Polaris buys OrbiTech minus $15m and ‘ignorant’ billing rate

Venkatachari Jagannathan
28 October 2002

Chennai: It is a double-whammy for Polaris Software Lab, which acquires OrbiTech Solutions (a Citigroup company). The stripping of OrbiTech by a whopping $15 million as interim dividend by its shareholders (Citigroup Venture Capital and OrbiTech employees), coupled with the downward revision of information technology (IT) services rate by Citigroup, has taken the sheen out of the acquisition that Polaris announced in May 2002.

Ending the four-month merger suspense, representatives of Polaris and Citigroup Venture Capital formalised their May memorandum of understanding (MoU) by signing the shareholder's agreement, but under different terms.

As per the new terms, Polaris will issue 42.65 shares of Rs 5 paid up for every100 shares of OrbiTech (Rs 2 paid-up). OrbiTech has 107-million outstanding shares, with 6.75 per cent held by its employees. Post-merger, Polaris shareholders will hold 52.75 per cent, while OrbiTech shareholders will own 47.25 per cent. The revised equity of Polaris will be Rs 48.5 crore - up from Rs 25.59 crore.

“However, Citigroup's voting rights has been capped at 29.9 per cent,“ says Polaris chairman and managing director Arun Jain. As per the original MoU the swap ratio was fixed at 14:25, resulting in a post-merger equity-holding of 54:46 in favour of OrbiTech shareholders, with no cap on their voting rights.

After the MoU in May, it took an inordinate time to formalise the same. Jain attributed the delay to legal intricacies involved in transferring the 57 intellectual property rights (IPR) / banking products owned by Citigroup. However, the markets were rife with various speculations.

Now it transpires that additional factors like the hefty interim dividend declared by OrbiTech and the billing rate revisions effected by Citigroup for its IT vendors weighed heavily on Polaris going ahead with the acquisition.