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September 23, 2008

Infosys has made an offer for Axon but a bidding war seems increasingly likely

Infosys has tabled an offer of 600 pence per share for UK-based Axon Group. The offer price is relatively low for a company which is felt to have significant potential for future growth. Other vendors could therefore be tempted to outbid Infosys, although the Indian giant has a significant amount of cash available to fund a higher bid, if necessary.

By CBR Staff Writer

Infosys, the Indian services giant, has tabled an offer of 600 pence per share for UK-based SAP consulting and services firm Axon, valuing the company at just over $751m. However, rumors that a counter-bid is being prepared are gathering momentum. In the first day of trading following the announcement of Infosys’s offer, Axon’s share price actually exceeded the Indian company’s valuation, closing at 606 pence per share. This suggests a clear expectation among investors that a rival bid will emerge in the coming days.

Infosys’s offer price represented a 19.4% premium on Axon’s closing share price on August 22, the last day of trading before news of the bid became public. However, many analysts have said that the figure is far from a knock-out bid, with others suggesting that it does not fully reflect the potential value of Axon’s operations and a bid closer to 700 pence per share could be expected.

Widespread uncertainty about how the current economic slowdown will affect spending on IT outsourcing projects has led to volatility in Axon’s share price over the last year. In September 2007, Axon was valued at over 900 pence per share, but by the middle of April 2008, its stock was worth just under 370 pence.

The price tag attached to Axon might seem high for a company with less than 2,000 employees and revenue of just over $375m in 2007. However, it has grown at a compound annual growth rate of over 40% in recent years and its results for the first six months of 2008 suggest that there is significant potential for further expansion.

Infosys remains confident that it can complete the takeover of Axon, citing the fact that it has received irrevocable undertakings to vote in favor of the deal from 18% of the company’s shareholders, including three of its founding members. Should the purchase fall through, Infosys will not walk away empty-handed; Axon will have to pay it an inducement fee equivalent to 1% of the offer price, which works out at roughly $7.5m.

Axon has admitted to holding informal conversations with other potential acquirers in the past, and potential challengers to Infosys are rumored to include Fujitsu, which is alleged to have offered close to 700 pence per share for Axon earlier this year. Infosys could also face competition from its Indian rivals, all of which are keen to increase their European presence. Wipro has yet to announce a takeover in 2008, but has dropped strong hints in the past that it is actively pursuing a European purchase, while market leader TCS has been extremely quiet in the M&A market over the last couple of years but has the scale to tie up a major deal.

Infosys itself certainly has the funds available to finance a higher bid for Axon. As of the end of June 2008, it boasted $1.7bn in cash and cash equivalents, compared to Wipro’s $427m and TCS’s $293m. Infosys’s initial offer for Axon was made in cash, which is reportedly one of the reasons that it was so readily accepted by the company’s founder members.

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Should Infosys complete the deal at the initial offer price, it would still represent the biggest deal ever executed by an Indian IT services provider. It could also act as the catalyst for a spate of M&A activity in the UK, Europe’s most mature outsourcing market. Potential deals could see local players, such as Morse, Anite and the Innovation Group, which have seen their share prices fall sharply over the last 12 months, become targets for international vendors that are keen to grow their presence in the region.

Ed Thomas

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