 "\"We are keeping those options open, whether to delist or to continue in the share market\"")
Virtusa Corporation has recently completed the acquisition of majority shares in Chennai-based Polaris Consulting & Services. Kris Canekeratne, Chairman and CEO, VirtusaPolaris, spoke to Gireesh Babu on the status of the deal and the way forward. Edited excerpts:
What is the current status of your Polaris acquisition? Where are you in terms of the overall plan?
The Phase I and II went very well from a Virtusa perspective and we believe it has also gone very well from the Polaris heritage shareholder perspective. The 26 per cent mandatory tender offer (MTO) was oversubscribed and we own approximately 79.6 per cent of the Polaris' outstanding shares.
On the integration side, we have made good progress although we started a little bit later than it was originally expected, primarily because of the regulatory delays in completing the acquisition. But we have made good progress. From a go-to-market standpoint we have decided to go to market as VirtusaPolaris, to take advantage of both Virtusa brand as well as the Polaris brand.
We have also completed our organisational structural changes to reflect the strategic go-to-market for the combined entities. We have created two growth engines inside Virtusa - one called Global Banking and Financial Services (GBFS), which includes all the Banking and Financial Services activities of Polaris and Virtusa, lead by Jitin Goyal, the former CEO of Polaris, who will be the President of the GBFS of the combined entity. We have taken all the other industry verticals we support, which is insurance, healthcare, communication, media and Information and Technology creating a business called Enterprise Technology Services (ETS), which is lead by Raj Rajagopal, who is now the President of the this services. On a go-to-market basis, we have defined and put systems in place, and now the systems, finance and HR integration, which are the final set of activities are to be integrated now and it will take up a majority of this year to complete.
What are the changes in your Citigroup account with the deal? How do you seen it going forward?
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Citigroup has signed VirtusaPolaris as a strategic partner, which means that we are one of a few suppliers that are a strategic preferred IT services partner of Citigroup Corporation that can cross sell and work within all parts of Citi. Despite that, Citigroup is going through a spent reduction. We have committed to honouring that spent reduction, which will cause headwinds for VirtusaPolaris. We expect that in this year, we will have some headwind from a revenue standpoint, specifically with Citi, but as we pursue and win new opportunities at Citigroup, we will be able to put ourselves back into a position of growth at Citi. We expect that will take about nine to 12 months.
Citi is about a 14-15 per cent revenue relationship now. The reduction is going to be faster than we can actually pursue and win new opportunities. And that is something that we are working on as we speak, to determine exactly how that is going to pan out. We expect to come out with a guideline for fiscal year 2017 in May, this year. We haven't disclosed the specifics around what we believe the headwind will be, because we are working through the modalities of that. However, the strategic partner status now Citigroup is providing is much larger relationship that what Polaris and Virtusa had. Other BFS business of Virtusa and Polaris are growing. We have clarity about the strategic business partnership. AIG is our second largest client after Citigroup.
Are you further investing in Polaris?
Following the deal, we will continue to make investments to improve the performance and these has been factored in. We have basically invested lower than we have estimated for the acquisition and both the Phase I and Phase II put together, the acquisition might have been in the range of $248 million.
Are you planning any lay-offs as part of integration and cost reduction?
The total headcount is over 19,000 team members. Account by account we will evaluate the onsite-offshore ratio to make sure that we are running efficiently. Much of the business model for doing the acquisition was based on revenue synergies and not cost synergies. We will make sure that from a performance stand point that high performance is maintained in the system and we are not contemplating any major cost reduction initiative.
How do you see the future growth?
The combined entity is approximately $880 million of proforma revenue on a fiscal year March 31,2016 basis. In the past Virtusa has grown over 20 per cent a year. As we combine the two entities, we are aware that it will have a negative impact and the growth will come down to at or around industry growth level. The short term goal is to create a growth engine inside Virtusa Polaris to be able to resume industry leading growth. It will take at least a year to be able to see that growth that Virtusa has experienced in the past.
Are you looking at delisting from the Indian public market? Would you be diluting stake?
According to Sebi regulation, we have to get into the cooling off period, for a period of approximately 12 months before we need to go back to them and speak with them about the strategic options we have and those include running a listed company in India as a majority owned division of Virtusa or potentially look at the procedure for delisting in India. These are all options that we will have at the end of one year. That one year period began in April 12, this year, which is the settlement date. We will have ongoing conversation with Sebi. We will execute our strategy in accordance with the regulations. We are keeping those options open. We have a shareholding of 79.6 per cent in Polaris now, we will be diluting it as per the regulatory requirement in near future.