Analyst: Infosys Could Be ISV Acquisition Target Due To Software Strength, Performance Woes

Independent software vendors (ISVs) might see Infosys an acquisition bargain due to its buildup of software-centric capabilities and execution challenges, according to Technology Business Research (TBR).

The Hampton, N.H. analyst firm said systems integrators like Bangalore, India-based Infosys have become appealing acquisition targets because they've built proprietary software products and adopted key performance indicators (KPIs) around product design and development that aren't usually found in the industry.

"The traditional IT services model is dying, it's eroding, and they need to transform," TBR's Boz Hristov, a senior analyst covering professional services, told CRN. "This year is going to be really critical for Infosys in terms of make-it-or-break-it."

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At the same time, Hristov said ISVs like Salesforce, SAP and Oracle are making efforts to develop vertical consulting and business integration expertise. SIs will find it easier to develop software capabilities than ISVs will to organically build consulting skills, Hristov said. This is because SIs have for been doing software development for years and already have software engineers on staff, he explained.

Companies like Infosys have been preparing for ISV acquisition bids by developing KPIs, which Hristov said would make the integration process easier. Infosys maintains robust SAP, Oracle and Microsoft practices, according to Hristov, and has made the development of a digitally-versed, software-centric sales force a pinnacle of its strategy.

"While embracing software company-like culture is a disruptive approach to the IT services market … it could be a two-edged sword if Infosys does not reach critical mass," Hristov wrote in a note to clients. "If Infosys does not master these attributes, it risks experiencing the pressures of market consolidation and potentially becoming an acquisition target."

Infosys announced Thursday that sales for its 2017 fiscal year – which ended March 31 – climbed above $10 billion for the first time, yet fell well short of projected revenue growth of between 8.6 percent and 9 percent. The company's stock fell $0.78 (5.11%) in trading Thursday to $14.48 and has lost more than 25 percent of its value over the past year.

Some of Infosys's recent investments haven't panned out as expected, with Hristov saying the company's retail and consumer product goods businesses have remained mired at 15 percent of total revenue despite the acquisition of e-commerce platform Skava two years ago.

Infosys didn't respond to requests for comment.

And Hristov wrote that Infosys's revenue growth guidance of 6.1 percent to 8.1 percent for the coming fiscal year would make it tough for the company to hit its goal of $20 billion in revenue by 2020. Continued underperformance would make Infosys's acquisition price more appealing to ISVs, Hristov said, and wouldn't scare many bidders away since the company still possesses engineering and technical talent.

Infosys has a lot of cash on hand, Hristov said but has been shy about deploying a large amount of cash for major acquisitions on the scale of Bangalore, India-based Wipro's $500 million purchase of Salesforce superstar Appirio in October.

However, Hristov said Infosys had invested more heavily in startups, but those have yet to move the needle much. Hristov said Infosys would need to buy a large consultancy that's really strong in specific verticals or geographies to regain the market position it enjoyed five or ten years ago.

Some of Infosys's senior leaders come from the ISV world, Hristov said, most notably CEO Vishal Sikka, who oversaw all products and innovation for enterprise software giant SAP before joining the SI in 2014.