Infosys: Ready To Play With The Big Boys

Infosys is ready to shop and the markets are ripe with rumors that they want Capgemini. Really? Agreed, Infosys has accumulated billions over the years, but can it afford to buy a company which is 3 times bigger…mmmm....

Lets look at some hard facts:

1. For 2007-08 Infosys has projected a 28-30% revenue growth and Capgemini has projected around 8%


2. Capgemini has a market value of 7.86 billion euros or $10.6 billion. Infosys has a market value of about 1.1 trillion rupees, or $27 billion


3. Capgemini has about 68,000 employees worldwide, including 12,000 in India, Most of Infosys's 72000 employees are in India, where wages are as low as one-eighth that of U.S. salaries


4. Infosys reported revenue of $3.1 billion for the fiscal year ended March 31 this year, and has forecast revenue of about $4 billion in its current fiscal year ending March 31 next year. Capgemini is 3 times bigger with revenue of $10 billion for its fiscal year ended December 31


5. Infosys’ operating margin stood at approximately 31% in the end of 2007, Capgemini's was 5.8%

"Lets take 'em boyz, there's only 70,000 of them and each one is paid more cheaply than the other"

In my opinion, this deal is highly unlikely to go through. With the weakening of the dollar, granted that all the big Indian players have to do something and take the next step, but let’s be realistic. Other than Capgemini's consulting arm (which is obviously stronger), they both seem to share the same strengths...So the question is what "real" value will buying Capgemini bring to Infosys? Infosys may be looking for access to the European markets, where it doesn't have a strong presence, but the cultural incompatibilities between the two companies are very high, and I for one don’t believe Infosys will be successful in bringing 70,000 employees under their wing who are culturally on the opposite end of the spectrum.

One thing is for sure. This rumor has certainly generated enough buzz to move the stocks (Capgemini is up 4.5%) and Indian outsourcing companies have shown they are “coming of age” and catching up with their European counterparts. But the question is will Infosys go above and beyond its reach at any cost. My answer again will be no as Infosys does not have such an aggressive mentality. They have downplayed the news not wanting to shoot themselves in the foot that one wonders why they are being so defensive. The CEO of Infosys himself came out and said he has not ruled out an acquisition in Europe, but said any target would have to meet Infosys' criteria (which no one knows incidentally!!!). Consider this approach to the one Rupert Murdoch took to acquire Dow Jones. Coming back to the point, another complication is the lack of M&A expertise for a deal of such a magnitude in India. Even if it goes through, can they truly integrate as one firm? Maybe I am being skeptical, but again, I highly doubt it.

Finally, Infosys is/has always been a debt-free company and a deal of this size will for the first time put them in a position where they will acquire a lot of debt and move away from organic growth. Though raising capital won’t be difficult, the real question is "Is Infosys ready to play like the big boys?"