Polaris delisting: Minority shareholders to get more premium than promoters

Kris Canekeratne, chairman & CEO of Virtusa Corporation, which recently completed a reverse book building exercise to delist Polaris Consulting, explains what the delisting means for his company

US-based information technology services company Virtusa Corporation recently completed a reverse book building exercise to delist Chennai-based Polaris Consulting, in which it acquired a majority stake through an announcement in November 2015. The delisting is expected to help Virtusa in the management of its Indian assets and offer more value to shareholders in the US. The company’s growth in its Indian advanced technology centres is expected to continue. In an interaction with Gireesh Babu, Kris Canekeratne, chairman & CEO of Virtusa Corporation, explains what the delisting means to Virtusa. Edited Excerpts:

What is the status of the Polaris delisting and how will it help Virtusa?

Through the delisting, we successfully acquired an 18 per cent stake in the company, taking our total shareholding to 93 per cent. The remaining seven per cent shareholders are mostly retail ones, besides some small institutions. The delisting regulations require that participating Polaris shareholders get to convert their shares at the same price as the delisting offer, which is Rs 480 per share; we will honour that when more shareholders join the exercise. As we own more than 90 per cent, we have taken the public listing out. We will no longer be a publicly listed entity on the BSE but continue to run Polaris as a public entity for one more year, according to the regulations.

How does this help the overall strategy of Virtusa Corporation?

It gives us more operational flexibility of being completely consolidated into Virtusa. We do not need to maintain a set of public records and filing, quarterly announcements and shareholder meetings. It reduces the financial and operational burden of having a public listed entity, especially when we own 75 per cent. Also, Virtusa's Banking and Financial Services (BFS) book, since acquiring Polaris, has done extremely well. At present, any of the profits attributed to Virtusa's BFS business, which continues to be accounted for through Polaris, we have to share the profits with the minority shareholders of Polaris. This naturally has an impact on Virtusa's shareholders in the US. A quarter of the profits that Polaris gets are attributed to the minority shareholders and it does not show up in Virtusa's earnings per share. So, it makes a lot of financial sense for us to delist Polaris.

The 25 per cent minority shareholders ended up getting a significant premium as part of the delisting process. The promoters and the MTO received significantly lower. We acquired the 52 per cent shares from the promoters for around $180 million. The Mandatory Tender Offer (MTO), during which we acquired 23 per cent, cost us approximately $90 million. But the last 25 per cent cost us $200 million. The last 25 per cent shareholders are getting almost 100 per cent premium on the MTO offering. With this, the total acquisition value comes to $470 million. Of that, $100 million is cash that accrues to Polaris, so the overall cost to Virtusa comes to $370 million.

How has been the integration and how successful is the acquisition?

By far, this has been one of the best acquisitions and integrations in the services industry. At the time we have announced the acquisition, Polaris' revenues for the trailing three years were flat or declining. Virtusa's BFS revenue growth was in a low-single digit. Since the acquisition and a very successful integration, Virtusa's BFS business, a combination of the BFS of both the previous entities, has grown by about 30 per cent year-on-year. At the time we announced the acquisition over two years ago, we had identified there would be $100 million worth of synergy revenue over a three-year period after the integration. We have realised more than $100 million of the synergy revenue in FY18 alone, just two years after the acquisition. This is one of the reasons that we decided to delist; the momentum in our business is very strong.

Banking, Financial Services and Insurance (BFSI) now represents over 68 per cent of our business, compared with less than 45 per cent before the acquisition. Virtusa increased its guidance to $1.16 billion in its guidance last week. That represents 18 per cent year-on-year growth and the BFSI book is growing faster than the company average. The success is in the combination of Polaris' expertise in corporate banking and investment banking, and Virtusa's trends in consumer banking. Acquisitions with this level of synergy and solid integration with these results are very rare, and we are pleased with that.

Will this delisting have any other implication, in terms of operations or headcount?

From an operational standpoint, we have integrated Polaris into Virtusa from a go-to-market perspective. The delisting will not change any of our operations. We took the Polaris brand from Virtusa Polaris about one year after the acquisition from a go-to-market perspective. For hiring, we use ‘Virtusa Polaris’ or ‘Polaris, a Virtusa company’. We will continue to use that for some period until we realise it is adding no more brand value as the value is getting associated more with Virtusa. The current headcount is just under 20,000, of which around 5,000 are in our client geographies. Almost four-fifths of the 15,000 in Asia are in India and the rest in Sri Lanka. We will grow the manpower in tandem with our business growth.