Why Lodestone acquisition may not change Infosys fortunes

 Lodestone's takeover will be a step closer for Infosys to strengthen its presence in the European market for IT enterprise services. With it, comes a battery of over 750 consultants that would add to the pool of Infy's in-house 10,000 SAP professionals. While this sounds great for the erstwhile IT bellwether, which has been struggling to grow business, it would not be able to influence its current situation at least in the near term on several counts.

Tiny size of the acquired business

Lodestone clocked sales of around $211 million in its latest fiscal. This is just over 3% of $7,075 million of revenue, which Infosys earned in the 12 months to June 2012. Which means, the deal will not have much impact on the Infosys' income statement in the immediate future. Infosys expects to grow Lodestone's presence in the European region by selling its solutions to existing clientele of the latter. But, it would take some time for Infosys to achieve that.

Lower profitability of enterprise related applications
Lodestone focuses on SAP based enterprise solutions and advises global firms on strategy and process optimization. Though Infosys has not mentioned the profitability of Lodestone's acquired business, enterprise related solutions tend to offer lesser margins according to industry trackers. This may not impact Infosys' profitability much given the relatively smaller size of Lodestone's operations. However, it may put pressure on Infosys to improve returns on its investment in the Swiss company to justify the deal.

Slack in Euro zone
Infosys' acquisition comes at a time when European nations are under economic stress barring a few markets such as Germany and Sweden. Authorities are likely to take some more time to resolve the crisis in the region. This will put on test Infosys skills to leverage Lodestone's existing clients and may prompt the company to take price cuts to increase or retain clientele.

Though Lodestone's acquisition gives a strategic advantage to Infosys in the Eurpoean region, it will not improve the prospects of the erstwhile Indian IT bellwether in the near term. Analysts feel that the deal size is not significant enough to change Infy's fortunes immediately. Considering lower margins on SAP related business, Infy may have to take extra efforts to earn higher yield on its investment in Lodestone to justify the acquisition. The company will have to carry out on its task to acquire skills to restore faith among investors.