On March 18, software solutions company Polaris Financial Technology announced that it planned to hive off its products business into a separately listed company to be called Intellect Design Arena. There was positive reaction to this from not only analysts, but also the stock market. The price of the company's shares jumped 11.57 per cent and hit a 52-week high of Rs 183.35 that day.
Rationalising the services and products divisions into two separate companies led to speculation that Polaris was contemplating selling the latter. The company quickly scotched such rumours and said the move was aimed at unlocking the potential of the products business. Over the next three years, the company said, it would double its earning in the segment, currently around $100 million. The new entity will focus on universal banking, risk and treasury management, transaction banking and the insurance businesses. Polaris Financial Technology will continue to run the services business focussed on solution services.
The new company will have to vie with major players for the business, globally estimated at $15-20 billion. Others already fighting for the pie include Finserve, Infosys' Finacle and Tata Consultancy Services' BaNCS.
While Polaris expects the demerger to help the company compete for its share in a focused manner, analysts says the three important challenges which the new company needs to address are talent, the right products for sale, and the need to attract public sector banks as customers.
Arun Jain, executive chairman, Polaris Financial Technology, says the company had realised the importance of the product business as far back as 2003, and had entered the products market in 2006. Initially, the company felt the synergy between the two businesses would help transform its banking business. Indeed, it helped Polaris gain clients in the United States and Europe.
Once the business reached maturity around 2012, the company realised that the opportunities in services and product businesses were turning out to be substantially higher. "However, on the other hand, we found that their paths were interlocked. When I went back and looked at the last eight quarters, I realised that they were almost flat quarters," Jain explained to investors recently. It was crucial to remedy this situation because the growth of product business is expected to be higher compared to the growth of the service business over the next few years.
Jain concluded that in order to enable the growth of the services business, Polaris needed partners. But, he says, "because of the nature of the business, a company offering services cannot partner with those also competing in the products business since issues of confidentiality would arise. We lost momentum in the service business because of being unable to partner with companies such as Calypso or Fundtech, who are the also product leaders and competitors for the services where our customers had their investments."
The other hitch with a combined business profile had to do with funds spent on R&D and sales. Though the company has around 200 salespeople, the actual number engaged in product sales is just around 30. This means that for its products, Polaris needs an implementation partner. "Polaris cannot be the implementation partner everywhere. Moreover, the customer should have the option to choose the implementation partners," says Jain.
Because of operational hiccups like these, Polaris decided to bifurcate the two business streams. Citing the example of how Cognizant separated from Dun & Brandstreet, Jain says, "It is always better to have separate entities when the business DNAs are different." Expecting a high rate of growth for products, the company will inject Rs 100 crore in R&D and another $10 million (Rs 60 crore) in sales.
Shashi Bhusan, analyst at Prabhudas Lilladher, says that ownership is easier in the new structure. "We believe that investment cycle for product business is very different from that of services business," his report said. "Hence, the spinoff into a separate entity could unlock value for the investors. Moreover, we believe the current structure is simpler for the management, if they decide to exit completely from either of the business."
The break-up, of course, did not happen overnight. The Boston Consulting Group, which was advising the company on both the design and business, suggested the change some time back. "But the question was whether we could take such a step, and if we did, what kind of impact it could have on the company," says Jain.
But good results in the last two quarters prompted Polaris to take the plunge. The new company will have around 3,000 employees. Manish Maakan will continue as chief executive of the Intellect Global Transaction Banking business operating out of London.
"We believe this is the first step to unlocking value for shareholders," said Srinivas Seshadri of CIMB in his report. "It also puts Polaris' high cash balance of over Rs 500 crore to good use. Any further development on the M&A front (services business sale is widely speculated) could further unlock value."
Key challenges that Intellect Design Arena faces are deciding the right product for a particular market, attracting talent in sales and marketing and becoming qualified for the bidding processes in the domestic market with regard to core banking solutions. To this, Jain lists the challenge of knowing where to invest. As far as attracting talent is concerned, he says the problem is mostly in sales and marketing in the Asia-Pacific region, though not in the US or Europe.
K Srinivasan, who heads India, West Asia and Africa operations of Polaris, adds that in the domestic market, despite having good solutions at affordable costs, the company faces the daunting task of attracting bankers (in the core banking sector) because of the eligibility criteria in terms of number of solutions installed with public sector companies, deal size, data migration and so on.
The willingness of customers to pay less for an Indian product of high value and longer sales cycle are other issues that the company will have to contend with. As a service company, Polaris had managed to rope in the Reserve Bank of India as a client and offered it treasury, portal, cash and securities solutions. "What we have done for RBI enables us to take such solutions to other bank regulators across the world," says Srinivasan. The company's other customers in India include Corporation Bank and Karur Vysya Bank.
Srinivasan says the company missed out on the core banking wave because of its late entry into the sector, but is ready for the next wave of "transaction banking", which includes Internet banking, corporate banking, treasury, Basel III and others. With bases for both services and products, it believes it has its flanks well covered.