The significance of India-based Infosys acquisition of Swiss-based Lodestone

The announcement of Infosys acquisition of the Swiss SAP integrator, Lodestone, is welcome news to me. For over a decade, I have been monitoring Asian buyers - in particular their appetite for acquiring European targets - and I am glad to see, once again, a significant transaction involving an Indian buyer and a European seller.

 

It is a fairly rare event when a company based in India makes any acquisition in Europe, regardless of size. In total, as per 451 Group, Indian groups have purchased European companies on average 10 times per year since 2005, peaking at 19 in 2006 and slowing down dramatically in 2009, counting only 4 transactions. They have picked up their pace to about 8 per annum since. Putting this volume in context, there were nearly 6,000 transactions involving European sellers in the last seven years. For a European seller, this translates into roughly a 1% chance of being acquired by a buyer headquartered in India.

 

However, when considering where on this planet your acquirer may be situated, one does need to look a bit more granularly. For instance, the odds are improved to about 1 in 40 if you are selling a BPO or IT Services player, bringing me back to the Infosys/Lodestone deal. At $345m, it is the largest acquisition of a European target by an Indian IT vendor since HCLs acquisition of Axon for $793m four years ago on the eve of the financial crisis. Lodestones price tag of 1.6x its 2011 revenues appears to be a good valuation, however, the targets growth rates and profitability remain undisclosed so its not possible to assess fully. Nevertheless, in a segment that has traded at a median value of ~1x revenues for years, the valuation Lodestone achieved attests to the strategic value for Infosys (and/or, more likely, the competitive nature of the deal process).

 

In any case, the transaction is a clear signal to Indian IT industry vendors: Europe is an area worth investing in. And, we are certain Indian buyer activity in Europe will continue growing.

 

We are also certain that to assure an optimal outcome in any M&A process, it is imperative to consider and address all potential acquirers from around the world.

 

Of course, including India ;-)

Posted by , Managing Director on 11 September 2012
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