

Axon's share price has fallen from £9.28 as recently as one year ago. But analysts are bullish about the company, which is the world's largest independent consultancy within systems, applications, products in data processing (SAP), and laud its recent efforts to enhance margins and diversify its revenue stream across a large roster of clients. Axon has effectively used M&A to grow its business and this year it has itself announced three deals. In July it bought US-based SCM and Australia's Consulting Principles. Those two deals followed the acquisition in May of EnterSys, a provider of SAP consulting services to the North American oil, gas and chemical sectors.

The price represents a multiple of 13 times 2007 Ebitda and twice revenues. Immediately after the deal some analysts expressed surprise that Axon had agreed to be sold so cheaply and speculated that Axon's half-year results could hold some unexpected surprises.

But yesterday Axon declared better-than-expected results for the first six months of 2008, with revenues up 28% year-on-year to £123.9 million and operating profit up 19% to £16.5 million. Consensus research estimates for Axon peg full-year revenues at £244 million and recurring Ebitda at £40.7 million. Based on those forecasts, the agreed price represents a multiple of 1.67 times forward revenues and 10 times forward Ebitda, making this an even more attractive deal for Infosys.

"This is a landmark transaction for the Indian IT industry as it reflects the tremendous growth of the industry," says Madan Menon, country head of global banking and markets for India at ABN AMRO, which is advising Infosys. ABN AMRO is part of the RBS group.

Infosys has already cornered 18.1% of Axon's shares in the form of binding agreements to acquire the 17.9% shareholding of founders Mark Hunter, Donald Kirkwood and Paul Manweiler and another 0.2% from Axon directors and certain key employees.

Hunter founded Axon in 1994 after resigning from software solutions company SAP. He presided over its growth for the next 13 years, including its initial public offering in March 1999. In 2007 Hunter severed all executive ties with Axon, stepping down from its board, but even before that he had been selling his shares. Indeed, it is speculated that the overhang of his shares is responsible for some of the pressure on Axon's share price.

The deal was done on a negotiated basis between Infosys and Axon, say sources. The next 30 days will be critical for Infosys as this is the period during which a competing bid could be tabled. In the event that Axon accepts a competing bid Infosys is entitled to a break fee of £4 million.

However, Axon's board of directors is recommending the deal to shareholders. The board is advised by Citi, which, along with Panmure Gordon, is also corporate broker to Axon.

As of June 1, institutions owned 63.8% of Axon's shares. Some key shareholders are Blackrock with 7.1%, Standard Life with 7%, AEGEON with 6%, JPMorgan AM with 4.8%, Scottish Widows with 4.3% and Barclays Global with 4.1%.

The deal, which is intended to be effected through a court-sanctioned scheme of arrangement, consolidates the Indian technology major's position within SAP consulting. On a trailing basis, Axon's $378 million of revenues for calendar 2007 add 9% to the $4.2 billion of revenues Infosys posted for the fiscal year to March 2008. In the SAP consulting space specifically, the two companies are comparable with around 2,000 employees each, although Infosys's SAP revenues are smaller than Axon's.

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