iflex's Hukku: Cashing in on the product success story

Exactly a year ago, when Charles Phillips, the President of Oracle, the second largest software company in the world, visited India for the first time (see "India Is Becoming A Pretty Big Market Opportunity", BT, August 29, 2004), the company had just made a hostile bid for PeopleSoft. Queried on possible acquisitions in India, Phillips said, "We are always scanning the marketplace for right opportunities."

The right opportunity seems to have arrived. A seemingly innocuous meeting during Philip's visit is believed to have triggered a slow mating dance culminating in last week's announcement that Oracle would acquire Citigroup Venture Capital's (CVC) 41 per cent stake in banking software firm i-flex for a sum of $593 million (Rs 2,609.2 crore).

As per regulatory requirements, Oracle will make an open offer to acquire an additional 20 per cent in the company at an estimated price of $316 million (Rs 1,390.4 crore). When the deal finally clears all regulatory hurdles, it would have cost Oracle a whopping $909 million (Rs 3,999.6 crore), according to Greg Maffei, CFO, Oracle. Essentially this means that Oracle's valuation of i-flex, which ended 2004-05 with revenues of Rs 1,138.59 crore and a net profit of Rs 233.77 crore, is a staggering $1.5 billion (Rs 6,600 crore)."The first phase of Oracle's applications strategy was to achieve critical mass, which it did (through its acquisition of PeopleSoft and other deals)," says Phillips. "Phase two is to tackle vertical markets. Acquisitions like that of i-flex are going to be important components of that strategy."

CVC, which decided to transform the bank's resident software firm Citicorp Overseas Software Limited's (COSL) product unit into an independent firm, list this firm, and finally, sell its stake-potential suitors from IBM to sap to Infosys are believed to have flirted with the company before walking away-is laughing all the way to the bank. Its initial investment of $400,000 (Rs 1 crore then) has grown to Rs 2,609 crore!

India's Most Famous Product Company

When i-flex CEO Rajesh Hukku joined COSL in 1989 after a decade-long stint at TCS (Tata Consultancy Services), the company was an internal IT shop for Citibank with just one product. During his earlier stint at TCS, Hukku had seen how software code written by Indian companies was packaged into products and sold at a higher price. In 1992, Hukku proposed to Citibank that the product unit of COSL, with 150 employees and its sole product Microbanker, be spun off into a separate company. Thus was born one of India's first famous product companies. The new company was named Citicorp Information Technology Industries Ltd (CITIL).

Citibank wasn't the company's first customer. CITIL focussed all its initial efforts on the Middle Eastern and African markets. Citibank was actually CITIL's customer #47. However, CITIL's growth was restrained, surprisingly because it was a part of the Citi family in a broader sense. When this resulted in it missing out on the y2k and the dotcom boom, and when, during pitches to banks such as Deutsche Bank and UBs it became clear that they were not keen on buying software from a competitor's subsidiary, Hukku decided to put out some visible signs of its independence from Citi. In 2000, the company renamed itself i-flex; in 2002 it listed on the Indian stock exchanges. Its flagship product was Flexcube, a wing-to-wing banking software solution (it is the world's #1 selling core-banking solution). The company also began to complement its product with services such as systems integration and applications development for the banking industry, an area where it quickly ran into competition from companies such as TCS, Infosys and Wipro that derive more than a third of their revenues from this segment. Today products contribute 54 per cent of the total revenue.

Why Sell Out?

For several reasons. While margins in the products business are in the range of 35-40 per cent, it is a mere 10-15 per cent in the services business. Yet, much of i-flex's growth in the past couple of quarters has come from services. And operating and net margins have come under sustained pressure.

Then, for all its success, i-flex derives just around 30 per cent of its revenues from the crucial us and European markets, and even that comes mainly from services. It has failed to make much headway among major banks in the us that were hesitant to buy their core banking solution from a small company. "i-flex had sort of reached a plateau in terms of product sales in the us," says Partha Iyengar, Vice President, Gartner, an it research and consulting firm. "Oracle will be able to open the doors of tier-one banks for i-flex in the us."

"Acquisitions like that of i-flex are going to be important components of implementing Oracle's applications strategy" Charles Phillips President, Oracle Corp.

In some ways, i-flex is at a point of inflection. Competitors such as Temenos, Misys and Fi Serv are breathing down its neck in the global market. And Infosys' banking solution Finacle is giving Flexcube a tough time in the domestic market. That is where Oracle, a large player in the enterprise software market comes in. While i-flex has an installed base of around 515 banks, Oracle has 8,500; 17 out of the world's top 20 banks run on the Oracle platform. "Even if they introduce me to a 10th of their customers, we are made," laughs Hukku, who is confident that the buyout by Oracle will not affect the company's relationship with IBM, which implements and services Flexcube in India. Hukku asserts that i-flex will remain platform agnostic, one reason why it will remain a separate entity under the larger Oracle umbrella. "We will provide what our customers want. But remember 90 per cent of our customers use Oracle. We see no problem. Depending upon market needs, we will continue to work with others including IBM."

Cultural issues are something that i-flex also needs to address. Oracle operates in an aggressive, leave-nothing-on-the-table kind of style. i-flex's culture is a combination of the technocratic and the genteel. So will there be integration challenges? "No," declares Hukku. "There will be no integration challenges, because there will be no integration." Then, that is something analysts like S. Subramanyam of Ascent Financial Services would like to wait and watch. "I think Oracle would like 100 per cent control," he says, pointing out that the company can derive considerable benefits by integrating its India development centre with i-flex's services business.

While all the players in the equation might have benefited, India's first genuine product success story is now just a part of another multinational it company. That is a pity.