M & A CritiqueIn February 2015, Infosys bought Panaya Inc., a leading provider of automation technology for large scale enterprise software management, for an enterprise value of $200 million (Rs 1,244 crore). The payment was upfront without any earn-outs and in the form of cash. The acquisition is in line with Infosys chief executive officer and managing director Vishal Sikka’s vision of moving away from plain vanilla services to intellectual-property based business model which will be a big revenue generator. In fact, Mr. Sikka’s goal after taking over the reins of Infosys has been three-pronged: use automation and artificial intelligence to make existing service lines more efficient, increase the proportion of revenue coming from next generation business and increase overall revenue productivity.
While the valuation was six times Panaya’s revenues, the acquisition was a strategic fit as it helped Infosys to improve its automation and delivery engine. In fact, under Sikka, Infosys has been making big bets on automation and other new technology like artificial intelligence and cloud-based services as the company tries to regain some lost ground from rivals like Tata Consultancy Services. Panaya, which started in 2005, is a software-as-a-service company that provides cloud-based quality management services for enterprise applications. It had a customer base of companies like Coca-Cola, Unilever and Mercedes Benz. For Infosys, which had a cash pile of $5 billion, a token $200 million was a small buy.
About Infosys:
Infosys was co-founded in 1981 by Narayan Murthy, Nandan Nilekani, N. S. Raghavan, S. Gopalakrishnan, S. D. Shibulal, K. Dinesh and Ashok Arora with a capital of INR 10,000 (USD 250) is now the one of the largest India-based IT services company by 2014 revenues.
Infosys is the global leader in consulting, technology, outsourcing, and next generation services. Infosys help enterprises transform and thrive in a changing world through strategic consulting, operational leadership, and the co-creation of breakthrough solutions, including those in mobility, sustainability, big data, and cloud computing.
It provides software development, maintenance, and independent validation services to companies in banking, finance, insurance, manufacturing and other domains. One of its known products is Finacle which is a universal banking solution with various modules for retail and corporate banking.
Infosys has a growing global presence with more than 165,000+ employees. Infosys has a presence in more than 50 countries. Globally, Infosys has 73 sales and marketing offices and 93 development centers as at March 31, 2014.It is headquartered in Bangalore, Karnataka. The company is listed on BSE, NSE, and NASDAQ.
Infosys Acquisition Trends:
Panaya will be the Infosys’ second largest acquisition so far. The largest was of Zurich, Switzerland-headquartered management consulting firm Lodestone for $345 million (Rs 1,930 crore) in September 2012.
Unlike its rivals such as Cognizant and HCL Technologies, Infosys is not seen as an aggressive buyer, notwithstanding its huge cash reserves. Since its inception, the company has acquired only five businesses before Panaya, including two in the business process management (BPM) market — McCamish and Portland Group.
| Company Name | Year | Value
($ mn) |
| Expert Information Services | 2003 | 23 |
| Captive BPO Operations of Phillips | 2007 | 28 |
| McCamish | 2009 | 58 |
| Portland Group | 2011 | 34 |
| Lodestone | 2012 | 345 |
Source:- hu Research
Though Panaya’s acquisition is a second largest acquisition for Infosys it is noteworthy that Infosys paid only two times the revenue in case of Lodestone but for Panaya the company has paid almost 6 times its revenue making the acquisition one of the most expensive acquisitions by any Indian IT service company. For Infosys, it makes sense to acquire an overseas headquartered company in the area of emerging technologies.
TriZetto, which was acquired by Cognizant in September 2014, was valued at 3.8 times its revenue. However, most of the acquisitions of pure software companies are valued at over six times their sales. SAP SE paid $3.4 billion, close to 12 times the sales of SucessFactors when buying the provider of human capital management software in 2011. Taleo, acquired by Oracle in 2012 for $1.9 billion, was valued 6.5 times its trailing 12-months sales.
About Panaya:
Founded in 2006, the California, US-headquartered Panaya provides cloud-based services for large-scale enterprise software management.
Business: Panaya is a Software as a Service (SaaS) company that facilitates ERP upgrades and maintenance by providing visibility and control over business application changes during the system’s life-cycle. Panaya’s applications reduce the time SAP and Oracle users spend during upgrades, testing, and maintenance and save significant money, testing risk and effort.
CloudQuality Suite: Panaya CloudQuality Suite delivers insights that tell customers what will break, how to fix it and what to test. It is constantly improving and finding smarter ways to perform everything from day-to-day maintenance to major projects.
Client Profile: Panaya has over 400 active clients, and counts one-third of the Fortune-500 companies among its customers of the present and past. Some of the marquee names include Coca-Cola, Mercedes-Benz, Peugot, BOSCH, GM, Renault, Eveready, Whirpool, Volvo, Clarks, L’oreal, Panasonic and Siemens.
Moving on from on-premise: Panaya had some legacy on-premise products. Going forward, the direction is around CloudQuality suite through the SaaS based model.
Financial metrics: Based on the consideration, the revenue run rate of the company is USD33m. Panaya has 156 employees. 40% of revenues are from the US, 40% from EMEA and the remaining from other regions. The majority of the staff is based out of Israel.
The Deal
This acquisition reflects Infosys’ execution of its Renew and New Strategy to enhance the competitiveness and productivity of current service line by leveraging automation, innovation, and artificial intelligence. Mr. Sikka had said, Infosys was looking at acquiring innovative companies in the field automation, innovation, and artificial intelligence.
The move to buy Panaya came at a time when Infosys was facing criticism from analyst for its slow approach in acquisition with a huge cash pile.
Commenting on the acquisition, Mr. Sikka said, “The acquisition of Panaya is a key step in renewing and differentiating our service lines. This will help amplify the potential of our people, freeing us from the drudgery of many repetitive tasks, so we may focus more on the important, strategic challenges faced by our clients. At the same time, Panaya’s proven technology helps dramatically simplify the cost and complexities faced by the businesses in managing their enterprise application landscape”
Mr. Doron Gerstel, CEO, Panaya Inc. said, ‘We are excited about leveraging Infosys’ global reach, service footprint, and broad customer base to deliver competing, simplifying, value to clients. I am confident this integrated propositions will uniquely position Infosys as the service leader in enterprise application services market.’
The company said it was expecting all the senior management and employees of Panaya to join. They would report to Abdul Razack, senior vice-president and head (analytics and big data).
Rationale:
It is all about cloud play
While Indian services companies are good at traditional enterprise applications, deployment and support, a lot of this is moving to the cloud. Panaya is a software-as-a-service (SaaS) company that provides cloud-based quality management services for enterprise applications.
The cloud play suite is powered by Big Data Analytics and sits on top of more than 7.5bn lines of code, from 27,000 customer analysis and 5mn test script transactions. Panaya automatically transforms this big data into insights by constantly seeking for patterns and applies it to solutions to benefit from the best practices in each of the projects.
Large Enterprises have numerous systems across the software landscape. Maintaining and upgrading these require deployment of an army of resources. Solutions like Panama’s Cloud Suite deeply understand the underlying software package implementation and thereby helps automate much of these manual processes, freeing the bandwidth for higher-skilled tasks.
Emphasis on IP
Infosys CEO and MD Vishal Sikka’s vision has all been about moving away from plain vanilla services to Intellectual Property based differentiators. With its patented disruptive technology which enables change impact analysis and automated code remediation, Panaya brings this to the table.
Strategic fit
Panaya fits strategically with Infosys’ well-articulated dual focus on renewing and new, which will help Infosys improve its automation and delivery engine.
Reasonable price
Panaya, which started in 2005, is believed to have raised $39 million to date from PE funds. With its IP and customer base, which boasts the likes of Coca-Cola, Unilever, and Mercedes-Benz, the valuation seems reasonable.
Cash deployment
Infosys is sitting on cash reserves of $5 billion. Even a $200-million acquisition of Panaya is just a small buy for the company. The move, however, goes some way in ensuring Sikka’s promise of deploying capital to capitalise growth opportunities.
Conclusion:
| Particulars | INR
in crore |
| Infosys’ Estimated Revenue for FY15 (E) | 52,000 |
| Infosys’ EBITDA Margin | 28.7% |
| Panaya’s Revenue | 210 |
| Panaya’s EBITDA Margin | 35% |
Sources:- Company Data, hu Research
Though Panaya’s contribution to Infosys’ net revenue will be negligible but because of its high margin business, Infosys’ EBITDA margins will increase significantly. If we assume EBITDA margin will shoot by 1% i.e Rs 520 crore then Infosys will recover its investment of around INR 1,244 crore in Panaya within two and half year. Hence the deal will be EPS accretive by the end of third year i.e FY2018.
