UPDATE 1-Indian IT firms vie for Axon as growth slows
(Changes slugging from pvs INFOSYS-HCL/AXON, adds analysis, comment)
BANGALORE, Sept 29 (Reuters) - Shares in Indian outsourcers Infosys Technologies (INFY.BO) and HCL Technologies (HCLT.BO) fell on Monday as the two rivals fought over British consultancy Axon Group Plc AXO.L.
Indian software firms such as second-ranked Infosys and bigger rival Tata Consultancy Services (TCS) (TCS.BO) are expanding in Europe and elsewhere to cut their dependence on the U.S. market, which accounts for over half the sector's revenues.
But a bidding battle for what would be the largest overseas acquisition by an Indian information technology firm could push up acquisition costs and dent earnings, analysts said. "A bidding war for Axon will be negative for Infosys and HCL," Dipen Shah, a sector analyst with brokerage Kotak Securities, wrote in a report. "We believe completion of an acquisition (would) take longer than earlier expected."
Shares in HCL tumbled nearly 12 percent and Infosys was down more than 3 percent in a Mumbai market .BSESN down 4 percent. Axon shares eased 0.3 percent in London.
HCL, India's fifth-ranked software services exporter, launched a 441.1 million pound ($810.8 million) bid for Axon on Friday, trumping Infosys's offer valuing the UK firm at around 407 million pounds. [ID:nBOM376648]
Infosys, sitting on a $1.8 billion cash at end-June and which has been relatively quiet on M&A, said it was considering its position in light of the announcement from HCL and urged shareholders to take no action.
Analysts say HCL's counterbid highlights the urgency among Indian outsourcers to expand their markets, grab bigger spending clients and beat a U.S. slowdown.
"The primary motivation is to acquire skill sets and contracts and relationships that have higher billing rates and that are more complex value-add services," said Karl Keirstead, a technology analyst with Kaufman Bros in New York.
"The Indian vendors are becoming more acquisitive precisely because the environment is getting a little bit tougher and they have got clean balance sheets and cash to spare at a time when many others don't," he added.
Comparatively cheaper wages and a large pool of English-speaking graduates had helped TCS and smaller rivals Infosys and Wipro (WIPR.BO) ride an outsourcing boom for years.
But growth has slowed sharply after Wall Street banks began to make huge writedowns related to the subprime crisis and as the U.S. economy lurched towards recession.
"The growth is slowing for Indian services firms and they have to look at unpenetrated markets and service lines to boost business," said Harit Shah, sector analyst with Angel Broking in Mumbai. "I see more acquisitions in the Indian software space in the near future."
On Monday, Morgan Stanley downgraded HCL to underweight from overweight, citing potential acquisition related and dividend yield risks and the worsening economic outlook.
"In the current environment, Axon revenues and earnings could be at risk next year," the U.S. broker said in a report.
Deutsche Bank maintained HCL as a hold as it expected the outsourcer's bid to pressure its financials in the near term and dilute profit margins until 2009/10.
"If there's a bidding war, HCL's net income could be highly vulnerable given the high debt funding," it said.
HCL has said it planned to fund its bid through cash and a 400 million pound loan.
Axon provides services to companies using products of German business software maker SAP (SAPG.DE), a services segment which is seen as having strong business potential. Analysts do not rule out other bidders jumping into the fray.
"We would point out that this is not a done deal as the risk of a counterbid from Infosys stays," said Credit Suisse in a report. "In addition, there could also be interest from foreign vendors due to high demand of SAP implementation space."
German media reported on Saturday that TCS was interested in Siemens' (SIEGn.DE) IT Solutions and Services (SIS) unit, and talks would begin next week in Munich. [ID:nLR156962]
Acquisitions could help revive India's M&A volume which dropped by almost a quarter to $43.7 billion in January-September, according to data from Thomson Reuters. (Editing by Ian Geoghegan)
