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i-flex’s Mantas acquisition: Our view
Aug 16, 2006

On Monday, banking solutions major, i-flex Solutions, through its subsidiary, i-flex America Inc, acquired a company called Mantas. This company operates in the analytics space, offering its clients products in areas such as compliance solutions and anti-money laundering (AML). i-flex acquires Mantas in an all-cash deal worth US$ 122.6 m (Rs 5.7 bn), reportedly the largest all-cash acquisition by an Indian software company. Here is our take on the deal. In order to finance this purchase, the company will make a preferential allotment of around 4.4 m shares to its parent, Oracle, at Rs 1,307.5 per share, as per the SEBI guidelines. Oracle will make a mandatory open offer to purchase up to an additional 20% of the shares outstanding at a price of Rs 1,475 per share in accordance with SEBI regulations.

Mantas’ products have considerable brand value globally and the company’s client list reads impressively, with marquee names such as ABN Amro, Bear Sterns, Citigroup and Merrill Lynch adorning it. The company has won numerous awards for its products, including ‘Best AML Solution’ for 2 years in a row (2004 and 2005) by Waters magazine. Mantas has an active client base of 22.

The rationale…
This acquisition will give i-flex an expanded breadth of offerings for the analytics, risk management and compliance software markets. Mantas will complement i-flex’s already existing analytics product, Reveleus. Reveleus’ major strengths lie in Basel-II, credit and operational risk management. The combination of these offerings will result in an end-to-end offering for potential clients, which generally prefer a ‘one-stop shop’ for their Basel-II and compliance requirements. It should be noted that i-flex was already selling Mantas’ AML product.

The market for such software products is significant. Tower Group estimates that compliance-related spending by banks and financial institutions globally will amount to around US$ 20 bn by 2008, a growth of 20% annually in that time frame. Given the heightened risk in the global business environment, increased compliance-related regulations, such as Sarbanes-Oxley, have resulted in the banking industry globally having to spend more time, money and critical management time on compliance issues.

However, it should also be noted that not all this money would be spent only on packaged software. A part of this also involves in-house spending. Unlike the core banking market, where around US$ 70 bn to US$ 80 bn is the estimated market size for packaged software like Flexcube, such figures are not readily available for compliance-related software. However, given the above-mentioned figures, the scope for growth is significant.

Apart from the above-mentioned reasons, i-flex is also looking to expand the geographical reach of Mantas by leveraging its sales force globally. The company is expected to get significant cross-selling opportunities with the addition of Mantas to its product portfolio. It will sell Reveleus and Mantas as a combined offering, and also sell both Reveleus and Mantas as separate products by themselves, thereby giving potential clients an end-to-end analytics solution.

Therefore, this acquisition will enable i-flex to skip the learning curve of developing new products, testing them and finally launching them, all of which takes totally around 2 to 3 years to complete. Apart from this, it takes another 2 to 3 years to build the brand of the product. Thus, through the Mantas acquisition, i-flex has effectively saved around 5 years, by buying out an established company with a view to taking advantage of the market opportunities in quick time and becoming a leader in the field.

Valuations
At a price of US$ 122.6 m, the Mantas acquisition comes at a price-to-sales multiple of around 3.5 times its trailing 12-months revenues of US$ 35 m and 17.7 times its net profits of US$ 6.9 m. Given the fact that Mantas is a software product company having an established product in the analytics and AML market place, these valuations appear reasonable. If we compare the price that Oracle had paid for i-flex in August 2005, this was around 23.2 times our estimated FY06 earnings at that time, and 33.7 times its trailing 12-month earnings.

Even in the first 2 quarters of CY06, Mantas has grown its sales at robust pace in excess of 25% YoY. Given the fact that Mantas will give i-flex an established AML and compliance product, faster time-to-market, an end-to-end solution in the analytics space and an entry into a fairly large market with good growth potential, we believe that the company has not overpaid.

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