Infosys acquires Lodestone, investors want more

It was inevitable, one could say. Infosys Technologies’ acquisition of IT consulting firm Lodestone Management Consultants finally answers a question journalists and analysts have never tired of asking the company. The company has a mountain of cash that keeps growing over the years; at last count it had reached $3.2 billion or Rs 17,760 crore as of June 30, 2012. But it has never made a large acquisition, leading to questions on whether it is being too conservative. Those questions have some answers now. Of its total cash, it is deploying 330 million Swiss francs (Rs 1,930 crore at current exchange rates) or 11% of its cash reserves to buy Lodestone. That is a significant outlay by Infosys for one acquisition, as it has been shying away from acquisitions all these years, saying it will do one only when it gets the right target at the right price. But its flailing performance in the past few quarters may have lent some urgency to its search.

Lodestone runs a consulting business, focusing on strategy and process optimisation as well as IT optimisation. SAP implementation is a key part of its business, and out of the 850 employees that it has, nearly 750 are experienced SAP consultants. Its advisory services are targeted at sectors such as life sciences, chemicals, financial services, investment, automotive and consumer goods sectors. Infosys has always wanted to add weight to its consulting business, not only
because profitability is higher, but it leads to better relationships with clients.

The company earned revenues of 207 million Swiss francs (Rs 1,210 crore) in 2011, which works out to about 3.5% of its 2011-12 revenues. The valuation appears reasonable, considering that Infosys has paid about 1.6 times of Lodestone’s revenues. Lodestone’s revenues rose by 14.4% in 2011. The company was started in 2005 and has seen revenues
grow nearly ten-fold since then. No details are available about the company’s profitability or whether it has debt on its books. The acquisitions serves multiple purposes. It will give a fillip to revenue growth, even if by a small percentage. Over the medium to long term, however, it offers Infosys and Lodestone cross-selling opportunities both in terms of their client list and services. The acquisition will take Infosys’ client list from 700 to 900, and will also help beef up Infosys’ industry coverage in certain sectors. The stock markets were not impressed, however, perhaps because the immediate impact of the acquisition is not very significant. The company’s share went as high as Rs 2,530 but fell to its day’s low of Rs 2,478, before closing higher at Rs 2511, a gain of 0.6% over the previous day’s close. Since then, it has been carried along by the broad rise in equities, and is up by 5% now. Investors probably want to see the company use up more of its cash, to secure good businesses, and buy businesses that contribute to growth as well as result in new growth drivers. The Lodestone acquisition too has the potential to achieve that purpose, a lot now depends on how the operations of the
two companies are integrated.

Comments are closed.