Changes Ahead at Infosys

Unlike its acquisitive contemporaries in India's information technology sector, Infosys Technologies, India's second largest IT company, has long preferred organic growth. Even as rivals Tata Consultancy Services and Wipro Technologies have scoured Europe and the U.S. for deals, Bangalore-based Infosys, which has been growing 40% a year over the last five years, until recently had little reason to go shopping.

Yet on June 28 Reuters reported that Infosys was eyeing Paris-based Capgemini (CAPP), Europe's largest IT services and consulting outfit. The markets took the story seriously, despite management denials. Notably, Infosys Chief Financial Officer V. Balakrishnan dismissed the story as speculation, arguing that Infosys was looking at acquisitions in the $100 million to $200 million range, while Capgemini has a market capitalization of $10.5 billion.

Nevertheless Capgemini's share price rose 3.7% on June 28 and a further 2.9% the following day. The French company's stock has only retreated slightly since. Stock movements at Infosys have been less spectacular. Since the story broke its share price has edged up 0.87% to $47.40. Infosys has annual sales of $3.1 billion and a market cap of $29 billion.

Challenge for Consulting Arm
However this rumor plays out, Infosys will probably have to make a bold move soon. Consulting—the systematic examination of a company's IT problems and how they fit into a strategic corporate vision—has long been the coveted preserve of Western firms, most of them U.S.-based (Capgemini is the notable exception). The Indians see consulting as the next prize to conquer and another way to leverage their lower-cost software-writing power.

Infosys for one is desperate to grow its consulting arm. While outsourcing remains its core business, accounting for most of its sales, Infosys top brass see consulting as a way to add more value and boost profitability. "The challenge here is to grow the (consulting) business," Infosys co-founder Nandan Nilekani told BusinessWeek in an April interview (see BusinessWeek.com, 4/18/07, "Keeping In The Groove At Infosys").