Wipro’s acquisition of Infocrossing – Insight

Wipro the IT company built on the model of differential wage is finding it hard to maintain margins post debacle of Dollar against the Indian Rupee. Growth is important and it is using its cash to acquire companies in FMCG space to IT and Business Consulting. Infocrossing has 900 employees in the US. [Will Wipro cut some staff or use them for different on site projects ? Currently Wipro, Infosys and MindTree have stopped Hiring and Training freshers for bench, which used to be the case earlier, indicating likely slowdown in Orders]

Kotak Research says, Wipro has announced an all cash acquisition of Infocrossing for US$600 mn (US$115 mn net debt and US$485 mn of equity). Infocrossing is a promising player in the IT data center and managed services operations. The acquisition is extremely expensive, the company has been valued at 2.6x ttm revenues and 14.5x EBITDA because of organic revenue growth of only 10-12% guided for CY2007 and single digit net margin.

The acquisition will likely dilute FY2008 EPS by 0.5% and FY2009 EPS by 0.8% on a non- GAAP basis. On a GAAP basis the FY2009 EPS dilution could be as high as 6%. Maintain Outperform but reduce FY2009 end DCF based target price to Rs 620/ share.

Update from Citigroup:
Citigroup in its research report after studying the impact of Wirpo’s acquisition has retained a BUY on Wipro with a target price of Rs 625.

Why it makes sense for Wipro to acquire Infocrossing ?
(1) Adds scale to IMS practice (~US$500 mn combined run rate for FY07); (2) Enhances Wipro’s offering in the total outsourcing space; (3) Adds to Wipro’s infrastructure in US with 5 data centers (~$250m of assets as per management estimate – $1000/sq ft); (4) Adds proprietary platform for integrated IT+BPO offering in healthcare segment.

Infocrossing adds to Wipro’s presence in IMS and enhances Wipro’s offering in the fast-growing Total outsourcing space. Visibility of telecom revenues is the key to the stock’s performance. Citi expects Wipro to report an EPS of Rs 23.37 and Rs 28.75 for Fy08 and FY09 respectively.