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The
Indian banking solutions market saw one more player jumping
on the bandwagon with the erstwhile COSL reinventing itself
as OrbiTech to look at the non-Citigroup market. But what
of Citigroup’s considerable stake in banking solutions company,
i-flex? Rajneesh De and Srikanth R P analyse
what the Citi could be up to with these interesting moves
RAM
Bhagwat
says IPR exchange will help Citi seal the game
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Citigroup’s
decision last week to rechristen Citicorp Overseas Software
(COSL) as OrbiTech is likely to have repercussions beyond
the mere renaming of a company. The business decision was
ostensibly made to push COSL out of the Citi stable that it
was restricted to, and peddle its range of products and services
to customers who may not have been too comfortable with the
Citi tag that COSL carried as part of its name. Of course,
the interesting twist in the OrbiTech launch is that Citi
already has the Rs 321-crore i-flex solutions operating in
the same space.
The prospect of two companies from the same group competing
for the same market pie is indeed an interesting phenomenon.
Something akin to Unilever and Procter & Gamble merging,
but with their flagship detergent brands Surf and Ariel still
slugging it out on FMCG shelves. Therefore, the OrbiTech launch
opens up a host of interesting possibilities. But before examining
all such hypothetical scenarios, it would perhaps be pertinent
enough to look at the core competencies of Citigroup’s
two banking software aces—i-flex
and OrbiTech.
In the same sphere
OrbiTech’s flagship product, OrbiPack, is a comprehensive
suite of software products for the banking and financial services
industry. These products offer solutions for different domains—corporate
banking, retail banking, trade finance, credit/risk management,
cash management, treasury management, lending, investments
and securities, mutual funds and credit cards. Citigroup currently
uses all of these products in 73 countries. Says Ram Bhagwat,
managing director, OrbiTech, “Our strength lies in our
domain knowledge of the banking and financial services industry.
Our OrbiPack suite offers plug-and-play products that seamlessly
integrate into the existing systems of any financial
institution (FI). This gives financial service providers the
ability to rapidly expand their range of customer offerings,
in a secure manner without any loss of data, and present a
single user interface to the end customer.”
i-flex, on the other hand, is already an established player
in the market, providing a balanced portfolio of products
and services to over 280 financial institutions across a wide
geographical spread covering 74 countries spanning US, Europe,
Africa, Asia-Pacific, the Middle East and of course India.
Its flagship product, Flexcube, is ranked among the top two
back-office banking systems in the world and is perhaps the
only success story of a product company with a ‘Made
in India’ tag. Its client list comprises an impressive
roster of names like Citibank in North America, DBS Bank in
Singapore, Rabobank International in Europe, Shinsei Bank
in Japan, Perwira Affin Bank in Malaysia and the Emirates
Bank in the Middle East. That does not mean that i-flex has
ignored its services business, which, in fact contributes
a healthy 46 percent of its revenues. i-flex commenced operations
in India in 1989 as Citicorp Information Technology Industries
(CITIL) developing software products based on Citibank’s
mainframe based corporate banking product. Currently, Citibank
owns a 48 percent stake in i-flex with current and past employees
holding the remaining equity. However, in September, earlier
this year, it announced an IPO with plans to offer 10 percent
of its equity capital through the issue.
Even within the services space, both i-flex and OrbiTech are
looking at the opportunity which has emerged post-September
11. With most FIs bearing the brunt of the attack, there is
a renewed interest in disaster management and recovery solutions.
Continuity of business by offering online mirror solutions
is the niche area where both companies are operating, and
both have received positive responses from clients till date.
So, as with banking solutions, both i-flex and OrbiTech will
be competing for the same set of customers, in India as well
as abroad. Especially on home turf where Indian PSU banks
are aggressively looking for end-to-end banking solutions,
this will provide Citi with a unique opportunity to capture
a huge chunk of the entire Indian banking space in one way
or the other. Of course, Infosys Technologies with its Finacle
suite won’t be a pushover, considering it has bagged
a huge majority of banking solution tenders in the recent
past. And of course, there will be tough competition from
the likes of TCS, Sanchez, Infrasoft and Kale Consultants,
to name a few.
To merge or not to merge
This does not seem to be the case since Bhagwat feels that
whatever be the similarities, there are quite perceptible
areas of difference between them. “Our services include
products, software development and consultancy services to
banks and financial institutions—much of the same area
which is serviced by i-flex. But we have a much wider footprint
in terms of solutions than i-flex. More specifically, we have
developed specialised solutions and products in specific sectors
like insurance, mutual funds and registrar and transfer activities,
areas where i-flex
definitely lags behind us.”
Even i-flex feels that though there are some areas of similarity,
there are enough differentiators between the two companies.
With i-flex going for public listing, all senior officials
are tight-lipped about merger plans. Says a senior official,
on conditions of anonymity, “Since both i-flex and OrbiTech
have the ability to offer banking solutions and products,
there are possibilities of cross-selling opportunities. We
have already been competing with them in the services space
and will continue to do so. This should be seen more as a
type of healthy competition than rivalry.” Adds Dipak
Rastogi, vice chairman, Citigroup Investments, “Ultimately,
we as a group believe that the market is mature enough to
have solutions and products from two companies of the same
group.”
These sentiments are corroborated even by independent views.
Says a well-known Mumbai-based analyst with a leading investment
firm, “In my opinion, i-flex and OrbiTech are in very
different lines of business. i-flex is more closely related
to corporate banking and banking products, while OrbiTech
is more involved in normal development work for the banking
sector, including reengineering, like many other Indian software
firms. Besides i-flex is a completely ground-up product oriented
company.”
The product orientation of i-flex
certainly is a key differentiator. i-flex is perhaps the only
Indian company to start developing a product from day one,
unlike others who are basically ‘productising’ a
project done for a client earlier. The question to be seen
is whether OrbiTech, honed in an environment of offering services
around solutions can make this shift successfully. “I
believe that Citigroup will never merge these businesses—I
see no gain in that, given the two different business models.
For Citi, both these ventures are simply investments,”
asserts the analyst quoted earlier.
Competitors for now
 According
to Rastogi, the market
is mature enough to have solutions from two companies
of the same group |
Subsequently,
with a merger in the immediate future ruled out, both OrbiTech
and i-flex are charting out their course of action in a competitive
environment. Explains Bhagwat, “Once we have marketing
channels, we can certainly be pushing each other. One problem
is that since we have built specialised solutions in each
and every sector for the banking and financial sector, there
will always be general competition.”
i-flex
too has a clear stand on the matter. OrbiTech has just been
formed and as there is no clear mandate from Citigroup on
the immediate future, i-flex plans to treat OrbiTech just
as any local competitor. As it is, i-flex looks at Citigroup
as more of a VC, and would like to be known as an independent
company which addresses markets on its own strengths. Says
the i-flex spokesperson: “It should be noted that Citigroup
will not just buy our solution or OrbiTech’s product
because they are products from a group company. Citibank was
only the 47th customer for Flexcube.”
Interestingly, none of the players are altogether ruling out
the possibility of a merger later. Says Bhagwat, “A merger
cannot be ruled out, and actually depends on many dynamics.
A merger will only be possible if there are certain niche
areas in which we have no solutions and they (i-flex) have
certain niche areas in which we have solutions. The number
of overlaps should be lesser and the number of synergies should
be higher. Only in such a situation can a decision be taken
about the possibility of a merger.” And anyway, he is
a strong votary of alliances. “In today’s times,
alliances are very important. So there is a definite possibility
of sharing of IPR which will be beneficial to both the companies.”
And with i-flex’s ambitions of inorganic growth through
acquisitions now quite well known, it would not be surprising
if all the players veer towards this viewpoint sooner or later.
The IPO effect
The i-flex IPO in early 2002 could make matters murkier. The
IPO is essentially a liquidity event, rather than a substantial
fund raising opportunity for i-flex. The company has a comfortable
cash position of over Rs 150 crore, predominantly from internal
accruals. Further, the company intends to dilute only up to
3 percent of its equity, with the balance being offered by
existing shareholders, key among them Citibank with a 48 percent
stake. Following the IPO, the company is likely to proceed
with an international listing that will provide it both an
acquisition currency (i.e. a dollar denominated stock) as
well as brand recognition. The latter will be a key to growing
non-Citibank business, while the former along with the company’s
substantial cash reserves will provide it inorganic growth
opportunities.
On the other hand, OrbiTech is currently a company owned largely
by Citibank. However, it has to go public soon, because employees,
who want liquidity, control significant chunks of equity.
However Bhagwat feels that OrbiTech is at least two years
away from an IPO, and says they have no immediate plans of
raising cash, as OrbiTech has very strong cash reserves.
There is another interesting scenario, which goes beyond a
plain vanilla merger. Since Citigroup has a greater stake
in OrbiTech and since its stake in i-flex will be diluted
post-IPO, the possibility of a sale of its stake in i-flex
at a premium cannot be ruled out. Such a sell-out from i-flex
is bound to generate cash flows for Citigroup, a part of which
can be pumped into OrbiTech for future organic expansion through
acquisitions and takeovers, which could probably be a strategy
for OrbiTech.
In the ultimate analysis, whether there is a merger or not,
or more radically a sell-out of Citi’s stake in i-flex,
the Indian banking scenario will certainly see some interesting
times, thanks to these two companies. Citigroup seems to have
all the aces up its sleeve.
(With inputs from Ivor Soans)
i-flex’s
impressive client list
North
America Europe A-PAC Middle-East/Africa India
Crossmar, US Rocorp, DBS, Singapore TAIB, Yatrim UTI Bank
Netherlands
Citibank NCB,Albania Shinsei Bank, Emirates Bank HDFC Bank
Japan
Grace Kennedy, Rosbank, Perwira Affin NBM Bank, Syndicate
Bank
Jamaica Russia Bank, Malayasia Nigeria
Rabobank United Bank of Union Bank
International Africa of India
Antwerp State Bank Federal Bank Karur Vysya
Diamant Bank of Mauritius of Middle East, Cyprus Bank
Holland Nations Trust NBC Limited, Saraswat
Bellegingsgroep Bank, Sri Lanka Tanzania Cooperative Bank
Kredyt Bank, Toronto Dominion Bank MINATEP, Karnataka Bank
Poland Bank, Hong Kong Cyprus
UBS Warburg Merchant First Merchant Bank,
Bank of China Malta
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