Infosys Technologies

AS A part of strengthening its back office business, Infosys Technologies made its second acquisition in the space, by acquiring Atlanta based McCamish Systems for $38 million. A couple of years ago, it had acquired the shared services centres of Royal Philips Electronics for $28 million. While the upfront consideration for the deal is $38 million, there could be a consideration of an additional $20 million payable to McCamish Systems if it achieves certain financial targets in the future.

McCamish Systems, founded in 1985, has 260 employees located at their delivery centre in Atlanta and clocked revenues of $38.2 million for the year ended December 2008.

The acquisition is expected to enhance Infosys’ capability to deliver end-to-end business solutions for the insurance and financial services industries. McCamish, which counts Nolan Financial Group, Phoenix Companies and Heritage Union as its top clients, will help Infosys not only to increase its revenues from insurance customers, but also position the Indian offshore firm as a more local company.

In a press statement, Amitabh Chaudhry, CEO and MD, Infosys BPO said, “The deal will enable us to bring together a convergence of operations and technology. Infosys BPO has in-depth knowledge of the insurance and financial services sector, and this deal reinforces our leadership position in providing business platform services. Also, this will contribute positively to our strategy of growing non-linear revenue.”

According to analysts, many financial services firms in the US who have received TARP (Troubled Asset Relief Program) funding from the US government would prefer to work with a local firm. Hence this acquisition holds significance. “The size of the announced acquisition is not significant in the context of Infosys’s total revenues. However, it is in line with Infosys’ strategy to increase share of BPO revenues from platform-based services. It could become more meaningful in the longerterm since Infosys looks to scale up business on the acquired platforms,” says Srinivas Seshadri, IT analyst, RBS.

McCamish had suffered operating loss in 2008 due to the drop in the demand from the financial and insurance sectors in the US. Though revenue ceased to grow, the company decided to keep each of its employees on the rolls to prevent a talent drain. The Infosys management has reiterated that it will keep Mc-Camish’s headcount intact. The excess staff will be deployed to deliver various projects at the IT services division of Infosys.

“McCamish reported operating loss last year since its salary expense, which is a fixed cost, did not change even though revenue skidded due to dismal business environment. Now, we have decided to deploy around 25-30 employees of McCamish to our IT division,” said Mr Chaudhry.

The acquisition will help Infosys BPO to compete with bigger players in the US insurance sector that includes CSC, Perot, and Accenture. While this is true, analysts do not see any change in the business dynamics of Infosys in the near term. “There is not much cash outgo considering Infosys’ strong cash balance (of Rs 12,273 crore as on September 09). We do see any major impact on its performance in the future,” says Kotak Securities senior VP Dipen Shah. On the financial front, Business process outsourcing (BPO) operations constitute just 6% of Infosys’ total revenue. Hence, this buyout will not have any significant impact on future performance, apart from marginally impacting its net margin. The deal will reduce Infosys’ Rs 12,273 crore strong cash base by Rs 300 crore. This may lead to a marginal drop of 30-40 basis points in net margins for Infosys on the whole.