AUGUST 3, 2005
NEWS ANALYSIS :TECH
By Steve Hamm
Why Oracle Has Its Eye on India A majority stake in banking-software
outfit i-flex gives the database giant more leverage against SAP Software
giant Oracle continued its acquisition binge Aug. 2 by purchasing a
controlling interest in Indian banking software specialist i-flex Solutions
for a price that's expected to top $900 million. It was Oracle's
(ORCL<javascript: void showTicker('ORCL')>) eighth acquisition this
year, and 12th in 18 months.
You can expect more of the same from the maker of databases and corporate
applications. "We don't want to play our hand too much, but we're looking
now in the telecom and public sectors. There's lots of complexity in the
businesses, and no clear market leaders," says Oracle President Charles
Phillips (see BW Online, 6/30/05, "Larry Ellison's Roving
Eye"<http://www.businessweek.com/technology/content/jun2005/tc20050630_7331_tc024.htm>).
"BUILD OR BUY." Oracle is ramping up its M&A activity in an attempt to make
up ground on Germany's SAP (SAP <javascript: void showTicker('SAP')> ), the
leader in corporate applications. Its strategy is to snap up leading
software companies that provide product packages for specific industries.
Those products compliment Oracle's databases and general business
applications (see BW Online, 7/7/05, "Oracle's Small Step, Bigger
Plan"<http://www.businessweek.com/technology/content/jul2005/tc2005077_9406_tc024.htm>).
"Oracle has to do this to become more competitive with SAP," says analyst
David Mitchell of market researcher Ovum. "It's build or buy, and I think
build takes too long."
The i-flex deal is very different from others Oracle has done in recent
months. Rather than buying the company outright, it's paying $593 million in
cash for a 41% stake owned by Citigroup (C <javascript: void
showTicker('C')> ), the original investor when i-flex started 13 years ago.
Then Oracle is offering to buy up to 20% of the publicly traded shares from
investors for a total price of $316 million.
UP TO STANDARD. In this way, Oracle will control the company, keeping it out
of the hands of SAP, but i-flex will still be run by a team of successful
Indian executives led by Chairman Rajesh Hukku. I-flex grew 42% last fiscal
year, to $261 million, and produced net income of $46 million. News of the
pending deal began to leak out last week (see BW Online, 7/28/05, "Oracle's
Shopping Spree Isn't
Over"<http://www.businessweek.com/technology/content/jul2005/tc20050728_6549_tc024.htm>).
The two companies are a good fit. Already, nearly 90% of i-flex's customers
use Oracle databases. I-flex's products are based on industry-standard
technologies, and Oracle is rebuilding its entire suite of applications to
industry standards in a massive three year project it calls Fusion. Having
Oracle as a parent will likely help i-flex increase its business with
tier-one banks, some of which have been reluctant up until now to bet their
technology futures on a relatively small Indian software supplier.
The deal caused a wave of excitement in India. A handful of top Indian
tech-services outfits are well known globally, thanks to their outsourcing
expertise, but India has only a smattering of software-products companies.
I-flex is the most formidable, with 575 customers in 115 countries.
BROWSING THE NEIGHBORHOOD. "This is a validation that one of the world's
largest software companies has chosen an Indian software company," says
Hukku. "It's a validation of the quality and complexity of Indian software,
and it's a shot in the arm for other Indian software product companies."
Other possible Indian software targets for acquisition include Polaris
Software, another maker of banking software, and Ramco Systems, a maker of
tools for developing corporate applications.
Don't be surprised if Oracle's M&A quest leads it back to India again.
"We're convinced that a good portion of the next generation of software
companies will be emerging from India," says Oracle's Phillips. He spent
more than eight months working on the i-flex acquisition. But now he knows
the country, so another deal could come much quicker.
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