Why i-flex shareholders preferred to sit tight?
Almost all i-flex shareholders appear to have held on to their shares despite Oracle Corporation's offer of a 10% premium (at Rs 882.62 a share) in its open offer to minority shareholders. Oracle paid around Rs 800 per share to a Citigroup venture fund to acquire its entire 41% holding in the company. The open offer for up to 20% of i-flex's equity, which ended late last month, helped Oracle get only an additional 0.68% stake in the company. This is easy to understand. i-flex shares have traded at an average rate of Rs 954 since Oracle announced the acquisition last August, well above the open offer price.
The reason why Oracle managed to at least get a marginal stake through the open offer was that i-flex's share price had fallen below the open offer price in the last five days of the open offer period. Investors are largely of the view that the company's fortunes could improve significantly under Oracle, which services about 8,500 clients in the financial services space. What's more, Oracle has strong business relationships with 17 of the world's top 20 banks, which analysts feel could be used to sell i-flex's core banking solution, Flexcube. This is one of the main reasons i-flex trades at Rs 965 per share, or about 29.2 times estimated earnings for the year ended March, 2006.
Interestingly, Infosys shares get a valuation of about 29.8 times forward earnings, making i-flex amongst the most expensive shares in the IT segment. This is hardly justifiable simply on business fundamentals, given Infy's disproportionately higher size, consistent earnings growth record and linear business model. i-flex's earnings, in comparison, have traditionally been lumpy with growth depending largely on the amount of license fees booked in a particular period. In the first six months of this fiscal, for instance, the company's earnings per share fell 47%, despite a healthy 29% growth in revenues.
Of course, there is the possibility of the company winning large deals, thanks to its new parent and also the fact that it's not owned by Citigroup anymore - according to analysts, it wasn't easy selling Flexcube to Citibank's peer group with Citi on board. Nevertheless, the fact that i-flex enjoys margins as high as Infy's signals that investors expect other triggers for the stock - like another attempt by Oracle to increase its stake in the company.
