Axon goes to HCL: the mystery gameplan?

Today, Axon Global’s shares will stop trading on the London Stock Exchange, marking a smooth ending to a takeover, which at one time saw HCL Technologies and Infosys Technologies pitted against each other. Though the logic of the deal and its benefits for HCL has been dealt with earlier, the ease with which HCL outbid Infosys is puzzling.

HCL’s counterbid was at a mere 8.4% premium but Infosys made no attempt to take the battle any further, at least from outside appearances. It was almost as if it had given up. In retrospect, given the way markets have fallen since then, maybe Infosys figured it was better off not to enter into a bidding war. Still, one would have expected at least one counter-bid.

When Axon welcomed HCL’s counterbid, after warmly endorsing that of Infosys, it was evident that HCL had done its homework. What could have swung the deal in HCL’s favour? One can hazard some guesses. What is apparent is that Axon was more favourable towards HCL; it is not normal for boards to approve a competing bid, especially when the premium is so low. While the board is expected to put forth the best bid for shareholders, in the past lower bids have been recommended, based on what the management thinks is in the ‘best interests’ of shareholders.

The HCL and Axon combination was more one of equals than that with Infosys, which would have been a case of a giant acquiring a small business. Axon was nearly a fourth of HCL in terms of revenues and a fifth at the net profit level. While Infosys would have integrated Axon within its own SAP division, for HCL it will be like a new division.

No wonder that HCL has even built a separate website for HCL Axon, retaining the Axon name, which in a way preserves its identity too, at least for the moment. Here is what came from a read of the the two scheme documents.

  • The Infosys scheme said that three directors Roy Merritt (chairman), Royston Hoggarth (non-executive director) and David Oertle (non-executive director) will have to resign once the scheme gets effective. The HCL scheme has no such express clause.
  • The Infosys scheme had the three key founders of Axon –Mark Hunter, Donald Kirkwood and Paul Manweiler—throwing the weight of their 17.9% stake behind Infosys. In fact the founders had given an irrevocable undertaking, which would stay unless the scheme did not become effective by December 31. In the case of the HCL scheme, HCL acquired a significant chunk of shares from the market.
  • In addition, Axon directors Roy Merritt, David Oertle, Stephen Cardell and Iain McIntosh and a key employee Ian Greenhalgh on November 3 2008 gave irrevocable undertakings to vote in favour of the HCL scheme. They did so for shares which they currently held or may get later on.
  • Here’s where it gets a little interesting and a little complex too. The Axon founders had instituted an Executive Reward Scheme (ERS) on October 3, 2005 under which they would give an option to certain employees to buy their shares at a price of 200 pence. These were exercisable after October 12, 2008. The shares underlying amounted to about a 5% stake in Axon and the founders’ stake would have come down by that extent. Stephen Cardell was to get 1.9mn shares, Ian Greenhalgh 500,000 shares, Mark Hirst 275,000 shares and Paul Knowles 500,000 shares.
    • In the Infosys scheme, the committee which governs the executive reward scheme decided on September 19, 2008 that the share allotment date will now be the date of the scheme hearing. The document says that the potential reduction in the shareholding of the founders (from 17.9% to 12.6%) will no longer occur. Considering that these shares were to be issued at 200 pence and the offer was at 650 pence, that’s a considerable profit in the bank for these officials. Stephen Cardell himself would have made £8.6mn. If this has been understood correctly, these people would not have got these shares. One is not sure, if after the scheme passed all the legal hurdles, they would have been able to exercise the option.
    • But there was no such clause, from the beginning in the HCL Scheme, precluding these employees from exercising their option. Both schemes had clauses saying that any shares issued after the scheme came into effect would also be part of the scheme at the same consideration as other shareholders. This would have been anyway acceptable because they would have benefited either way.

These are some of the crucial differences between the two schemes that I could spot. Whether these did play any role in tilting the scales in favour of HCL, one does not know. Meanwhile, HCL has made Stephen Cardell the president of HCL Axon, the new entity where Axon has been housed.  HCL’s management has said on television that its cost of acquisition has come down substantially in rupee terms, due to the currency movements during this period. Interest rates too have become favourable. Now, its performance will be visible in the December quarter, but HCL has definitely made a transformative acquisition.

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