Date:16/10/2005 URL: http://www.thehindubusinessline.com/bline/iw/2005/10/16/stories/2005101600690900.htm

Back i-flex solutions: Reject

Krishnan Thiagarajan

SHAREHOLDERS of i-flex solutions may avoid tendering to the open offer being made by Oracle Corporation to acquire an additional 20 per cent equity stake in the company.

The open offer price of Rs 882.62 works out to just a 10 per cent premium to the Rs 800 per share paid by Oracle to acquire a 41 per cent equity stake from Citigroup, the key promoter of i-flex.

As adequate `control premium', typically above 25 per cent of the deal value, is not being offered, the offer is unattractive. Further, the i-flex stock trades at Rs 915 — at a premium to the offer price. A higher offer price, which factors in an attractive control premium, makes sense for three key reasons: One, the Oracle-i-flex deal is a win-win for both parties.

For Oracle, i-flex's flagship banking product, Flexcube, enables it to compete straightaway with SAP, Temenos and other US players in the global banking products space.

As Oracle products/solutions run in 17 of the world's top 20 banks and 23 of the top 25 North American banks, the market access and cross-sell opportunities for i-flex's products improves dramatically.

Secondly, once i-flex gets access to Oracle's brand, scale and resources, it will be able to reduce substantially its selling and marketing expenses.

The operating leverage that it can derive by reducing sales and marketing expenditure can be substantial. Finally, the services business of i-flex, which accounted for 46 per cent of the revenues of Rs 1,140 crore in 2004-05, has been growing rapidly.

In 2004-05, it grew by almost 70 per cent, largely on the back of an aggressive drive to enhance the non-Citi business. At the same time, Citi continues to be a prominent client.

Though the margins of the services business are lower than in products and there is limited clarity on its role under the Oracle umbrella, the services segment is a significant value-add to the i-flex portfolio.

Offer details: The offer opened on October 5 and closes on October 24. JM Morgan Stanley is manager to the offer.