Infinity and beyond -- Unboxing the M&A action inside $12.8 bn Infosys

Infinity and beyond -- Unboxing the M&A action inside $12.8 bn Infosys
Infosys CEO Salil Parekh  |  Photo Credit: Reuters
9 Nov, 2020

Last month, India’s second-largest IT exporter Infosys completed the buyout of Kaleidoscope Innovation, headquartered in Cincinnati, USA. The deal, announced in September, was pegged at $42 million in cash.

What’s the big deal?

Infosys has built quite an appetite for buying new capabilities. Under current chief executive officer (CEO) Salil Parekh, it has deployed almost $750 million in making seven strategic investments since 2018. Four of those have come this year alone -- Simplus, Kaleidoscope, GuideVision, and Blue Acorn iCi.


Stock brokerage analysts often wondered why Infosys sat on its cash and bank balances, as opposed to acquiring companies like Cognizant and Wipro do. The company’s cash and cash equivalents, at the end of Q4FY20, stood at Rs 18,649 crore, as against Rs 30,367 crore in the comparable quarter in 2015.

Furthermore, Infosys’ operating margin in FY20 was 21.3%, compared to 25% in 2016. 

It is reinvesting its profits for growth -- a significant change from its historic fetish for high operating margins and organic growth.


The acquisitive mood signals hunger at a time, post Covid-19, when M&A valuations have been tempered by the pandemic, while digital transformation deals are ripe for the picking for IT services.

How does this work?

Take the example of Kaleidoscope Innovation, which Infosys just acquired. It is a product design firm that develops micro-surgical instruments and devices used in minimally invasive surgery and even drug delivery services for ophthalmic therapies. 


In Infosys’ announcement of the deal, Kaleidoscope co-founder and CEO Matt Kornau emphasised on the latter’s prowess in AI, analytics and digital infrastructure.

Currently, healthcare and lifesciences as an industry contributes a paltry 6.4% of Infosys’ annual revenue of $12.8 billion. Rival Cognizant Technology Solutions derives 28% of its $16.7 billion revenue from the healthcare industry.

When IT outsourcing deals come up for bids in the healthcare industry, Kaleidoscope will give Infosys a competitive advantage or at least a foot in the door because of the capabilities that are now part of the Infosys stable. According to deals advisory ISG, the healthcare and pharmaceutical sector saw a 5-6% growth in deal activity in the past six months over the corresponding period in 2019.  


Post pandemic, more business deals are likely in the healthcare industry. And Infosys doesn’t want to be caught on the wrong foot. “Infosys’ strategy is to build capabilities in digital technologies that are relevant for our clients,” a company spokesperson told TechCircle, in an emailed statement on Monday.

How does Infosys’ competition stack up on the M&A front? 

In the same three year period as Infosys, Wipro has made six acquisitions. And Cognizant 14, including eight in 2020. That’s the peer group with large operations in India.


If you want the gold standard for an M&A strategy to compete for organic growth, look no farther than Accenture. It made a whopping 34 strategic acquisitions in FY2020, ending 31 August 2020, aggregating more than $1.5 billion in such deals!

For real?

Yes. This is the season to build competencies fast and align them with what the sales folks are seeing in terms of renewal deals or digital transformation opportunities. 


TCS is an honourable exception, opting to grow skills fast in-house. 

But Infosys is in a hurry to overtake Cognizant and bridge the gap with $22 billion TCS. Ergo, acquisitions are of essence to Infosys’ ability to bag large outsourcing deals, with a bias towards digitising operations for the enterprise client.

Sounds counterintuitive

It does. However, valuations are sobering in the M&A market, remember? This is the time to build capabilities before growth returns for companies in a hurry.

Sample this Harvard Business Review paper titled ‘What M&A Looks Like During the Pandemic.’ It is authored by Mark Herndon, chairman of the M&A Leadership Council, and John Bender, president of consulting firm M&A Partners. The M&A Leadership Council surveyed 50 C-level executives and senior corporate development leaders about their acquisition plans. 

Only 12 of these 50 (about 23% of the respondents) reported either “no impact in 2020 forecast deal volume” or their intent to “accelerate” deal volume during the remainder of 2020 based on the increased number of opportunistic targets or more palatable valuations brought about by the crisis. 

“Further analysis of these respondents provided vital insights for other executives and deal-makers intent on growing their companies during and after Covid-19.”

IT vendors during such otherwise trying times, according to data analytics and consulting firm GlobalData, need to continue to fill gaps for new age digital experiences by pursuing selective acquisitions to have an extensive digital portfolio.

“IT providers that can leverage capabilities around technologies such as AI, blockchain, cloud, and big data, and rethink their future business models by evaluating digital transformation will have a competitive edge,” Sunil Kumar Verma, lead analyst for Information and Communications Technology (ICT) at GlobalData, said in a statement, earlier this year.

Back to Infosys

The last two months alone saw Infosys announce three acquisitions.

In September, Infosys acquired Kaleidoscope. In the same month, it bought out GuideVision focused on ServiceNow, thus propelling its existing capabilities in areas of digital transformation. Infosys has been a partner of ServiceNow -- a cloud computing platform to help companies manage digital workflows for enterprise operations. 

In October, Infosys said it would acquire Blue Acorn, focused on Adobe, amping service areas of customer experience-driven digital commerce services. In February, Infosys announced the acquisition of another cloud consulting firm. It said it would buy Salt Lake City, Utah based Simplus in a deal size amounting up to $250 million -- its second largest deal in US dollars.

The cloud opportunity is real

Infosys’ units are divided into three different service lines -- digital services, core services, and products and platforms. Core comprises traditional offerings that have scaled and industrialized over the years. Products and platforms include the company’s Edge suite of products, Infosys Finacle, Infosys Nia, Panaya, Skava, Stater, and McCamish.

Digital houses Infosys’ business transformation offerings such as customer experience tools, artificial intelligence-based (AI) analytics and big data, Internet of Things (IoT), cloud applications, and cyber security systems.

Even as Infosys does not share cloud revenues separately, its performance metric is linked and clubbed under digital revenues. Digital revenues grew 25.4% in constant currency terms to $1.6 billion in the second quarter ended September 2020, and made up over 47% of total revenues.

“With the investments we have made specifically in digital over the last two and three years, that has been a tremendous benefit in what has happened… I think very shortly we will cross over the 50% mark (in digital revenues),” Parekh said, at the Q2 earnings call with the press, in October.

Having signed six deals with new clients, Infosys recorded its largest ever TCV in the second quarter, at $3.15 billion. The pipeline was strong on the back of accelerating digital transformation and continued focus on automation efforts, Parekh had said in the analysts call. This, even as the quarter’s revenue included only a marginal contribution from the Vanguard deal that is reportedly worth $1.5 billion.

The M&A activity hasn’t stymied in-house development

A case in point, EdgeVerve Systems. The wholly-owned subsidiary of Infosys is a provider of enterprise software tools that dabble with automation technologies such as Robotic Process Automation (RPA).

EdgeVerve’s portfolio, part of Infosys’ products and platforms service line, includes AI and ML platform Infosys Nia, automation platform AssistEdge, and AI-enabled business applications  such as TradeEdge, FinXEdge, and ProcureEdge.

While the company’s M&A programme is focused on acquiring more established businesses, its Infosys Innovation Network builds alliances with younger companies that are working on emerging technologies, the company’s statement added.