I'd been watching Axon for the past nine years—since they went public—perhaps because they're based at Egham, just a few miles down the road from our Bedfont office. Equally, I knew that Infosys, a major Indian outsourcing services provider, was flush with cash, and was looking for an acquisition in northern Europe in the $300-400m zone. It just never occurred to me to connect the two together.
For what it's worth, here are the notes I've gleaned from the Web today and from my archive of clippings:
Infosys has announced its intention to acquire SAP services specialist Axon for about $750m, a 19% premium over the share price. The board of Axon is unanimously recommending the deal.
The acquisition will create the largest SAP services provider of the major Indian offshore players, and should place Infosys somewhere inside of the top 10 suppliers of SAP consulting services in the USA. Key clients include Xerox, BP, Orange, TXU, Transport for London, as well as major sub-contracting engagements in the USA, such as the Home Depot.
Despite the economic slowdown, SAP-related services remains a high-growth area. Infosys claims their SAP practice is growing 65%+ CAGR; other Indians are seeing similar growth rates. It’s not new applications that are driving growth. Instead the market is being driven by consolidation of multiple SAP platforms, upgrades to SAP’s latest releases—customers get penalised by higher maintenance charges if they stay on old versions—and the relocation of application management offshore. In summary, it’s all about cost reduction. The Indians that are seeing their SAP practices grow fastest say it's because they have the lowest delivery cost.
Axon brings a raft of clients to Infosys where it needs them most: in Europe. Infosys gets about 27% of sales from Europe, which should pan out to around £600-700m this year. The extra £120m+ of EMEA revenues that Axon brings will come in very handy, albeit at around half of Infosys’ margins.
”Our stated policy is to move up the value chain, move into the consultancy space,” said the CFO of Infosys.
The chief executive of Infosys said yesterday: “A lot of Indian companies are looking at Western Europe. This is our first acquisition there, and right now our focus is to make sure that this process goes through before we talk about where we go next.”
Axon Background
Axon was set up by Mark Hunter in 1994 after he left SAP to create a team of ERP services specialists.
Back in 1999, describing itself as a 'UK SAP implementer', Axon was available to provide statements for the press on the state of the R/3 market.
In 2000, calling itself a 'leading UK ERP integrator', Axon was happy to put the boot into the troubled Baan with a comment or two about its general unsuitability for most customers.
In 2002, Axon acquired an Australian consultancy which contributed £7m to its annual revenues of £43m.
Early in 2003, Axon was announcing an 87% downturn in net profits the previous year, due to the SAP market slowdown.
In 2006, Axon acquired three vertically focussed SAP consultancies in the USA, which contributed £32m to the company's total revenues of £138m. But it also disposed of its Middle East operation. Axon had just £6m in cash—which could have put its survival at risk if it expanded too quickly—so it arranged a £40m loan facility with its bank. Ovum, now describing Axon as 'the most spectacular beneficiary of the current revival in demand for SAP services', outlined the secret of Axon's strategy:
- Qualify deals early,
- Stick to a handful of verticals (particularly local government in the UK),
- Concentrate sales effort on a handful of big contracts,
- Ride on the back of a large outsourcer (especially Capita) that needs a C&SI partner to win deals. (This may give a clue as to Infosys's interest in Axon.)
Early in 2007, Ovum was lauding Axon's offshore investments in Malaysia, where it had 300 staff. Axon split the roles of CEO and chairman. Its stated goal was to become one of the biggest SAP practices in the world. Founder and executive chairman Mark Hunter said he believed Axon now had 1% of the global SAP services market.
In the second half of 2007, Ovum was describing Axon with words of praise that it normally reserves for Accenture and Oracle: 'Axon's model continues to work wonders ... Axon has become the poster child for the focussed buy-and-build strategy'. The UK public sector had been particularly good for Axon, with a large programme at Birmingham City Council. Axon bought another firm in the Far East, this one with 150 SAP consultants in China, Singapore and Kuala Lumpur. Its CEO described Axon Group as 'the largest consulting firm in the world focussed on the $24bn SAP services market'. But chairman Mark Hunter left the firm, and according to analyst Richard Holway, this made it inevitable that Axon would get swallowed up in an acquisition sooner or later.
In January, Axon shares halved in price for no clear reason. In March, Axon reported revenues of £205m, organic growth of 29%, and operating profit margin of 17%. It admitted that there was little room for growth in the UK; hence its focus on the USA and what it calls the DACH region of Europe: Germany, Austria and Switzerland.
So how did I miss this one? Was it simply the mismatch between Infosys's supposed target price range and the eventual price bid for Axon? Or is it that there are just too many possible pairings of cash-rich acquirers and potential targets?
Sources:
- http://www.feedingthesapecosystem.com/2008/08/infosys-to-acquire-axon-potentially-top.html
- http://hotviews.blogspot.com/2008/08/infosys-to-acquire-axon-for-407m600p.html
- http://www.axonglobal.com/pages/about_us/news/infosysbid.asp
- http://www.ft.com/cms/s/0/7798b574-730f-11dd-983b-0000779fd18c.html
- http://business.timesonline.co.uk/tol/business/industry_sectors/technology/article4606620.ece
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