Oracle Corp. of Redwood Shores, Calif., moved closer to its stated goal of becoming a more important banking technology provider Tuesday by announcing it would purchase a majority stake in the Indian core processing developer i-flex solutions ltd.
Oracle is known for its back-office database technology, and though it has many bank customers, it lacked a menu of banking-specific applications such as core processing.
Observers say that by acquiring i-flex, it would gain products specifically aimed at banks and would move beyond its strategy of offering one product to multiple industries.
I-flex is one of the fastest-growing core systems providers worldwide, though its U.S. sales are low. Analysts say Oracle's backing would probably boost i-flex's sales substantially in this country.
Charles Phillips Jr., Oracle's president, said in an interview Tuesday after the deal was announced that i-flex should fit naturally into his company's product line. The two companies already collaborate on product development, and i-flex uses an Oracle database for its core banking applications, he said.
"I-flex was the preeminent company we could buy to gain access to this vertical market," Mr. Phillips said. "This is a very elegant relationship, because we've been working together for so long."
Oracle said it would buy Citigroup Venture Capital International's 41% stake in i-flex for $593 million in cash. Citigroup Inc. founded i-flex in the mid-1980s as a software development subsidiary in Bangalore and partially spun it off in 1992 by offering its shares on the Bombay stock market.
To acquire up to 20% more of i-flex's stock, Oracle also announced an offer to buy shares for $20.33 each. The tender offer, required by Indian law, could bring the total price tag for the deal to as much as $909 million.
Oracle said that it plans to complete its purchases this year, and that it has no plans to acquire the remaining 39% of the stock.
Rajesh Hukku, the chairman and managing director of i-flex, said the tighter relationship with Oracle, the world's largest maker of corporate enterprise software, should help his efforts to sell his products in the United States.
"The combination with Oracle will give a lot more credibility and comfort" to bankers who may have resisted purchasing i-flex software until now, Mr. Hukku said. His company already receives about half its services revenue from the United States, mostly for writing customized financial programs for customers such as the American Stock Exchange and the International Monetary Fund, but few banks here have bought its flagship Flexcube core processing system.
About 8,500 banking companies in 115 nations use i-flex's software and services, he said. For example, Citi has said it plans to use Flexcube in 90 nations, though it has not announced any plans to use the system for U.S. accounts.
Mr. Hukku said i-flex's strongest sales have been in the Asian banking market, and it has recently made some gains in Europe, as well. "We think that trend will eventually reach the United States."
In its last fiscal year, which ended March 31, i-flex's earnings rose 14% from the previous year, to $46.6 million. Revenue grew 42%, to $261.4 million.
M. Arthur Gillis, the president of the Dallas research and consulting firm Computer Based Solutions Inc., said both Oracle and i-flex should benefit from the deal.
"In terms of perceptions, this has got to be a home run" for Oracle, he said. "Oracle didn't have a core system. They solved that today."
Oracle positions itself as a major banking vendor - it says 17 of the world's 20 largest banks, and 23 of the top 25 in North America, use its products - but the systems it delivers have "always been a stepchild, a discrete piece of work that often doesn't touch the banking systems," Mr. Gillis said. "It's off to the side."
I-flex, too, would pick up "a tremendous boost by having a name like Oracle attached to it," he said. "I don't know if bankers would admit it, but in Illinois, Iowa, Texas - places where banking is strong - they buy American."
Christopher F. Penny, an analyst at Friedman, Billings, Ramsey & Co. Inc., called the deal "a logical move" for Oracle. "To get into banks, you've got to acquire your way in."
I-flex has made few software sales in this country, mostly to the domestic branches of foreign banks, but "it could potentially put another competitor into the marketplace," he said.
However, Mr. Penny also said he doubted Oracle's arrival in the core banking market would prompt major banking companies to replace the systems they have used for decades. When it comes to modernizing their key computer systems, "most banks just say we'll do it ourselves," he said.
"Oracle is certainly making that bet that they can penetrate that market with this product," Mr. Penny said. "I think it will stimulate that conversation at the boardroom level."
