Changes ahead at Infosys

By Nandini Lakshman, BusinessWeek

Unlike its acquisitive contemporaries in India's information technology sector, Infosys Technologies, India's second largest IT company, has long preferred organic growth.

Even as rivals Tata Consultancy Services and Wipro Technologies have scoured Europe and the United States for deals, Bangalore-based Infosys, which has been growing 40 percent a year over the last five years, until recently had little reason to go shopping.

Yet on June 28, it was reported that Infosys was eyeing Paris-based Capgemini, Europe's largest IT services and consulting outfit. The markets took the story seriously, despite management denials. Notably, Infosys Chief Financial Officer V. Balakrishnan dismissed the story as speculation, arguing that Infosys was looking at acquisitions in the US$100 million to US$200 million range, while Capgemini has a market capitalization of US$10.5 billion.

Nevertheless Capgemini's share price rose 3.7 percent on June 28 and a further 2.9 percent the following day. The French company's stock has only retreated slightly since. Stock movements at Infosys have been less spectacular. Since the story broke its share price has edged up 0.87 percent to US$47.40. Infosys has annual sales of US$3.1 billion and a market cap of US$29 billion.

Challenge for Consulting Arm
However this rumor plays out, Infosys will probably have to make a bold move soon. Consulting--the systematic examination of a company's IT problems and how they fit into a strategic corporate vision--has long been the coveted preserve of Western firms, most of them U.S.-based (Capgemini is the notable exception). The Indians see consulting as the next prize to conquer and another way to leverage their lower-cost software-writing power.

Infosys for one is desperate to grow its consulting arm. While outsourcing remains its core business, accounting for most of its sales, Infosys top brass see consulting as a way to add more value and boost profitability. "The challenge here is to grow the (consulting) business," Infosys co-founder Nandan Nilekani told BusinessWeek in an April interview.

Infosys' consulting business could do with a boost. Although the company as a whole has been experiencing rapid growth, its three-year-old U.S.-based consulting business actually lost US$27 million in the year through March, 2007, and had sales of just US$111 million. "Consulting has been a lacuna in Infosys' revenue stream," says Alok Shende, vice-president of research firm Frost & Sullivan's IT practice in Mumbai.

Wooing Big Names
Infosys also has to make major inroads in Europe, which has been more resistant to the attractions of Asian outsourcing than the United States. The United States. accounts for over 70 percent of revenues for Indian outsourcers and, while that has been a huge source of growth, it leaves them vulnerable to dollar-rupee currency swings. So far this year the rupee has appreciated 8 percent against the dollar.
What's more, there's no getting away from the company's commitment to bringing in consulting expertise at an executive level. Infosys has already wooed some big names from consulting competitors in the United States. These include Stephen Pratt, formerly a senior partner at Deloitte Consulting; Romil Bahl, from EDS Consulting Services; and Paul Cole, Capgemini's former head of global operations.

If an Infosys-Capgemini deal were to happen, experts warn that making it work would be a mammoth achievement. One possible problem would be the considerable overlap in India, which accounts for 18 percent of Capgemini's global head count. Last year Capgemini doubled its Indian workforce when it acquired Kanbay International which, while U.S.-based, has a large Indian presence.

Yet Capgemini so far has been struggling to find savings. "Capgemini doesn't have the cost advantage of Indian companies," says Ashish Basil, a partner in transaction advisory services at Ernst & Young, in Mumbai. Infosys would have to cut costs by restructuring, not just relying on a low-cost Indian workforce.

Even if a Capgemini deal doesn't materialize, Infosys has the cash and cash flow to make some sizable moves. The Bangalore company may also want to boost share prices in the long run. Though Infosys stock has performed heroically over the last five years, in the last 12 months it has trailed the Bombay Sensex index, rising 23 percent versus a 38 percent increase for the index. One way or another, action is likely at this paragon of Indian tech.