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i-flex: Now an Oracle company! - Views on News from Equitymaster
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i-flex: Now an Oracle company!
Aug 3, 2005

Oracle Corporation, a US$ 11.8 bn software giant and the largest provider of enterprise software/ERP solutions globally, has signed a Memorandum of Understanding (MoU) to acquire the entire stake of Citigroup in the Indian banking software products major, i-flex solutions. Citigroup is the largest shareholder in i-flex (through Orbitech) with a 41% diluted equity stake. The latest deal will make Oracle the largest shareholder in i-flex and, as per the SEBI takeover code, it will have to make an open offer to acquire another 20% stake in the company. So, yet another MNC company taking over an Indian software company, after HP taking over Digital Globalsoft and Flextronics taking over Hughes Software Systems. Let us analyse the deal and see what is in it for i-flex’s shareholders.

Big deal!

Oracle, as we have mentioned above, is buying out the entire 41% stake of Citigroup in i-flex at Rs 800 per share. It will then make an open offer to acquire 20% more, at a price of Rs 882.6 per share, a 6% premium to the average two-week trading price. Totally, this will take the total shareholding of Oracle to 61% and make it the majority and controlling shareholder. Oracle will pay US$ 593 m for the 41% stake from Citigroup and, provided the open offer is fully subscribed, will end up paying US$ 316 m for the 20% stake, taking the total payout to US$ 909 m. This will make it the largest acquisition deal in the Indian software space.

i-flex’s management has indicated that after the completed acquisition, expected to finish by the end of this calendar year, the company will align its product development, sales, marketing and service activities with Oracle. The management will continue to function as before and Oracle will induct its President, Mr. Charles Phillips, on the board of i-flex. As has been reported, i-flex is expected to continue to function as a publicly traded company, enabling shareholders to participate in its growth.

What should shareholder do?

There has been media speculation about the possibility of this deal since the past few months now. The management has not commented on this when queried. Citigroup had been looking out for an exit option since a while now and yesterday’s announcement is, thus, a culmination of months of negotiations with Oracle. But, coming back to the moot question, what is in it for the retail shareholders in i-flex?

We need to consider a few factors before coming to a judgement. One factor seems to be a positive and that is, the investors will be able to participate in the future growth of the company, as both Oracle and i-flex have said that it will continue to be a publicly traded company on the bourses. While MNCs have, in the past, de-listed their Indian arms, we take these two companies’ announcement of a continued listing on face value. Future prospects appear bright for i-flex. For three years in succession, International Banking Systems (IBS), UK, has ranked Flexcube, the company’s flagship product, as the number one selling core banking software worldwide. Given recent traction witnessed in this business, with tank size touching US$ 60 m at the end of 1QFY06 and a fast-growing services business, apart from recent product diversification into areas of insurance (Castek) and operational risk management (ORTOS), we are positive on the future growth prospects.

The offer price of Rs 882.6 implies a price to earning multiple of 19.1 times our estimated FY07 EPS. On a price to sales basis, the offer price is around 4.3 times our estimated FY06 sales. Considering these high valuations and the fact that this could be an attractive exit opportunity for shareholders, we believe that i-flex’s shareholders have got a fair deal from Oracle.

Deal valuations: Attractive?
  Temenos* Misys* i-flex FY06E**
EPS US$ 0.3 US$ 0.1 Rs 38.1
P/E 28.5 83.9 23.2
P/S 2.9 1.3 4.4
* For Temenos and Misys, the figures relate to trailing earnings
** For i-flex, the P/E and the P/S ratios are based on the offer price of Rs 882.6

The major benefit for i-flex from this deal is that it will get access to the huge base of global marquee clients of Oracle, the world leader in enterprise software. Oracle serves 17 of the top 20 banks globally and this will be a huge opportunity for i-flex to leverage Oracle’s reach and technology expertise. It will also be able to leverage the Oracle brand name and resources to deliver better quality solutions to its customers. In fact, most of i-flex’s customers use Oracle already. Thus, the company will also be able to sell its strong services business to these clients as well. The management of i-flex will not change, apart from the induction of Oracle President, Mr. Charles Phillips, on the board. The brand name of all its products and services will not change, given the strong brand equity and reputation that products like Flexcube and Reveleus already enjoy. For Oracle, this will enable it to offer rich industry-specific solutions for the banking industry, apart from its expertise in ERP. And for Citigroup, this has given them an attractive exit opportunity, for which they had been looking for a buyer since the past few months. Overall, it appears to be a win-win deal, both for Oracle and i-flex’s shareholders.

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