Subba’s Serendipitous moments

September 29, 2008

The HCL bid for Axon

Filed under: Business,Competition — Subbaraman Iyer @ 9:41 pm
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As was reported here, HCL formally launched an acquisition bid for Axon by raising its bid by 8.3% over the Infosys bid. Infosys will now have the opportunity to increase the bid.

It is quite easy for Infosys to enter into the bidding war given that Infosys is sitting on a cash chest of $1.8 billion. HCL is already stretched because it has only $500 million in cash and this acquisition will be funded by raising debt. Given this debt funding, HCL’s net income will be diluted considerably. In fact, with all the offshoring advantage HCL  has, it is valued at about 12 times EBITDA. It is no wonder that HCL shares plunged by about 12% in a market which was already in a downward trend. Further, Morgan Stanley downgraded HCL from overweight to underweight keeping in view the acquisition risk.

Given that Infosys original offer was itself valuing Axon at 24 times EBITDA, this increased bid will make it even higher for a SAP consulting house. Despite the advantages of being in Europe and some of the intrinsic strengths of Axon, I think this may turn out to be an expensive buy for the eventual buyer — be it Infosys or HCL.

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