 "Polaris acquisition will strengthen Virtusa's capabilities in global BFS: Kris Canekerante")
Kris Canekerante, chairman and CEO of Virtusa, spoke to Gireesh Babu and T E Narasimhan after announcing the deal on how it would help Virtusa's ability to pursue larger consulting and outsourcing contract. He also spoke on how Citigroup Technology's business to Polaris has played a major role in this deal. Edited excerpts:
What are the key things which led Virtusa to acquire Polaris?
Virtusa has been growing at around 23 per cent for 10 years, thanks to banking and financial services and insurance (BFSI) sector, which contributes significantly for Virtusa's revenue, followed by communication and technology and Media and Information. For future, we felt it was important to strengthen our capabilities in global BFS. This is one key reason. A majority of the work Polaris did is in BFSI. By combining Polaris' BFS, we can provide end to end services in Global BFS. We can expand our addressable market. In past, Polaris and Virtusa could sell to only a segment of the market. Third reason, by combining Virtusa and Polaris, we believe that we can go after larger outsourcing engagements, for which is important for growth and scale.
Can you elaborate on scale and how it would help to get bigger deals?
On a proforma basis, this acquisition will lead to a combined company of over $800 million. Virtusa, this financial year, on a guided basis, is guided to $579 million at the mid-point of revenue and Polaris' $300 million is added. That gives us a very unique position in BFS, because of that $800 million of overall proforma revenue, the proforma revenue for BFS is over $470 million. That gives us very strong presence in global financial services, it makes us one of the top providers in it. With the acquisition, we believe that we will be in the top 20 in the global BFS. Virtusa and Polaris have strong capabilities in different sides of banking and also have very meaningful relationship. For Polaris, its relationship with Citigroup is over $100 million a year. Virtusa has some very large relationship with banks like JP Morgan, Barclays, etc. By combining, we can go after larger opportunities because we have the referenceability, the scale and the capability.
How important is Citigroup's role in this deal?
Very Important. Citigroup was a 45 per cent client for Polaris. Once the combination is done, Citigroup becomes less than 15 per cent client for the combination. It greatly reduces Citigroup's risk. It also gives an opportunity as a preferred strategic partner to be able to pursue more opportunities at Citigroup. When Citigroup started speaking with us (we had a small relationship with Citigroup at Virtusa, while Polaris has a big relationship with Citigroup), what they realised was that Virtusa could come in and apply its core capability and Polaris' strengths and capabilities to enact an efficiency improvement programme, whereby they (Citigroup) could reduce its spent.
Virtusa is known in the industry for rationalisation and consolidation of IT assets, which we call as software platforming. When we took a look at the work that Polaris was doing and the work that Virtusa doing, and the underlying systems, we believe that there is an opportunity to rationalise and consolidate and thereby provide Citigroup with a reduction in spend, which is very important for them. In return, they gave us a long-term strategic partnership where we can pursue anywhere within the Citigroup organisation.
Could you put some numbers on this?
Citigroup has spent around $140 million a year with Polaris. We believe moving forward and our commitment to Citigroup is that we will reduce that spend to about $120 million.
Revenue will come down during that period of time, because Citigroup is reducing their spend. At the same time, we have the opportunity to go and win new business. We believe that in the short-term, the Citi revenue will come down. It will have an overall impact on the business. In the long-term, we have the opportunity of pursuing new opportunities and growing our business.
What will be your offshore capabilities?
In Virtusa and Polaris, we have very similar on-site-offshore ratio. It is in the low 20 per cent range. The overall proforma headcount is a little over 18,000 people. If you take a look at a ratio of 77 per cent offshore, that is a very sizeable number of people in our locations in India and in Colombo, Sri Lanka. We believe that through the combination, we basically expanded our reach in our hiring geographies. We also believe that they are one of the few IT consulting and outsourcing companies that can create a compelling value proposition for our team members and that value proposition is around innovation.
Any plan to lay-off employees?
The entire rationale for this combination is based on revenue synergies. We have identified over a $100 million of revenue synergies over the next three years. It's not driven on cost synergies. Our team members will continue to have great career opportunities and we will invest into growth. Our desire and goal is to grow faster than the industry growth. We know, given the Citigroup reduction in spent, we might have reduction in growth.
When do you expect the leadership transition to happen in Polaris?
The existing management could run for the next six or eight weeks. In that time frame we are going to look at integration plans. Once we close the transaction, we can quickly move to the next phase. Our preliminary thoughts are that we will combine Virtusa's global BFS and Polaris's BFS under one autonomous global BFS business and Jitin Goyal, CEO of Polaris global BFS, will head this business for the combination. All the other industries that we work in, insurance, health care, media and technology will be driven by Raj Rajagopal, who will run all of Virtusa clients and revenue outside of global BFS. Both the companies will continue to be listed public companies. But, on a global basis, we will look at it as one entity.
Where do you want to see the combination in a few years?
We think about the value that we can create for our client. We continue to aspire to be a provider that can help our clients, especially in BFS, reimagine their future through digital storefronts. In all the industries that we work in, we want to be known as a company that come in and rationalise and consolidate back-end applications and systems to create more cost savings and create more efficiencies.
