Monday, March 23, 2009

Why Infosys Should Buy FICO

Now Indian Software Companies need to grow up and look behind Software Services, and fight for much more lucrative Software Product side with significant focus. Infosys and Iflex have shown they can play well by building Finnacle and Flex-Cube (both are banking ERP Products) respectively.

IFlex sold itself to Oracle while Infosys has gone from strength to strength. It is already the most valuable software company in India, and among Top 10 Software Services provider globally. Its main problem to move to the next level is the lack of experience in big ticket acquisitions. But that should not be a problem; they can hire few acquisition experts and go ahead.

I see FICO (earlier Fair Isaac) as one of the best possible target for Infosys at this point of time. There can be many reasons; here are few:

1. FICO's Low Valuation due to bad market condition
As per yesterday's market close, FICO share stood at 12.72 (Mar 20th After Hours) and Market Cap at $621 Million. A company having Revenue over $800million, this valuation is too low. Source Google Finance.

2. 55 Years of History and Strong Branding in US
FICO has been in market for last 55 years, and it is the pioneer company to establish Analytics and Decision Management as an industry. Its FICO Score and Falcon are very strong brands.

3. Strong R&D Culture
Fair Isaac has very strong R&D culture, and owns many patents. This will be a great addition for company like Infosys who lacks it.

4. Financial Industry Coverage
Infosys's major focus has been Financial Industry for long; its Banking ERP, Finnacle, has been doing great for the company. But this has been limited to South Asia. Most of Europe and America is dominated by IBM and Oracle.

Infosys needs some partner to break this barrier and establish itself as global major for Banking ERP. There is no other company that suit Infy better than Fair Isaac. Fair Isaac works with more than 80% of World's Banks. Its Fraud fighting product Falcon and Credit Score FICO are used by almost all Financial players in US, and outside.

5. Complimentary Products and Services
Infosys has ERP Product and BPO Operations expertise and infrastructure; while Fair Isaac has Business Intelligence Tools and Enterprise Decision Management Product. Infosys's strength lies in low cost operations and services, and is moving up the value chain organically. Fair Isaac works in high IQ knowledge management area and is fighting to move down the value chain. Great complimentary possibilities.

6. Infosys has enough cash for buyout
If Economic Times's report is to be believed, Infosys has cash reserve of well over 12,000 Crore INR ($2.4 Billion) currently. This keeps it in comfortable position to make this buy-out, and still be cash positive.
Not to worry about financing operations for FICO; it has good revenue of over $800 million.

Ending Note:
I see Infosys as the best suitor to make this buyout but there are other probable bidders too. These are:
1. Wipro (strong cash position; experience in acquisition)
2. TCS (strong cash position; good acquisition experience; Tata group backing a bonus)
3. Accenture (can think of major entry in Banking thro this buy-out; cash position unknown; but have strong track record of acquisitions; good revenue making only second to IBM in BPO and Software Services)
4. IBM (can buy FI any day; too big operations and might not opt for this acquisition; already strong presence in Financial Industry)
5. Amazon (strong acquisition history; interest in data mining and analytics)
6. Google (Google has been buying companies from variuous background; one of the biggest data miners today and thus could opt for FI)

Well, there could be many who join this bandwagon. If Infy prepares itself well and gets FICO, it will create a new history for Indian Software Industry.

Please share your view as comment here. Would love to know what you think. Cheers



Deep Sherchan said...

If this happens, then surely it would be a big step. Especially with FICO's long history.

Anant Dhamala said...
This comment has been removed by the author.
Anant said...

Well interesting! One small nitpick though! Infosys's Finnacle is no where close to industry standards! The reason it has done well in South Asia and no where else is because of the enormous clout they enjoy among decision makers in South Asia. Outside here, it cant compete because its product is no where among the best. And I got this from a person who has actually worked for a long time in Finnacle and then joined Iflex!

Manish said...

Infosys is already earning 62% from US and they want to reduce it to 40% and here you are suggesting to buy a company in US and that too in BFSI segment (contributing 35% in the revenue of Infosys)…

At the time of acquisition looking only at cheep valuation is not at all advisable. We have to see revenue mix and future of that mix….SAP and consulting is the next big thing, so Infosys should look for companies in these two spaces....

Bhupendra said...

Thanks Deep, Anant and Manish.

@Anant, I had talks with few people in the banking industry and their experience with Finnacle does not seem too bad.

@Manish, You have a point. But this is the time when Infy can do some miracle. Its competitors are hit hard, and it can play well.

Infy can well play safe and reduce US exposure; but I would consider that a lost opportunity.


Manish said...

Hi Anonymous,
Could you post in English...

Anonymous said...

hi All,

i believe FICO would be a great add-op to Experians' portfolio


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