Investment bankers give thumbs down to Infy deal

TIMES NEWS NETWORK[ SATURDAY, JUNE 30, 2007 12:09:14 AM]

MUMBAI: A few months ago, before its entry its into the elite Nasdaq-100 index, the then CEO Nandan Nilekani indicated that the first major acquisition by Infosys could well be in Western Europe or in the BPO space, in response to the oft-repeated query on its acquisitions. On Thursday, market reports seemed to indicate that Infosys was not only eyeing companies in Western Europe but a player that’s almost thrice in revenues, Capgemini. Indian IT companies have been trying to break into the high-margin consulting business but without much success. For Infosys, consulting revenues made up just a little over 3% of its topline in FY07. According to estimates of research firm Gartner, the global IT consultancy business today is around $55 billion, and expected to grow at a CAGR of 7% to $71 billion by 2010. Consulting is an opportunity, no Indian IT firm with global ambitions can afford to ignore. An inorganic growth strategy may prove to be the driver and the impetus that the business needs, since none of the players have been able to crack it so far. Capgemini would provide this to Infosys. The reactions to whether such a move will actually benefit Infosys have been mixed in the analyst and investment banking community. While the consultancy business and a strong European presence of Capgemini are clear strengths that Infosys will gain from, the likely valuation of Capgemini and the potential hit that Infosys will take in its profitability margins, are getting the thumbs down from i-bankers. Abhay Aima, head of equities and private banking group, HDFC Bank, is being cautious about the deal. Says Aima, “While in the long term it may be a brilliant strategy, what matters to the investor is what the stock swap and the valuation will be in the short term. That is assuming the deal does indeed happen — right now, both companies have denied it.”