- Commentary -

January 8, 2010 (FinancialWire) (Cross Border: U.S. India News Wrap) — Infosys’ (NASDAQ:INFY) BPO arm recently acquired US based insurance process solutions provider, McCamish Systems LLC. The move helps Infosys further its strategy as a key business platform services player. Both companies find the acquisition a good fit to each others business goals, vision and capabilities.

McCamish’s proprietary VPAS™, PMACS and Deferral+™ solutions are top rated platforms in the insurance industry software space. It also offers integrated support solutions that are 409A compliant to the retirement and financial services industry. Clients for the company comprise half of the top 20 insurance providers in the US. The combination is expected to enable McCamish to service larger portfolios of transactions for clients and expand into global markets. This will establish Infosys as a key player in providing business platform services for the BFSI sector in the US.

Valuation: Surprisingly low

The valuation of the deal comes at a relatively low price for Infosys. With free cash reserves of USD 2 billion, Infosys has purchased the player at a mere USD 58 million. McCamish’s sales as at 2008 end stood at USD 38.2 million almost the exact cash dispersal Infosys will make towards the acquisition. The deal also adds around 260 employees. According to Infosys, it has absorbed “an exceptional group of professionals” adding to their existing capabilities.

Infosys has recorded at least 30% revenue growth for each year in the past decade though at marginally decreasing values. Competitors like Tata Consultancy Services (TCS) have adopted a more aggressive acquisition strategy since early this decade. On a broader level, the Indian BPO industry has experienced a slowdown for 2008-09 as its annual growth rate of 17% compared to the robust 30% + CAGR’s recorded in the period 2004-08. Top players like TCS and Infosys taking action to strengthen their business models also indicate the industry’s attempts to pace itself from the effects of last year’s financial downturn.

Infy’s foray into the BPO business itself was through the acquisition of Progeon, a move mirrored by most leading IT-BPO providers. Infosys which holds 8% of the Indian IT market share, has had slipping revenues from its BPO division. The company’s BPO operations contribute to just about 1% of its revenues.

Strategic Path: Growing non linear revenue

Does this mean that Infosys is breaking from its long established practice of organic growth? Even though the company’s defined strategy states that it firmly believes in organic growth, it has always maintained that it would acquire only those companies that are in line with this strategic growth. However in the past these acquisitions have been at much smaller scales and at values in the bracket of USD 5-10 million.

This is the first deal that the company has made overseas in around two years. According to industry experts, there are signs of consolidation in the outsourcing industry. With valuations being priced lucratively, it is an opportune moment for buyers.

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