Friday, October 19, 2007

Acquisition of I-Flex by Oracle - Case Study

Lokesh Banjaria, Bhupendra Verma, Ramesh K. Vadlamani, Vinod Durge (PGDIM 13, NITIE), K.V.S.S. Narayana Rao


Public Announcement to the Shareholders of I-Flex Solution Ltd
Place: Mumbai
Date: February 10, 2007

This announcement is in continuation of and shall be read in conjunction with the original Public Announcement dated September 13, 2006 and the subsequent public announcements dated November 6, 2006, November 22, 2006, December 8, 2006, December 27, 2006 and January 4, 2007 (collectively the “PAs”) and the Letter of Offer to the shareholders of I-Flex Solutions Limited dated November 23, 2006 (the “Letter of Offer”), issued/sent by or on behalf of Oracle Global (Mauritius) Ltd. (“OGM”/the “Acquirer”) and Oracle Corporation as the Person Acting in Concert with the Acquirer (“OC”/“PAC”), pursuant to Regulation 10 and 12 and in compliance with the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and subsequent amendments thereto (the “SEBI (SAST) Regulations”).
The details subsequent to the completion of the cash offer made under the SEBI (SAST) regulations, by Acquirer along with PAC to acquire up to 28,390,000 fully paid up equity shares of face value Rs.5/- each of I-Flex solutions limited ( “Target Company”) representing 34.14% of the Emerging Voting Capital of the Company at an Offer Price of Rs.2,084.00 per fully paid up equity share along with interest of Rs.16.00 per fully paid up equity share, amounting to a total payment of Rs.2,100 per fully paid up equity share, are as under:
1. Name of the Target Company: I-Flex solutions limited
2. Name of the Acquirer(s) including PACs: Oracle Global (Mauritius) Ltd. (Acquirer) and Oracle Corporation (PAC)
3. Name of Manager to the offer: DSP Merrill Lynch Limited
4. Name of the Registrar to the offer: Mondkar Computers Private Limited
5. Offer Details
a) Date of opening of the offer: December 4, 2006
b) Date of closure of the offer: December 23, 2006

6. Details of the Acquisitions

S.No Item Proposed in the Offer Document* Actual*
6.1 Shareholding of Acquirer/PAC before MOU/ PA 44,595,730 (54.80%) 44,595,730 (54.80%)
6.2 Shares agreed to be acquired by way of Preference Issue 4,447,418 (5.81%) 4,447,418 (5.81%)
6.3 Shares acquired in the open offer 28,390,000 (34.89%) 22,885,968 (28.03%)
6.4 Size of the open offer (Number of shares by offer price of Rs. 2,084/-per share) Rs. 59,164,760,000 Rs. 47,694,357,312
6.5 Shares acquired after P.A. NIL NIL
6.6 Post offer shareholding of Acquirers/ PACs 72,985,730 (89.69%) 67,481,698 (82.92%)
6.7 Pre & Post offer shareholding of Public Pre - 36,781,948 (45.20%)
Post - 8,391,948 (10.31%) Pre - 36,781,948 (45.20 %)
Post - 13,895,980 (17.08 %)

7. Status of the escrow account, whether released or not: Released
8. Payment of interest to the shareholders along with the details thereof: Rs 16.00 per fully paid up equity share of I-Flex. This interest is computed at a rate of 10% per annum on the revised offer price of Rs. 2,084 per fully paid up equity share for the period from the original scheduled date of payment (December 9, 2006) up to the revised scheduled date of payment (January 6, 2007) or actual date of dispatch of payment consideration (January 6, 2007), whichever is later.
9. Status of investor complaints received, if any: Four investor complaints are pending as of the date of this Public Announcement and are being addressed.

The Acquirer and the PAC accept full responsibility for the information contained in this Public Announcement. The Acquirer and the PAC are jointly and severally responsible for the fulfillment of each of their obligations in terms of the SEBI (SAST) Regulations.
Issued by the Manager to the Offer on behalf of the Acquirer and the PAC
DSP Merrill Lynch Limited
10th Floor, Mafatlal Centre, Nariman Point, Mumbai - 400 021
Tel No: +91 22 6632 8000, Fax No: +91 22 2204 8518
Email: I-Flex
Contact Person: Mr. Suramya Gupta

1. Acquirer - Oracle Global (Mauritius) Ltd.
(i) Acquirer is an unlisted company incorporated in Mauritius on June 28, 2005 under the Companies Act, 2001 of Mauritius, with its registered office located at Mauritius. The paid up capital of Acquirer is US $1,000. Since its incorporation, no financial statements of Acquirer have been prepared.
(ii) Acquirer is a wholly owned subsidiary of Oracle, promoted by Oracle and belongs to the Oracle group of companies. Acquirer is an investment company and does not have any income generating operations.
2. The Person Acting in Concert - Oracle Corporation
(i) Oracle was incorporated on October 29, 1986 under the General Corporation Law of the State of Delaware with its registered office located at 500 Oracle Parkway, Redwood Shores, California, 94065, U.S.A.
(ii) Oracle develops, manufactures, markets, distributes and services database software and middleware software, as well as applications software designed to help its customers manage and grow their business operations. Oracle also offers an integrated suite of business applications software. Oracle is the holding company of Acquirer and holds all of the issued, subscribed and paid-up share capital of Acquirer.
(iv) Based on the latest audited consolidated US GAAP financial statements as on May 31, 2005 (in millions, except per share amounts), the financial statements of Oracle are as follows:-
Year ending May 31, 2004 May 31, 2005
Revenue US$ INR(2) US$ INR(2)
10,156 441,278 11,799 512,667
Net Income 2,681 116,489 2,886 125,397
Common Stock and Additional Paid In Capital 5,456 237,063 6,596 286,596
Stockholders' Equity 7,995 347,383 10,837 470,868
Book Value per Share 1.55 67.35 2.11 91.68
Earnings Per Share (basic) 0.51 22.16 0.56 24.33
Earnings Per Share (diluted) 0.50 21.72 0.55 23.90
Return on Networth 42.4% 36.0%
Price to Earning Multiple (1) 20.2 (x)
Note: (1) Based on the closing price on NASDAQ on August 1, 2005
(2) Based on the exchange rate listed in paragraph below.

Certain financial details contained in this Public Announcement quoted in Rupees are denominated in US$. The Rupee equivalent quoted in each case is calculated in accordance with the RBI Reference rates as on August 1, 2005, namely 1 US$ = Rs. 43.45 (Source:

1. The Target Company is a public limited company incorporated on September 27, 1989 under the Companies Act, 1956 with its registered office located at SEEPZ, Andheri (East), Mumbai - 400096.
2. The total paid up equity share capital of the Target Company, as of the date of this Public Announcement, is Rs.375.54 million divided into 75,107,698 fully paid up shares of Rs. 5/- each. There are no partly paid-up shares.
3. The Target Company is a provider of information technology solutions to the financial services industry worldwide through a comprehensive range of products and customized service offerings. The Target Company's portfolio of offerings comprise the Flexcube product suite for consumer, corporate, investment and internet banking, asset management, and investor servicing; custom application software development and deployment, maintenance and support services (both onsite and offshore); and business and IT consulting. The Target Company also offers financial institutions customized solutions through its domain and technology Centers of Excellence, which encompass areas such as Business Intelligence, CRM, Development & Integration Services, e-services, Insurance and Payment Systems. Supported by a mature, quality led process assessed at SEI CMM Level 5, the Target Company draws on its functional and technology expertise to offer services to customers in the financial services world. I-Flex Consulting, the consulting arm, offers Strategic and Business consulting to customers in the financial services industry.
4. Based on the latest audited standalone Annual Accounts of the Target Company, the financial statements of the Target Company are as follows: - (Rupees in millions, except per share amounts.

Year ended March 31, 2004 March 31, 2005
Revenue 6,844.6 9,028.6
Net Income 1,758.9 1,976.4
Equity Share Capital 373.7 374.4
Net worth 9,665.5 1,1251.9
Book Value per Share 258.64 300.53
Earnings Per Share (basic) 23.56 26.43
Earnings Per Share (diluted) 22.73 25.64
Return on Net worth 19.93 % 18.90 %
Price to Earning Multiple (1) 34.9 (x)
Note: (1) Based on the closing price of the equity shares on NSE as on August 2, 2005
Source: I-Flex website,

5. As on the date of this Public Announcement the Board of Directors of I-Flex comprises of 6 directors: Mr. Rajesh Hukku, (Chairman and Managing Director), Mr. Joseph P. Kennedy II, Mr. S P Bharucha, Ms. Tarjani Vakil, Mr. William Twyman Comfort, Jr., and Mr. Yashodhan Madhusudan Kale and Mr. Ajay Relan - Alternate Director to Mr. William Twyman Comfort, J.

Reasons for the Offer:
The main reasons for the acquisition of I-Flex by Acquirer Group are:-
 Oracle and I-Flex have had an ongoing commercial relationship since 1997. Several of I-Flex’s applications products are built on the Oracle technology infrastructure using Oracle development tools. In addition, Oracle and I-Flex have engaged in several joint sales and marketing activities to serve customer needs for complementary elements of the parties' offerings.
 Both Oracle and I-Flex will benefit from greater scale, resources and expertise, enabling them to accelerate and deliver innovative solutions to their customers.
 By aligning talents of both organizations, the companies will be better able to address the evolving needs of their respective customers.

Synergy refers to the potential additional value from combining two firms, either from operational or financial sources.
Operating Synergy: Operating Synergy can come from higher growth or lower costs
 Cost Savings: in same business to create economies of scale.
 Higher growth: should have potential for higher growth.
Financial Synergy: Financial Synergy can come from tax savings, increased debt capacity or cash slack.
 Tax Savings: provides a tax benefit to acquirer
 Debt Capacity: is unable to borrow money or pay high rates
 Cash slack: has great projects/ no funds

To be successful in the financial services industry, vendors must cultivate a robust vertical market strategy. Through I-Flex, Oracle is hoping to seize huge untapped potential. The combined product and services footprint of Oracle and I-Flex maps to approximately $145 billion in annual banking IT spending. Prior to the strategic investment, I-Flex’s capabilities mapped to roughly $120 billion in annual IT spending, while Oracle's solutions corresponded to only $25 billion! As hinted at earlier, Oracle may eventually position itself to provide the banking industry with a banking software ecosystem that encompasses core processing, enterprise resource planning, and customer relationship management (CRM) atop an architectural foundation of service-oriented architecture (SOA) with embedded analytics, business process management, and business intelligence. Core systems transformation represents a market with longevity. C-level executives will spend years revamping their archaic systems in an effort to streamline processes and simplify architectures with baked-in enterprise functions. Before I-Flex, Oracle was in no position to compete for this business.

Structuring of the Deal
Preferential Allotment and Open Offer
 On September 14, 2006, I-Flex issued approximately 4.45 million shares of common stock at a purchase price of 1,307.5 Indian rupees per share (Preferential Allotment). Oracle purchased the Preferential Allotment for approximately $126 million and increased our ownership to approximately 55%.
 Proceeds from the Preferential Allotment were primarily used by I-Flex to fund the acquisition of Mantas, Inc., a financial services application software company, in October 2006.
 As required by Indian law, following the preferential allotment, Oracle published an announcement on September 13, 2006 notifying the public shareholders of I-Flex of their intention to make an open offer to purchase up to 20% of the outstanding equity of I-Flex for 1,475 Indian rupees per share. On December 7, 2006, Oracle increased the price of their open offer to 2,100 Indian rupees per share including interest and increased the number of shares that they may purchase up to approximately 35% of the outstanding equity of I-Flex.
 If the open offer is fully subscribed, the aggregate consideration for the open offer would be approximately $1.3 billion and would increase their ownership interest in I-Flex to approximately 90%. Pursuant to Indian laws, the open offer commenced on December 4, 2006 and is expected to close on December 23, 2006. The open offer is not conditioned upon any minimum level of acceptance by I-Flex shareholders.
The cumulative investment in I-Flex as of November 30, 2006 was $973 million, which consisted of $953 million of cash paid for common stock, $6 million in transaction costs and $14 million in equity in earnings from our initial purchase date to April 14, 2006. The cumulative investment in I-Flex was allocated to I-Flex’s net tangible and identifiable intangible assets based on their estimated fair values. The minority interest in the net assets of I-Flex has been recorded at historical book values. The excess of the cumulative purchase price over our interest in the net tangible and identifiable intangible assets was recorded as goodwill. The preliminary allocation of the cumulative purchase price including the minority interest in the net assets of I-Flex is as follows

Cash and marketable securities...................................................... $ 281
Trade receivables ........................................................................... $ 125
Goodwill ........................................................................................ $ 611
Intangible assets.............................................................................. $ 187
Other assets .................................................................................... $ 96
Accounts payable and other liabilities ........................................... $ (49)
Deferred tax liabilities, net ............................................................. $ (66)
Deferred revenues........................................................................... $ (33)
In-process research and development............................................. $ 23
Minority interests ........................................................................... $ (202)
Total purchase price…………………………………………….... $ 973
The preliminary allocation of the purchase price was based upon a preliminary valuation and our estimates and assumptions are subject to change. The primary areas of the purchase price allocation that are not yet finalized relate to identifiable intangible assets, the valuation of consulting contract obligations assumed, certain legal matters, income and non-income based taxes and residual goodwill.

1. The total funding requirement for the acquisition of up to 15,586,914 equity shares held by shareholders in the Target Company at Rs.882.62 per share is Rs. 13,757.32 million (Rupees Thirteen Billion Seven Hundred and Fifty Seven Million and Three Hundred and Twenty Thousand only) (the "Maximum Consideration").
2. Acquirer, JMMS, The Hongkong and Shanghai Banking Corporation Limited ("HSBC"), a banking corporation incorporated under the laws of Hongkong Special Administrative Region ("HK SAR") and The HongKong and Shanghai Banking Corporation Limited, have entered into an Open Offer Escrow Agreement (the "Escrow Agreement") in accordance with Regulation 28 of the SEBI (SAST) Regulations. Pursuant to the Escrow Agreement,
 Acquirer has made a cash deposit of US $38.0 million (equivalent to Rs. 1,651.1 million) in a bank account which is in excess of 25% of the value of the total consideration up to Rs. 1000 million and 10% of the value of the total consideration beyond Rs. 1000 million payable under the Open Offer (assuming full acceptances) with HSBC, Mauritius (the "Foreign Escrow Account").
 At an exchange rate of Rs. 43.45 per US $ the cash deposited in the Foreign Escrow Account cumulatively is in excess of the amount required under Regulation 28(2) of the SEBI (SAST) Regulations. JMMS has been duly authorized to realize the value of the aforesaid Foreign Escrow Account in terms of the SEBI (SAST) Regulations.
 In the event of any shortfall in the escrow amount arising on account of exchange rate fluctuations, Acquirer has undertaken to provide additional funds to ensure that the Foreign Escrow Account has adequate funds to discharge Acquirer's obligations under the Offer. The Funds will be transferred from the Foreign Escrow Account to HSBC; India (the "Indian Escrow Account") after the requisite approval has been obtained from RBI for opening and operating an escrow account in India. JMMS has been duly authorized to realize the value of the aforesaid Indian Escrow Account in terms of the SEBI (SAST) Regulations.
3. Oracle has access to adequate cash funds and shall make the funds available to Acquirer through a loan for making the necessary purchases, including those mentioned in the Offer.
4. HSBC Bank, USA, who are the bankers for Oracle (the "Bankers") have via their letter dated August 2, 2005 confirmed that Acquirer has made the firm arrangements for meeting the obligations under the SEBI (SAST) Regulations.
5. Pursuant to the Resolution of the Board of Directors of Oracle dated July 31, 2005, Oracle has confirmed that it has sufficient means and capability to meet its obligations under Regulation 29 of the SEBI (SAST) Regulations.

Benefits to I-Flex solutions
This agreement to acquire i-flex by Oracle does change the rules of the banking game and improves the fundamentals of the former. There are two key positives that the deal offers to i-flex:
 The association with Oracle will open the doors for i-flex in the North American market in a big way. 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 for i-flex's products would change dramatically. Moreover, as i-flex has also been struggling to establish its foothold in the US market, this deal can straightaway strengthen its pitch among Tier-I banks. The ability to compete in every large deal in the banking space with SAP, Temenos or others will be a huge positive.
 As i-flex gets access to Oracle's brand, scale and resources, it will be able to scale down substantially its selling and marketing expenses. Now, i-flex spends about 15 per cent of its revenues on these expenses; the operating leverage it can derive by reducing the spending on this head can be substantial. Any margin improvement on operating profits will flow straight to the bottom-line of i-flex.

Benefits to Oracle
From its acquisition of a majority stake in I-Flex, Oracle gains instant market entry to the vertical banking market it covets, including three bright spots in financial services technology:
 Core banking transformation through the FLEXCUBE product, representing a $65 billion market that is growing 7% annually and is the largest piece of the IT spending pie in banking.
 Risk management and compliance through the Reveleus business, representing a $20 billion Market. Reveleus is the jewel in the crown of I-Flex and may be in danger of being overlooked by Oracle.
 Business process outsourcing through the Equinox division, representing a $15 billion market that is growing 40% annually.

Vertical Market Strength
Formerly a horizontal player for database technology and enterprise software, Oracle is poised to compete in higher-value vertical markets. Vertical domain expertise is a prerequisite for mindshare in financial services. It is usually not enough merely to sell technology. In addition to the solutions themselves, Oracle gains access to I-Flex’s deep financial service domain expertise, is outstanding in certain parts of the I-Flex solutions lines. Given Oracle's relative lack of expertise in the vertical domain, most of its banking relationships are with banks' IT departments. I-Flex’s capabilities should present opportunities for Oracle to cultivate relationships at the business level.

Diversified Solutions Portfolio
I-Flex brings diverse technology assets and domain knowledge to Oracle. While Oracle's immediate focus is to leverage I-Flex’s core banking technologies and expertise, strategic opportunities in business analytics, specialized outsourcing, and risk management may prove even more bountiful in the long term.

Risks Involved:
This deal also has risks on at least three fronts:
 The product business in the banking industry that i-flex targets is typically lumpy, where deal breakthroughs take a fairly long time of happen. While the association with Oracle will open the doors for i-flex, it may take a while — even years — to convince banks to switch from in-house systems to packaged software.
 On top of that, the marketing channel overlap between i-flex and Oracle will also be high, as the former has built alliances and partnerships with companies for marketing Flexcube in 50 countries. There may be considerable attrition on this front.
 There is limited clarity on the role of i-flex's services business, which accounted for 46 per cent of the revenues of Rs 1,140 crore in 2004-05. For i-flex, services that catered to the in-house development work for banks (Citi and non-Citi) have primarily been a de-risking strategy for its lumpy products business.
Future Plans
1. I-Flex and Oracle intend to make cooperative efforts to develop joint products, improve sales activities, marketing and customer service, and align certain operations to deliver a comprehensive solution for their respective customers in the banking arena. Oracle plans to implement this by entering into the MOA with I-Flex.
2. Acquirer does not have any plans to dispose of or otherwise encumber any assets of the Target Company in the next 2 (two) years, except in the ordinary course of business of the Target Company and except to the extent required for the purpose of restructuring and/or rationalization of assets, investments, liabilities or otherwise of the Target Company for commercial reasons and operational efficiencies.
3. Subject to the provisions of applicable law, Acquirer intends to have its nominee directors appointed to the Board of Directors of the Target Company upon the closing of the purchase and sale of the Purchase Shares under the Agreement. In addition, Acquirer will also be entitled to have its nominee elected or appointed to the Board of Directors of the Target Company after the expiry of at least 21 days after this Public Announcement and after having fully funded the Open Offer escrow account in cash in accordance with the terms of the Escrow Agreement (as defined below) and as provided under Regulation 22(7) of the SEBI (SAST) Regulations.
4. Acquirer undertakes that it shall not sell, dispose of or otherwise encumber any substantial asset of the Target Company except with the prior approval of the shareholders of the Target Company to the extent required by applicable laws.

Closure of the deal
Oracle holds 83 per cent of i-flex’s shares and has been consistently trying to acquire the rest in a bid to delist i-flex from the Indian bourses. It would require a little over 90 per cent of shares to do so. The move will help Oracle to integrate i-flex with its business worldwide. Under current norms, if the minority shareholders do not surrender shares willingly to the new promoter, the Securities and Exchange Board of India’s (Sebi’s) takeover code requires the new promoter to come out with a proposal to buy back the rest of the shares from the minority shareholders under a proposal to delist the company. The buy-back price is decided on the basis of the market price under the reverse book building process. Reverse book-building requires generating offers from sellers. However, since Oracle’s open offers received a tepid response, the US-based firm has reportedly been lobbying the Indian government for over a year to amend the Sebi takeover code. The amendment was aimed at compelling the minority shareholders to surrender the shares of i-flex in favour of Oracle.
Since I-flex’s public listing, it represented ‘a volatile part of Citibank’s holding’, ‘It was quite natural that some time Citigroup would look for an exit.’ As a pure investment, Citigroup has achieved an extremely healthy return. The company, as Citil, was spun out of Citibank’s Indian development resource in 1991. Its Microbanker system was rewritten as Flexcube and launched in 1997. Flexcube is now used by almost 200 banks, the company has over 5500 staff, and its results have consistently headed in the right direction, with net profits up 30 per cent for the year-ended 31st March 2005 to Rs 2.32 billion ($53.5 million) on revenues up 44 per cent to Rs 11.38 billion.

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