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Why Oracle Has Its Eye on India

By Steve Hamm Software giant Oracle continued its acquisition binge Aug. 2 by purchasing a controlling interest in Indian banking software specialist i-flex Solutions for a price that's expected to top $900 million. It was Oracle's (ORCL) eighth acquisition this year, and 12th in 18 months.

You can expect more of the same from the maker of databases and corporate applications. "We don't want to play our hand too much, but we're looking now in the telecom and public sectors. There's lots of complexity in the businesses, and no clear market leaders," says Oracle President Charles Phillips (see BW Online, 6/30/05, "Larry Ellison's Roving Eye").

"BUILD OR BUY." Oracle is ramping up its M&A activity in an attempt to make up ground on Germany's SAP (SAP), the leader in corporate applications. Its strategy is to snap up leading software companies that provide product packages for specific industries. Those products compliment Oracle's databases and general business applications (see BW Online, 7/7/05, "Oracle's Small Step, Bigger Plan").

"Oracle has to do this to become more competitive with SAP," says analyst David Mitchell of market researcher Ovum. "It's build or buy, and I think build takes too long."

The i-flex deal is very different from others Oracle has done in recent months. Rather than buying the company outright, it's paying $593 million in cash for a 41% stake owned by Citigroup (C), the original investor when i-flex started 13 years ago. Then Oracle is offering to buy up to 20% of the publicly traded shares from investors for a total price of $316 million.

UP TO STANDARD. In this way, Oracle will control the company, keeping it out of the hands of SAP, but i-flex will still be run by a team of successful Indian executives led by Chairman Rajesh Hukku. I-flex grew 42% last fiscal year, to $261 million, and produced net income of $46 million. News of the pending deal began to leak out last week (see BW Online, 7/28/05, "Oracle's Shopping Spree Isn't Over").

The two companies are a good fit. Already, nearly 90% of i-flex's customers use Oracle databases. I-flex's products are based on industry-standard technologies, and Oracle is rebuilding its entire suite of applications to industry standards in a massive three year project it calls Fusion. Having Oracle as a parent will likely help i-flex increase its business with tier-one banks, some of which have been reluctant up until now to bet their technology futures on a relatively small Indian software supplier.

The deal caused a wave of excitement in India. A handful of top Indian tech-services outfits are well known globally, thanks to their outsourcing expertise, but India has only a smattering of software-products companies. I-flex is the most formidable, with 575 customers in 115 countries.

BROWSING THE NEIGHBORHOOD. "This is a validation that one of the world's largest software companies has chosen an Indian software company," says Hukku. "It's a validation of the quality and complexity of Indian software, and it's a shot in the arm for other Indian software product companies." Other possible Indian software targets for acquisition include Polaris Software, another maker of banking software, and Ramco Systems, a maker of tools for developing corporate applications.

Don't be surprised if Oracle's M&A quest leads it back to India again. "We're convinced that a good portion of the next generation of software companies will be emerging from India," says Oracle's Phillips. He spent more than eight months working on the i-flex acquisition. But now he knows the country, so another deal could come much quicker.

Hamm is a senior writer for BusinessWeek in New York

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