Polaris Orbitech Merger Outline - v2

POLARIS-ORBITECH MERGER
POLARIS ORBITECH MERGER

Vithalprasad Gaitonde
Anand Venugopal
Michael G Singh
Naveen Panchagatti
PGSM
V
Aim
Mastery
Non-Stop
V
A
M
N
PGSM-2002: Strategic Management
August 23rd 2002
Class presentation
The Polaris-Orbitech merger at a glance
Mergers Why and how ?
BFSI Industry context (setting the scene for the merger)
Polaris and Orbitech
individual history, strengths and position at the time of acquisition
Details of the Merger
Polaris Acquisition strategy, intended benefits

PART I What happened and why ?
Polaris Strategic challenges
General post merger challenges
Polaris- Orbitech specific challenges

Path and Options ahead
Recommendations and Justification

PART II Moving forward
Polaris-Orbitech
The Merger at a glance
Pre-merger structure
Etc.
TCS
Infy.
COSL - CitiCorp Overseas
Software Ltd.
Citibank India Tech.
(India based IT group of
Citibank)
ORBITECH
Citigroup
COSL
IT
Citigroup
93% stake
COSL + Citibank India
Technologies = Orbitech
May02 - The merger
Polaris buys stake in
Orbitech from
Citigroup for equity
25 -> 14 to form the
new Polaris
Citi portion of Orbitech
outsourced to Polaris
COSL had other
customers and no Polaris
ties
Polaris
Other Polaris customers
The merger at a glance
Citigroup
POLARIS

Founded : Arun Jain 1996
Publicly Listed; 2443 employees
HQ:Chennai; Multi office; multi-
client Global spread with S&M infra.
Offshore Devp Center specialist
KNOW HOW - implement IT solns
Product: Bankware : SME
Polaris
ORBITECH

Ram Bhagwat: COSL+Citil
93% Citi; 1300+ employees
In business since 16 years
Core domain specialists
KNOW WHY - Designs IT
solutions; owns IPR of product
suite :Orbipack : High-end
Orbitech

The merged entity: Polaris Software Labs (1+1 = 3)
3800 employees; 600 crores; 5th Largest listed IT company in India;
4
th
largest BFSI player after TCS, Infosys and Satyam
Can leverage combined strengths and wide product-solution mix
to become a strong force in the Global BFSI industry

Mergers Why and How ?
Expansionary:
Augment technical capabilities through acquisitions (Cisco,Oracle,
Microsoft)
Adjust to new technologies (AT&T)
Acquire research competencies
Contractionary:
Combine and reduce excess capacity (Conrail, Exxon)
Consolidate industries
Empirical Results (Andrade & Stafford,1999):
M&A activity in the 70s and 80s motivated by eliminating excess
capacity.
In the 90s, M&A-activity highest in industry with strongest growth
prospects.
Merger Strategies
Indian BFSI segment
Indian BFSI segment
Indian BFSI segment
The Indian BFSI S/W segment
Major Players TCS, Infosys, Satyam, i-flex,
Polaris/Orbitech, Nucleus Software, LaserSoft
Indian banking software vendors sought after in the global
market
Overcoming stiff competition from international players
Indian products based on much newer technology than the
western counterparts (mainframe-based legacy and
proprietary systems)
Indian systems more modular and interoperable
Entry barriers in the US
Successfully penetrated Latin America, Europe, Africa &
Asia

Indian BFSI segment
BFSI The Market beckons
Global banks are looking to phase out old technology
Integrated future of Banking operations
Rapid shift from total branch automation (TBA) to core
banking solutions to the application service provider (ASP)
model
New customer demands such as Internet banking and
mobile banking
Innovative pricing models & modular product offerings
Domestic Banks venturing into automation in a major way
- out of over 50,000 branches of public sector banks, only
about 4,000 branches have been fully computerized

BFSI (India) SWOT Analysis
Strengths
No baggage of legacy systems
Systems based on latest technologies
Weaknesses
Marketing and Sales efforts for Brand building
Credibility needs to be built up which can take time
Opportunities
Keyed into the latest technologies and low lead time for
technology development
24x7 banking architecture and Straight Through Processing
Threats
Custom-built software applications at lower cost
cultural barriers in European markets

Polaris Software
Polaris The company
Founded by Arun Jain in 1996 with a capital of Rs.25,000/-
Customized IT solutions to several multinational clients
2443 professionals & over 7500 person-years of experience
15 offices worldwide.
HQ:Chennai with 5 development centers in India,
International operations through wholly owned subsidiaries
Switzerland, Germany, Ireland and Australia.
1
st
company in the world- Assessed and certified on SEI CMMI
One of the top 25 best employers in the country
Owns BankWare

Polaris Financial Highlights
Qtr ended June 30 2001
Revenues: Rs.71.33 crore
Net Profit: Rs.14.91 crore
For Qtr ended June 30 02
Revenues: Rs.68.45 crore
Net Profit: Rs.13.68 crore

FY 02 Revenue breakup
BFSI = 70 %
Emerging verticals = 30 %
Polaris Key financial Metrics

Polaris Software Lab - Key metrics

.

FY - 2001

FY - 2002

.

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Geographic Revenue Break-up

US/North America

69.2%

71.3%

67.8%

57.0%

47.9%

40.7%

40.1%

36.5%

Europe

16.0%

17.3%

21.1%

23.8%

21.2%

22.3%

21.7%

16.7%

India

5.0%

5.8%

4.7%

7.2%

8.5%

15.8%

17.3%

24.2%

Asia Pacific & Japan

9.9%

5.6%

6.4%

12.0%

22.4%

21.2%

20.9%

22.6%

Total

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

Technology concentration risks

Maintenance

26.0%

24.0%

28.0%

24.0%

23.6%

22.8%

21.5%

20.3%

Product enhancement

11.0%

9.0%

8.0%

9.0%

10.2%

11.8%

11.0%

6.8%

New applications

33.0%

39.0%

37.0%

37.0%

39.8%

37.8%

44.4%

45.9%

Migration and Re-engineering

18.0%

17.0%

16.0%

21.0%

16.9%

18.4%

15.1%

19.5%

ERP and others

12.0%

11.0%

11.0%

9.0%

9.4%

9.2%

8.0%

7.6%

Total

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

Domain concentration risks

Banking,Finance,Services,Insurance

58.0%

65.0%

68.0%

72.0%

70.5%

68.5%

71.3%

72.3%

Emerging Verticals

42.0%

35.0%

32.0%

28.0%

29.5%

31.5%

28.7%

27.7%

Total

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

Orbitech Software
Orbitech The company
Formerly Citicorp Overseas Software Limited (COSL) formed in 1985
with a 93 % stake with CitiGroup
Over 15 years of experience in delivering, implementing and
maintaining software solutions in diverse technical environments
Software Development Centers in Mumbai, Hyderabad and Chennai
and Relationship Offices in the United Kingdom and USA
Services (Customized Development, Maintenance, Support and Data
Center Management) and Products
SEI-CMM Level 5 company
Owns OrbiPack
1200+ employees and 700 contractors
Orbitech Financials, Offerings
Major Revenue from CitiGroup
Sales of $68 million in financial year 2001-02
Net profit of $ 21 million
Non-Citigroup revenue of $3.5 million

PRODUCTS
Internet Banking
Relationship Integrator
Core Banking
Lending
Investments
Credit Cards
Cash Management
Treasury
Trade
Information Security

SERVICES
Data Center Management
Data Center setup services
Unix Administration
Oracle/Sybase Administration
Software Development Services
Application Design and Development
Testing and Validation
Ongoing Maintenance
User support and training
Polaris strategy analysis
and Details of the Merger
Polaris Strategy
The need of the hour was the creation of the demand itself.
As quoted by Mr.Arun Jain, CEO To position Polaris in the
premium BFSI relationship space by recreating organizational
DNA, ushering in high quality processes, attaining the globally
acknowledged CMMi Level 5 rating and redefining our sales
processes
Build delivery capability and maturity to integrate
complementary skills and portfolio for inorganic growth.
Build senior management team which will have the competence,
capability and the desire to create an Indian global giant in the
BFSI technology space.
Build clear sustainable advantage products and services
excellence.

Reduce Polaris dependency on software services for revenues and to have a strong
presence in the products business.
Leverage the Citi brand name
Bring together organisations with domain skills (Orbitech) and offshore execution skills
(Polaris)
The merged entity would have an 85 % exposure to the BFSI space the most stable
and the biggest revenue earning segment for the Indian software industry.
Stronger contender for the bigger RFPs in the BFSI space. The BFSI industry is the
largest user of IT services accounting for approximately 20% of the total global market
Cultural synergy
OrbiTechs products strength complements Polariss services strength.
IPRs Protection
Citigroup eventual need for dilution of its stake to lesser than 50%(currently 54) [iFlex
(47.5), eServe (39)]
Citigroups outsourcing services strategy

The Merger Why? (Inorganic Boost)
The Merger Why? (Organic Growth)
Tangible shift towards the offshore business model
which has improved operating margins
Product focus - correct position of OrbiPack vis--vis
Bankware
Addition of reputed clients
.

Merger Size Comparison
Polaris Orbitech
Sales (Rs cr) 294 333
PAT (Rs cr) 59 103
Net profit margin 22.50% 31%
No. of employees 2544 1256
No. of software dev centres 5 4
Orbitech is bigger than Polaris so far as sales and
profits are concerned.
Operations have been more profitable as it enjoys
much better net margins than Polaris.

Merger Valuations
Merger ratio of 14:25 - 14 shares (Rs.5 paid-up) of
Polaris for 25 shares (Rs.2 paid-up) of Orbitech - is
inexpensive for Polaris.
As per the merger ratio Polaris has to issue 6.88 crores
of shares in lieu of Orbitech shares.
At Rs 240 levels (which was the market price of Polaris
when the merger was announced), the valuation comes
to Rs 1651 crores, implying a price-earnings multiple
of 16 times FY2002 EPS for Orbitech.
A price-earnings ratio (PE) of 16 times for a company
with the credentials of Orbitech look reasonably
inexpensive, more so since its operations are more
profitable than that of Polaris.
Merger Valuations
Pre-merger Post merger
Polaris Orbitech Polaris
Sales (Rs crores) 293.8 333 626.8
PAT (Rs crores) 58.8 103 161.8
Net Profit Margin 20% 31% 26%
Citigroup's contribution to Sales (Rs crores) 99.65 333 432.65
Citigroup's contribution to sales (%) 34% 100% 69%
Citigroup's holdings 6% 93% 53%
Stake of Arun Jain and associates 56% 26%
Polaris OrbiTech
Revenues US$ 60 million US$ 66 million
Net Income US$ 12 million US$ 22 million
Pre-merger EPS of Polaris - Rs 12
Post merger EPS - Rs 15 - a 25% increase at one shot

Polaris Strategic challenges
General post merger challenges
Polaris- Orbitech specific challenges

Path and Options ahead
Recommendations and Justification

PART II Moving forward
Post-merger Challenges
Possibility of increased attrition, especially in the middle and
upper management levels.
Widely differing compensation structures (Orbitech
compensation & benefits significantly superior to Polaris)
Citibank: major stake holder and customer
Overlap in product offerings - BankWare v/s OrbiPack
Orbitech might lose its tax benefits. The Sec 10A says that on
change of 51% ownership tax benefits to software units would
go. Polaris currently pays tax at the rate of 9.5%.
Culture integration issues which is true for any merger.
Citi would constitute about 70% of the total revenues of the
merged entity. Thus, client concentration risk would increase.

Uncertain future for 500 contract employees of Orbitech
Ability to leverage the synergy to target the higher end of the
banking market.
Higher risks associated with the product business as compared
to pure services business of some competitors

Post-merger Challenges
Recommendations:
Golden Rules for Merger Success
Create a clear vision and strategy
Communication of vision for the merger to achieve
commitment of stake holders e.g. employees
Establish Leadership for the merged entity
Focus on growth & not cost efficiency
Show early tangible wins internally & externally
Cultural Integration
Risk Management

Recommendation: Vision
Emerge as the most comprehensive Services and Solutions
Provider in the BFSI space.
Develop a strong image of excellence in products and services.
A clear and sustainable advantage
Build a superlative delivery capability and maturity to integrate
complementary skills and portfolio for inorganic growth.
Position in the premium BFSI space,
usher in high quality processes
attain the globally acknowledged CMMi Level 5 rating and
redefine sales processes.

Recommendations: Product Strategy
Focus on the premium segment with OrbiPack,
pitch Bankware at small- and medium-sized
organizations
Integrate the Development and Delivery of
product streams to achieve consistency across
product/service offerings
Leverage relationship history of the merged
entities
Recommendations - HR
Build senior management team which will have the
competence, capability and the desire to create an Indian
global giant in the BFSI technology space
Show of solidarity by top management (Arun Jain and Bhagwat)
New hiring at the middle and senior management level will bring
in un-biased Management
Incentivate : Dilution of stake by Citigroup might work to the
advantage of the senior management of the merged entity
Integration Challenges
Focus on Salary structure and benefits rationalization in the new
Polaris
Cross promotions and movements:
Iron out differences in the middle level management on due to
history of Vendor-Client relationship
Recommendations :
Reduce Risk: Business and Client Mix
Reduce over-dependence on Citigroup for
earnings and diversify with more client
relationships
Be the first mover among Indian companies to
penetrate the US BFSI segment
Follow through on execution of BPO initiatives
Polaris has set up Optimus, a 100 per cent subsidiary.
It is also understood to be close to acquiring the Bangalore-
based business process outsourcing (BPO) company,
FirstRing India, a fully-owned subsidiary of FirstRing Inc, US.

Thanks for listening!

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