The Hindu Business Line : i-flex solutions: Accept

While i-flex stands on a sound footing, product business is inherently volatile and greater synergies are expected to accrue from its association with Oracle only in the long haul.

Attractive price-earnings multiple
Adequate premium for corporate control
Synergies to accrue only in the long haul

Mr Rajesh Hukku (left), CMD, i-flex solutions, and Mr Charles E. Phillips, Jr., President, Oracle Corporation.

Shareholders of i-flex solutions can tender to the open offer being made by Oracle Global (Mauritius) along with Oracle Corporation to acquire an additional 34.14 per cent equity stake. The revised offer price of Rs 2,100 per share (including an interest component for delay in the offer) is 40 per cent higher than the earlier price of Rs 1,475 announced in September. The latest open offer follows the preferential allotment of equity at Rs 1,307.5 made by i-flex to Oracle to part-finance the acquisition of the US-based Mantas Inc., apart from open market purchases made at prices up to Rs 1,475.

What makes it attractive

Three elements make this open offer attractive for i-flex shareholders. One, even if we factor in fairly aggressive per share earnings estimates of Rs 45 for 2006-07, up from Rs 29 the previous year, the price-earnings multiple on Rs 2,100 works out to 46 times. The earnings estimate is based on a robust 23 per cent sequential growth in revenues and 94 per cent in post-tax earnings in the second quarter ended September 30, and the recent acquisition of Mantas Inc., a key player in the areas of anti-money laundering, trading and broker compliance.

Compared to the frontline vendor Infosys Technologies, which trades at 33 times its 2006-07 projected per share earnings, i-flex trades at a fairly steep premium. And this premium between i-flex and frontline software vendors is likely to continue even in 2007-08.

Two, the latest price of Rs 2,100 impounds a significant premium for corporate control, which is evident from the 40 per cent price revision put through by Oracle. For investors who had avoided the open offer made by Oracle at Rs 882.6 per share, the latest offer represents a handsome premium for exiting the share. We had put out a `reject' recommendation for the earlier offer made on October 15, 2005.

Greater synergies

Finally, while i-flex stands on a fundamentally-sound financial footing, product business is inherently volatile and greater synergies are expected to accrue from its association with Oracle in the US market only in the long haul. At the latest earnings conference call, the i-flex management talked about Oracle selling the Flexcube solution in markets where the i-flex sales force did not have a strong direct or partner-led presence. This is probably setting off the process of integrating Oracle and i-flex sales teams.

i-flex will be able to use the brand, scale and resources of Oracle to reduce its selling and marketing expenses. However, the full impact of these synergies and penetration in the American market will be felt only in the long run.

The only flip side for shareholders who tender to the offer is if it fails and Oracle opts for the delisting route.

In that case, will shareholders get a much better price based on price discovery under the reverse book-building process? While this is a distinct possibility, the uncertain variable is that the decision to opt for delisting and its timing will rest with the Oracle management. In any case, Oracle's claim that it would not delist for the next five years unless its value dips cannot be taken at face value.

Offer details: Oracle recently revised the open offer size in i-flex from 20 per cent to 34.14 per cent. This will take Oracle's stake in i-flex to 89.21 per cent, just short of the delisting threshold of 90 per cent.

The offer price has also been revised upwards from Rs 1,486.4 (including an interest component of Rs 11.35 for delay in the offer) to Rs 2,100 per share. The manager to the offer is DSP Merill Lynch. The offer opened on December 4 and closes on December 23.

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