What Infosys should do to impress markets

 At $345 million, Infosys' acquisition of Lodestone, a European IT consultant, is its costliest ever. The purchase seems to make sense: it will increase Infosys' footprint in Europe, a market where it has so far not had a significant presence. 

Lodestone has 200 clients, of which 83% are located in Europe, mainly in Switzerland and Germany. Most of these clients will be new for Infosys, which has 700-plus clients now. 
Lodestone's expertise is in manufacturing, medicine and consumer goods, which could nicely complement Infosys' existing expertise in banking and finance. 

Unusually for an European company, Lodestone's revenues have grown dramatically, clocking up over 100% annual growth for two years till the crisis hit Europe, when it shrank by about 3% and then bounced back with 23% and 14% revenue growth in the two succeeding years. 

Two-thirds of the payment for the all-cash deal will be made immediately, and the rest after three years, which means that the impact on Infosys' earnings will be minimal. In fact, Infosysexpects the deal to start making money in 18 months. 

But is Lodestone enough for Infosys, which is sitting on a pile of cash, and is perceived to be too conservative and risk-averse? The sensible thing to do would be to look at innovative companies around the world, and when prices look reasonable, snap them up. 

Acquisitions could help in three ways. One, they could bring innovations developed in smaller companies into the fold of Infosys. Two, they could get a set of clients who have worked with the target companies, into Infosys' portfolio. And, three, a company like Lodestone brings with it the large consulting and customer engagement skills, along with domain expertise, that Indian IT companies lack, although consultingled growth has been their goal for some time now. 

Realising this in practice has proved tough. While consulting arms might not be huge earners of direct revenue for IT firms, they help nab the big orders. The more independent and credible these are, the better their chances of both earning independent revenue and generating larger orders for strategy execution. Buying Lodestone is a sound step; we need more steps to make it a dance.