The Pros and Cons of Infosys’ Acquisition Of Simplus

The Pros and Cons Of Infosys Acquisition Of Simplus

This week Infosys acquisition of Simplus, a Salesforce integration consultant, for $250 million created great excitement. After evaluating this transaction in detail, I find that there are the pros and cons of Infosys’ acquisition of Simplus.
The transaction shall consummate in Infosys’s fiscal 2020 fourth quarter.
The demand for Salesforce advisory and implementation services is high. On the back of Salesforce’s global turmoil – the US-headquartered company presently makes over $10 billion in fees, twice the number five years before – the firm’s partner network is witnessing booming interest for consulting and technology support.
The deal appears a week after competing Cognizant stated two buyouts in the Salesforce segment, igniting the competition for cloud services revenue.

Deal Rationale
The acquisition accompanies the purchase of Fluido, another Salesforce consulting business, in 2018. These acquisitions imply that Infosys desires to develop more profound expertise around Salesforce and make that a significant portion of its consulting services going ahead.
The Simplus purchase enables Infosys to seize more market share while enlarging Salesforce capabilities to offer existing customers. Simplus should necessarily assist in the area of Quote-to-Cash, that time after the sale when quotes are received, contracts are confirmed, and cash gets collected on the sale. It generates an opening for Infosys to burst out of the vendor services silos and combine its Salesforce services with its ERP services (SAP, Oracle).
The acquisition would further boost Infosys’s grow its geographic presence as Simplus has facilities across North America, Sydney, Melbourne, London, and a large delivery center in Manila.
About Simplus
Salt Lake City, Utah-based Simplus, was established to implement digital transformation consulting services to businesses on the Salesforce platform. The firm has specialized expertise in the domains of Quote-to-Cash applications.
Co-founder and CEO, Ryan Westwood, oversees management.
Simplus’s main offerings cover:

• Consulting
• Implementation
• Data integration
• Change management
• Training

The firm counts more than 2,000 customers over a range of technology-enabled industries.
Investors have funded at least $49.3 million and comprise Kensington Capital Ventures, University Growth Fund, Salesforce Ventures, Savano Capital Partners, EPIC Ventures, and Cross Creek.
Deal Structure
The size of the deal is $200 million, which involves contingent consideration given for the acquisition of shares that are subject to the closing adjustments.
The employee incentives, as well as the retention payments that are a sum of up to $50 million, will be made on adhering to the specific performance stipulations for three years. This acquisition gets valued at 3.7x enterprise value-to-sales Financial Year 2020, which is somewhat on the costlier side.
Simplus’s revenue was a sum of $67.1 million for the fiscal year that closed January 31 and rising at a reasonable rate of 60 percent year-on-year. For the calendar year 2019 and 2018, its revenues equaled $42.1 million and $16.7 million, individually. As we consider a 45% YoY growth in the FY21E, this purchase will estimate for 0.7% of the Infosys’ revenues.
Impact on Infosys Valuation
A study of the firm’s most current announced financial results show that as of December 31, 2019, Infosys had $2.85 billion in cash and trading asset securities and $3.5 billion in aggregate liabilities and no long-term debt.
Free cash flow for the twelve months closed December 31, 2019, was $1.9 billion.
In the preceding 12 months, Infosys’s stock value has risen 1.7% vs. the U.S. IT industry’s growth of 35.6% and the U.S. overall market index’ growth of 20.3%, as the INFY chart indicates below:

Source: Simply Wall St.

The venture by itself won’t affect INFY’s stock value. Still, the quote-to-cash sector is a hot sector of focus for technology consulting firms, as customers need to obtain cloud capabilities to automate and augment their sales to collection processes over the business.
The quote-to-cash software business is developing from a conflux of factors such as the renewed transition of enterprises to the cloud and growing confidence in e-commerce channels for creating revenue.
Hence the transaction makes strategic sense, but from the shareholder perspective, this acquisition currently is not accretive.