HCL bids for Axon Global, teases Infosys

HCL Technologies, as was rumoured, made its move to acquire Axon Global, spoiling Infosys’ party mood. The Delhi-based IT company has launched a counter-bid for Axon Global, which will make Axon shareholders happy, but also ups the acquisition cost for Infosys. HCL’s initial bid of 650 pence a share, through its UK-subsidiary HCL EAS, is just an invitation to start a bidding war. With just an 8.3% premium to Infy’s offer price, Infosys will most certainly make a counter-bid.

Both will dig their heels in for a prolonged battle, Infosys has already asked Axon’s shareholders not to do anything for now. It need not worry as, with the Axon share price having risen to 682 pence, investors will just watch the fun from the sidelines. The three parties to the stake will now make their moves.

Mysteriously, Axon seems to be indicating that it is not averse to HCL as a partner either. Given that it recently recommended the Infosys acquisition, that seems strange, as HCL’s offer values Axon just marginally higher. Rather than putting its weight behind Infosys, it is saying that Axon and HCL have had a long standing relationship and the Axon board is ‘pleased’ that HCL has decided to make an offer. That is not likely to please Infosys, though.

But Axon has to play by the rules of its agreement with Infosys, so it will not change its recommendation for 60hrs from September 26, after which it will consider all proposals. In addition, Axon has also signed an inducement agreement with HCL, by which it will pay 1% to HCL, among other triggers, if the Infosys offer is declared unconditional or is completed (this part is not very clear to me, though, why would Axon have to pay if the Infosys offer succeeds, especially at a higher price).

Then, we come to HCL. For HCL, the Axon deal means a lot more that it does for Infosys, in terms of impact. Axon’s ₤204mn revenues will add 23% to HCL’s Rs 7639.4 crore sales compared to just 9% for Infosys, and 18% to its net profit of Rs 1431.2 crore (pre-forex loss) compared to 9% for Infosys. That will be useful for HCL in a year in which, not only has the business environment turned rough, but its own performance has been affected by losses on forex covers.

HCL’s enterprise applications contributed 10.8% to its revenues in the June’08 quarter, and its share has been going down, it was 12% in the Jun’07 quarter. And, HCL ranks nowhere in the top 20 companies in the global SAP services market, with TCS and Infosys in the 15-20 rank bracket, while Axon is ranked 12. HCL has said that it will fund the acquisition through a mix of its own group resources and loan facilities from Standard Chartered.

HCL’s 2007-08 (June year-ending) balance-sheet shows up cash and treasury investments of Rs 2462 crore or $540mn, whereas the Axon acquisition is valued at Rs 3,792 crore, and will rise further once the counter-bids begin. Even if HCL sets aside half its cash stash for the acquisition, it will still need to raise a considerable amount from debt, at a time when raising debt is both difficult and more expensive. It can, of course, set aside a higher amount for the acquisition. The third player in this game is Infosys, the first mover. It perhaps can offer more to Axon, in terms of scale and potential to grow. And has a more comfortable cash position of about $2bn, even a bidding war won’t worry it unduly. But Axon will have a slightly better bargaining power with HCL, due a narrower difference in terms of size.

The bid price will perhaps have the last word. HCL will have to play it carefully here. If it carries the bidding war too far, Infosys can just walk away, with little more than a bruised ego. For HCL, it will be left holding a company at an inflated valuation. In a bad market such as this, that would be the last thing it should be risking, even if the acquisition can make its performance seem healthier in 2009.

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