Early this year, Polaris Software initiated a move to acquire a New Jersey based firm, DATA Inc., for a consideration of Rs 975 m. DATA Inc. provides software solutions for banking and financial sectors just like Polaris. The benefits of the acquisition for Polaris were global reach, better delivery facilities, ensuring shorter customer acquisition time and most of all a readymade global development center. However, the marriage was not meant to be.
In October, DATA Inc. filed a lawsuit against Polaris and its managing director Mr. Arun Jain for backtracking on the acquisition agreement. It claimed reimbursements of major expenses incurred following the acquisition promise of Polaris. It also claimed that it had revealed extensive confidential information to Polaris during the negotiations and this could seriously compromise its competitive position if the deal did not go through. However, Polaris has denied the charge of breach of agreement.
DATA Inc. claims that Polaris went back on the price agreed and wanted to settle for a figure considerably lower. The reasons for this had nothing to do with DATA Inc.ís performance or future prospects. Mr. Arun Verma the owner of DATA Inc claimed that Polaris had gone back on the deal on the advise of its accountants. They had advised Polaris against the potential negative effect, which the down payment of Rs 700 m will have on its Profit & Loss statement based on the Indian GAAP.
What went wrong? Was the valuation that was done by UBS Warburg too high? Or did the due diligence report by KPMG bring out some hidden issues?
Mr. Jain of Polaris claims the latter. According to him after the three standard audits - business, legal and financial, KPMG had asked Polaris to back away from the deal.
Lets look at Polarisís balance sheet. In FY00, it had investments of around Rs 650 m. Of this, Rs 485 m (or 76%) are into mutual funds and other investment schemes. Polarisí 1HFY01 revenues stood at Rs 1,149 m (85% of its FY00 earnings). Assuming, Polaris achieves the same revenues even in the 2HFY01, then the total revenues stand at Rs 2,298 m. This figure does look achievable as its focus areas (i.e. finance and telecom) are showing strong growth. In light of all these facts, the issue of Rs 700 m down payment affecting its P&L statement does seem surprising.
Operating Profit Margin (%)
Profit before Tax
Profit after Tax/(Loss)
Net profit margin (%)
Diluted number of shares
Diluted Earnings per share*
More than impact of the down payment, the issue seem to be that if Polaris had acquired DATA Inc. at the proposed valuations it might have deflated its EPS and hence its market valuation. Therefore it backed out. The conclusion is that the ugly situation could have been avoided had Polaris done its homework well.
Polaris stock took a hit, as the impact of the acquisition on revenue growth had already been factored in. Now the markets seem to be re-rating the stock. The stock is trading at a P/E multiple of 19 times based on its 1HFY01 annualised earnings. Its valuations are quite low compared to others in the software industry.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407