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Krishnan Thiagarajan

WHY is Citigroup's arm, Citigroup Venture Capital International, selling out its equity stake in i-flex Solutions, a company created by the group in the nineties?

That is a question that would have been on everybody's mind the day Oracle announced a $909-million deal to buy out Citigroup's stake in the venture.

There are three strategic reasons why this deal makes sense for the Citigroup arm.

First, the 43-per cent equity stake held by Citigroup Venture Capital International (CVCI) in i-flex was a venture capital investment made at the start of this product venture. Compared to an original investment of about Rs 1.5 crore ($4 lakh) and some infusions at a later date, bringing in the total to Rs 4 crore, CVCI is selling out its 43-per cent stake for a consideration of about Rs 2,600 crore ($593 million). This clearly shows that the deal has paid off handsomely for the Citigroup.

Second, during 2004-05, i-flex completed the 50-country implementation and rollout for Citigroup of the former's flagship product, Flexcube. The completion of this assignment would have substantially reduced the operational risks for Citigroup from this investment.

Since market sources claim this deal has been in the works for at least six months, this must have given CVCI the time to find the right partner and negotiate an appropriate price for its 43-per cent equity stake.

Finally, i-flex has been steadily building its non-Citi business, both on the products and services side for the past couple of years. For instance, in 2004-05, Citigroup and its entities accounted for only 22 per cent of revenues from products business and about 65 per cent from services business of i-flex.

This contribution from products and services has come down further to 19 per cent and 45 per cent in the first quarter of 2005-06.

The relationship with Citigroup may not change materially in future, as the management of i-flex has recently entered into a five-year products and services agreement with the company.

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