The acquisition battle for UK-based consulting firm Axon is far from over with markets expecting Infosys Technologies to make a counter bid and HCL Technologies [Get Quote] to up its stake again.

A 700-750 pence per share final price for Axon ($900-910 million) cannot be ruled out by the time the bidding war ends, say CLSA analysts. 

Axon-Packed

• Axon is a great strategic fit for both Infosys [Get Quote] and HCL Tech
• Debt financing could make HCL Tech's cost equal to Infosys
• Weaker ERP practice makes HCL Tech an eager buyer
• Infosys should make one final offer and move out with the inducement fee
• Infosys better placed than HCL Tech to keep growing SAP practice organically

However, regardless of whoever wins this largest overseas acquisition, Emkay Global Financial Services analysts opine that Axon could well prove to be a winner's curse since a long-drawn bidding war might tell on the bottom lines of both firms.

The immediate impact was evident on the stock prices of these firms. HCL Tech's share price tumbled by 8.05 per cent and Infosys' slipped by 3.85 per cent on the Bombay Stock Exchange.

J P Morgan downgraded HCL Tech from overweight to neutral due to the financial turmoil in the US and the near-term disruption due to the Axon deal.

HCL Tech can theoretically raise the stake up to 835 pence per share, according to CLSA analysts.

They also believe that Infosys should make one attractive counter bid, and then move out with an inducement fee of 1 per cent. Under the inducement contract, the company that fails to get the bid gets 1 per cent of the bid amount.

Merrill Lynch is the financial adviser to HCL EAS. Emkay Global Financial Services analysts note that although Axon could be a prized asset for HCL Tech in the form of expanding its European/Enterprise Applications footprint, it could be margin/earnings dilutive over the next two years.

"On a first cut basis, we estimate that Axon acquisition could hit earnings estimates for HCL Tech by 2 and 5 per cent for FY09 and FY10 respectively. We have assumed that the acquisition gets consummated in Q1CY09 with debt costs at 7.5 per cent per annum and GBP/USD at 1.85 for our calculations.

Any counter bid by Infosys, which raises the acquisition costs further, can accentuate the negative impact," reason Emkay analysts.

While HCL Tech does have a financial edge due to the debt financing, the additional value offered by HCL Tech could be neutralised.

"First year savings due to debt financing is $15.3 million and second year savings are $14.6 million. So, HCL Tech is not bidding higher than Infosys. That implies that HCL Tech retains the option of further bidding," say CLSA analysts.

Investment bankers, however, argue that such opportunities are hard to come by.

"The problem with analysts is that they are not used to see debt on the books of these IT firms. But finding such a good strategic firm is very difficult," says a banker on condition of anonymity.

• HCL counters Infy bid for UK-based Axon