Such a deal was signed last week between the Rs 321-crore revenue OrbiTech Solutions (a Citigroup company) and the Rs 293.80-crore Polaris Software Lab. OrbiTech closed last fiscal with an after tax profit of Rs 107 crore, while for Polaris Software the figure was Rs 58.86 crore.

As per the memorandum of understanding (MoU) signed between the two, OrbiTech will merge itself with Polaris and its shareholders (employees holding 6.75 per cent and OrbiTech holding 93.75 per cent) getting 14 shares with a face-value of Rs 5 in Polaris for every 25 shares (face-value: Rs 2) held in OrbiTech by them.

Post-merger, the equity-base of Polaris will go up by Rs 29.41 crore to Rs 55 crore. The merger will be effective from 1 April 2002 this fiscal after getting the approvals from Polaris shareholders and the court. Post-merger, Citigroup Venture Capitals stake in Polaris (valued at Rs 2,700 crore) will be 56 per cent, while the original shareholders of Polaris will hold 46 per cent.

Soon Citigroups holding in the company will come down to 49.5 per cent. Certainly the company will not figure as a subsidiary in Citigroups balance-sheet as and when it is drawn up, says Polaris chairman and managing director Arun Jain. The stake reduction will be achieved when Polaris signs up a major client or acquires another outfit.

If the deal goes through in the present format then Jains current 46-per cent holding in Polaris will come down 25 per cent. Till now in India the attitude of the business community is to have their stake control intact to be handed down to generations. Business is not looked at dispassionately. This is one of the reasons why many American companies have their market cap less than the turnover. But I have decided to dilute my control to create wealth and deliver value for the shareholders, says Jain.

The deal has caught the breath of industry analysts who are going gaga over Polariss future. And they dismiss the thought of Citigroup concluding this deal as an exit strategy from OrbiTech.

Citigroup is a monolithic banking giant and software is not its core business. When one considers the groups balance-sheet size, OrbiTechs turnover of $66 million can be dismissed as a rounding-off error figure. Certainly this is a deal to create value for the shareholders and one need not read between and behind the lines, argues an analyst.

He may be right. Citigroups annual IT spend is $6 billion and only $250 million comes to around five Indian software companies. While OrbiTech is the largest IT service provider for Citigroup its services just constitute 4 per cent. So imagine the revenue if that pie increases to 10 per cent, the analyst says.

And this is not difficult to happen, as Polaris will reap the benefits of OrbiTechs deep customer knowledge and their decision-making processes. Supporting him is R Aditya, IT analyst with Navia Markets: Consolidation process is going on in respect to Citigroup software outfits. The Polaris-OrbiTech deal, if it comes through, will be a win-win deal for the shareholders.

Aditya says the merger will catapult Polaris into a different orbit. At global markets, size does matter a lot and companies like TCS and Infosys cart away lucrative contracts due to that. The merged entity will boast a turnover of Rs 614 crore and cannot be ignored by global banks.

In three to five years Polaris is sure to occupy the space of most-preferred IT vendors in the world, predicts Aditya. But Jain says post-merger, the business from Citigroup for Polaris will go up to 70 per cent from the existing 30 per cent and this will be consciously reduced.

Will that put Polaris into a high-risk category? Certainly not, argue analysts. What makes you think that Polaris will say no to business from Citigroup. The de-risking will be done by seeking out new business. And why should Citigroup shift its business to other companies when OrbiTech knows its requirements thoroughly, asks an analyst.

But why Polaris, why not i-Flex, another Citigroup company that is toying with an IPO idea? Jain explains: Synergy is the one-word answer. While i-Flex is mainly into banking products, the other two are into implementation, services and maintenance space.

Aditya predicts an EPS of Rs 18 for Polaris shareholders this fiscal and Rs 20 the next year. He has sent out his recommendation to buy the stock as long-term investment with an expectation that the market price goes to Rs 360.

The genesis of MoU Fiscal 2001-02 was a landmark year for Polaris as it took a decisive step to change its core change the companys DNA, as Jain likes to put it. Over the years we have acquired the expertise in delivery and we decided to acquire the expertise in demand creation. In other words Polaris decided to go out marketing with guns blazing.

The company recruited 128 management graduates and people from Accenture and Hindustan Lever, apart from top-flight talents like Standard Chartered CEO Harpal Dugal and Suren Khirwadkar, who headed Citibanks business in Saudi Arabia. The company also acquired a couple of prestigious clients against tough competition.

While explaining the 4-per cent growth, Jain made an open statement that the company would grow at a rate of 50 per cent in the current year. Some 17 to 25 per cent would come from leveraging existing clients while the balance is expected from inorganic growth, through mergers and acquisitions (M&A).

The M&A idea found an immediate taker in the form of Citigroup. It is learnt that Ajay Relan, a Polaris director, suggested that Jain look at OrbiTech, a 100-per cent subsidiary of Citigroup.

Citigroup decided to sell/divest stakes in OrbiTech because it was interested in banking alone as its core focus; technology was not going to be its focus area. But the banking group would be interested in return on investments from the technology sector, says OrbiTech managing director Ram S Bhagwat.

And OrbiTech is no stranger to Polaris. For the past 16 years Polaris wrote the substantial code for the former and maintained Citigroups systems through Citicorp Overseas Software. And OrbiTech, as a separate entity, emerged out of Citicorp Overseas Software in October 2001 to focus on generating IT-related business from Citigroup and non-Citigroup entities in the financial domain.

When OrbiTech was formed questions were raised about Polariss future because the former was looked upon as a competitor, but Jain termed it as his collaborative business partner. At that point Polariss exposure to OrbiTech was around 14 per cent.

Finding huge merit in Relans suggestion Jain mooted the idea with analysts, investment bankers and found the response favourable. There were many synergies between the two. And what both the companies brought to the table was simply irresistible. On one hand Polaris has the expertise in project execution offshore while OrbiTech has the domain expertise, says Aditya.

We own intellectual property rights (IPR) for 57 products and many of them have won accolades from bankers and others, says Bhagwat. Further upon the merger the equity immediately gets broad-based. Fortunately Citicorp Overseas Software transferred the IPRs to OrbiTech at the time of formation.

The companys products are the ones that power Citigroups global financial systems. Our products work in 73 countries, are very robust, have multi-language, multi-currency and multi-time zone capability, he says. It was Citigroup that brought the concept of a centralised banking solution when others were working on branch automation.

In addition, while Polaris is well placed in the US market, OrbiTech is well entrenched in European markets. Apart from becoming an end-to-end player in the banking, financial services and insurance (BFSI) space, including data centres, the opportunities to cut costs for both are immense.

Soon investment bankers were sounded out about the merger idea. Kotak Mahindra Capital and Enam Financial Consultants were hired as financial and strategic advisors, respectively. Salomon Smith Barney was the advisor for OrbiTech and Ernst & Young valued both the companies.

The Rs 25.59-crore equity-based Polaris was valued at $210 million, while OrbiTechs enterprise value was put at $246.75 million. Valuation of our products was not done separately, says Bhagwat, who says the Rs 20-crore equity company owns assets worth Rs 170 crore. OrbiTech has five software development centres and one corporate office, with a total space of 1.5 lakh sq ft.

While reports about the merger started appearing in newspapers, Jain was a bit tense, as he wanted the deal to go through without any hitch since he couldnt afford another takeover fiasco like Data Inc that happened exactly two years ago. On 20 May 2000 he had announced the takeover of Data Inc but backed out a couple of months later.

So, on 22 May 2002, the normally religious Jain decided to be doubly careful and braving the medias ire he waited for an hour for the raahukalam (inauspicious time) to pass before announcing the signing of the merger MoU with OrbiTech.

The road ahead For Polaris, the road ahead is full of opportunities. The company can now mine more work from its existing clients and look out for newer ones. Polaris executive director Govind Singhal says: We are not going to phase out any products whether ours or OrbiTechs though some are actually complimentary. On the other hand we will sell the best solution based on the client needs.

The merger will also spread the geographic risk. Apart from savings in costs, the merger will result in the company getting better rates than what it charges now. But the benefits to bottomline will not be visible on a quarter-to-quarter basis and will accrue over a period of time. This is due the fact that Polariss revenue mix is now more towards offshore execution than onsite, says Aditya.

According to industry sources, the company bagged orders like AIG and CommerzBank mainly on rates. But the challenge before Jain and Bhagwat is handling the human resource integration issue. For instance, in case of operations that are common for both the companies, the divisions are headed mostly by Polaris officials. We have hired Grow Talent, an HR consultancy firm, to smoothen the integration, Jain says.

The cultural assimilation will not be a major issue as both the companies have relationship that spans over 16 years. You should also remember that Citigroup will not hand over 1,200 employees to another company without satisfying itself about their future, sums up an analyst with a Mumbai firm. Illus:

Particulars	OrbiTech	Polaris
	(Rs in crore)
	2002	2002
Total Revenue	321	293.80
Profit After Tax	107	58.86
Equity	20	25.59
Cash reserve	NA	74.00
Average Billing Rate
Onsite (USD/hr)	NA	60.90
Offshore (USD/hr)	NA	19.90
Offshore revenue	85%	63.1%
Onsite revenue	15%	36.9%
Revenue from BFSI	NA	71.1%
Revenue from emerging
Verticals	NA	28.9%
Employees	1200	2600
Attrition rate	7%	11%