Virtusa gets bigger with $ 270 m buy of India’s Polaris

Monday, 9 November 2015 00:00 -     - {{hitsCtrl.values.hits}}

  • Announces definitive deal to acquire 78% stake in Polaris Consulting & Services Ltd.
  • Move aimed at making it a leading end-to-end IT services and solutions provider to global banking and financial services 
  • India-based Polaris has 7,650 staff with 12 development centres; FY16 1H revenue of $ 150 m
  • Collectively Virtusa and Polaris will have 18,000 employees, generating $ 826 m revenue
  • Citigroup with 45% existing business becomes Virtusa-Polaris’s largest client
  • Virtusa secures $ 300 m debt financing from J.P. Morgan Chase Bank, N.A. and Bank of America, N.A. for the acquisition

lead-Virtusa-picVirtusa Chairman/CEO Kris Canekeratne along with Senior Vice President Madu Ratnayake at the media briefing on Friday - Pic by Daminda Harsha Perera

By Charumini de Silva

Virtusa, a global business consulting and IT outsourcing company with roots in Sri Lanka, is growing to enhance its prospects in the financial services industry with the acquisition of India-based Polaris in a $ 270-million deal (around Rs. 38 billion).

The US Nasdaq-listed Virtusa announced on Friday in Colombo that it had entered into a definitive agreement to buy majority stake (a maximum of 78%) in Polaris Consulting and Services, which is listed on the Bombay Stock Exchange. Polaris too is a global provider of IT solutions primarily to the banking and financial services industry segment.

The transaction consideration includes both the 51.7% majority interest and an unconditional mandatory open offer to purchase up to 26% of the outstanding shares of Polaris from the public. 

 “We will go for the market as one autonomous entity and we go for the banking and financial services industry as Virtusa-Polaris. From a structural perspective, we will continue to run two public listed companies; Virusa in the US and Polaris in India. Virtusa Corp will have a majority interest and control over Polaris,” Virtsua’s co-founder and Chairman/CEO Kris Canekeratne told the media briefing on Friday in Colombo.

As of 30 September 2015, Chennai-based Polaris had approximately 7,650 employees serving its global client base through 12 development centres. For the six months ended 30 September 2015, Polaris generated total pro forma revenue of approximately $ 150 million. Polaris had cash, cash equivalents, and short-term and long-term investments of approximately $ 44.8 million as of 30 September 2015.

Collectively, Virtusa and Polaris will have 18,000 employees, generating $ 826 million in revenue for the 12 months ended 30 September 2015.

The acquisition will combine Virtusa’s deep domain expertise in consumer and retail banking with Polaris’ proven strength in corporate and investment banking. This combination will provide an end-to-end portfolio of differentiated solutions to the global banking and financial services industry segment, improving the combined entity’s competitive position and expanding its addressable market. 

Justifying the rationale behind the acquisition, Canekeratne said that they had identified significant revenue synergies that Virtusa could leverage on as they go out into the banking and financial services market.

Virtusa expects to realise over $ 100 million of cumulative revenue synergies over the next three fiscal years from the business combination.

Outlining the salient strategic reasons for acquiring Polaris Consulting and Services Ltd., he said this acquisition helped them to create a fully integrated leader in financial services technology and operations, which basically brings together under one umbrella consumer banking, corporate banking and investment banking, allowing them to provide end-to-end services, thereby greatly expanding Virtusa’s addressable markets. 

“As a result of this combination we will have relationships with 10 of the top 20 global banks. It clearly gives us the opportunity to go after much larger IT contracts.”

He said that another important aspect of acquiring Polaris was that Citi Group was one of their top clients, where Citi Group spends about $ 140 million a year with Polaris. About 45% of Polaris’s revenue is generated by Citi Group. 

As a result of this acquisition, Citi Group has entered into a preferred IT services partnership with Virtusa and Polaris whereby we now have the opportunity to be able to sell our services across all of Citi Group, he noted.

“It is a very significant endorsement for Virtusa - Polaris combination and post the combination Citi Group would become Virtusa-Polaris’s largest client.”

Noting that the acquisition was very much in line with Virtusa’s acquisition strategy, Canekeratne said that for the first time in Virtusa’s history a single acquisition fitted all three criteria of their acquisition strategy which includes expanding industry presence, capabilities or services and geographical reach. 

“This acquisition clearly helps us expand our expertise in global banking and financial services. It brings new capabilities or services that we can essentially leverage across all banking and financial services. It gives us a presence in Australia and Japan; two countries in which we always had our strategic road banner. That was also something very compelling when we evaluated the merits of this transaction.”

Highlighting strengths of Virtusa and Polaris in banking, he said Virtusa had formidable expertise in retail and consumer banking. In consumer banking, in governance and regulatory initiatives, digital transformation, and helping clients, especially large banks, rationalise and consolidate their IT infrastructure – their back end systems. 

Polaris has significant debt in corporate banking, in trade finance, in transaction processing and in capital markets. Today, as a part of the combination, it will be able to provide a complete set of opportunities in global banking and financial services.

He said that the transaction also provided them with the opportunity to utilise some of the cash they had in India.

“As you know, once you have cash in India you have to use either for expansion purposes or for acquisition purposes. It clearly enhances our revenue base on a performer basis. Polaris would have added about $310 million to Virtusa’s revenue in the fiscal 2016 year, which I would say that on a combined basis and on a performer basis our revenue would have been around $898 million.”

Virtusa’s organic revenue guidance for this full fiscal year is $588 million.In general the firm has been growing at about 23% per annum.  

Recurring revenue

Elaborating on recurring revenue, Canekeratne asserted that prior to this combination Virtusa had approximately 54% of its revenue in recurring or long-term visibility and about 46% of their revenue in consulting or project base revenue. However, on a performer basis, after the merger, the consulting component will drop to 40% and the recurring component will grow to about 60%. 

“That’s clearly an important element for us especially from a strategic standpoint we have plans to expand and increase the recurring revenue or the application outsourcing revenue of Virtusa,” he pointed. 

Commenting on how this transaction was going to benefit Sri Lanka, Canekeratne said: “We look at our geographies of clients. The more services and capabilities we can provide in those geographies results in more overall work opportunities for our global team members. So in the past Virtusa by itself could only address about one half of the banking market, but with this acquisition we can now address a larger market thereby bringing larger engagements which we can execute out of India and Sri Lanka.

“The first element of growing any of our infrastructures, regardless of whether they are in Sri Lanka or India, is to be able to have valuable services that can be provided to our clients. The more services we have, the more work we can execute from our offshore locations in India and Sri Lanka. That is how we can bring in more opportunities for Sri Lanka.”

Virtusa intends to finance the transaction through a combination of cash on its balance sheet and debt. Virtusa has secured commitments for senior secured debt financing of $ 300 million from J.P. Morgan Chase Bank, N.A. and Bank of America, N.A., in support of the transaction, comprised of a $ 100 million revolving credit facility and a $200 million multi-draw term loan. 

Third quarter fiscal 2016 revenue for Virtusa is expected to be in the range of $ 150-$ 153 million.

Fiscal year 2016 revenue is expected to be in the range of $ 654.6-$ 661.6 million.