Flex Appeal

Citigroup is disassembling its Mumbai chromosome. As the first chapter of the
approximately $900 mn Oracle buyout deal for top banking solutions vendor i-flex
winds up at $593 mn, Oracle has good reason to smile over the probable returns
ahead by way of Citigroup clientele-who form about 90% of the i-flex customer
base. Citicorp Capital Venture held 49.5% of the equity base at the time of i-flex's
IPO three years ago, and later divested it to 41%.

Oracle would be more than happy with this 41% Citigroup stake in the Indian
banking major. Here, its decision to buy back an additional 20% stake worth $316
mn by the end of the year from i-flex shareholders is more a case of complying
with India's regulatory laws. A few i-flex shareholders were not keen to cash
out en masse, though the majority of them are expected to swap for margins of up
to Rs 300 per share, when Oracle's buyback offer at Rs 882.62 per share is
floated sometime in September.

On the product side, which brings in 50% of Mumbai-based i-flex's revenues,
Oracle could innovate further with its Oracle financial offerings meshing with
Flexcube, i-flex's superstar product. Flexcube's appeal as the world's
largest selling banking solution lies in its ability to be a conduit for diverse
product offerings-where it can offer a single customer view and provide
automation across multiple delivery channels with differentiated financial
products.

But wrenching out stronger marketshare for Flexcube in India will be a key
challenge ahead. Flexcube has had a tough time wresting platform space from
Infosys's Finacle in the Indian banking space. However, i-flex's strong
mindshare in the Americas, Europe and Africa over the last five years, thanks to
the Citigroup DNA, is primed for Oracle to exploit further.

The services component, which brings up roughly another 50% of i-flex's
revenues, will present a fresh set of challenges. Integrating it with Oracle
Financial solutions and sorting out middleware incompatibilities will require
time-and money. Oracle's strongest bet would be to make Flexcube work in
tandem with its ERP and other e-procurement solutions for financial institutions
in the smallest possible (or permissible) time window so that existing Flexcube
clients stick with Oracle under the new order of things. Beyond just price
negotiations, this would require a strong alignment with the i-flex top
management. Already, fears abound that the i-flex leadership could go the way of
the PeopleSoft top brass-with Oracle president Charles Phillips set to join
the i-flex board, once the interests of at least one-third of the 575-plus
customers in 115 countries are served.

At a press conference-call, Ellison said that Oracle's overall application
strategy is "to go beyond ERP" and offer customers richer
industry-specific functionality. Let's not forget that with the entry of open
standards players like Day Software and Ascential Software, the niche in content
management and databases occupied by the likes of Microsoft, IBM and Oracle
could be increasingly under threat. So, Oracle's acquisition spree in recent
months and the decision to go beyond ERP is partly from the risk posed by its
open standard competitors.

Oracle's ability to culturally integrate i-flex's 5,500 employees as well
as explain to customers the need to merge Flexcube with their financial
offerings and the benefits accrued to their overall ERP and banking product
offerings will be most crucial, especially in India. With a 60% database market
share, strong assimilation with Indian operations will be a prerequisite to
rebooting i-flex's rather patchy performance over the past few quarters. The
Indian operations of the company stand to benefit further as Oracle adds more
banking and insurance clients in 2005. Flexcube already runs on Oracle Database
10g and Oracle Application Server 10g.

The core issues Oracle will continue to grapple with once the buyout is
completed will be how to flex its database muscle in servicing the expectations
of top-gun i-flex customers like UBS Securities and GE Capital, cutting
operational costs, besides outpacing the competition in the ERP marketplace.
Will i-flex "get it (Oracle) there" in banking? The merger test begins
in right earnest. Even as the flag is set to flutter higher for India's
product development companies.

Ravi Menon