Virtusa To Buy Majority Stake in Indian Banking Giant for $270M

Virtusa plans to purchase up to 75 percent of a $288 million banking powerhouse to expand client offerings and win more consulting and outsourcing deals.

The Westborough, Mass.-based company - No. 54 on the CRN Solution Provider 500 - said its acquisition of 7,650-employee Polaris Consulting & Services will make it possible for the company to provide everything from retail and corporate banking to capital markets and risk compliance to such financial services giants as Citi, J.P. Morgan, HSBC and Barclays.

"Polaris is a tremendous fit for Virtusa from both a strategic and financial standpoint," Ranjan Kalia, executive vice president and chief financial officer, said during an investors' call Thursday morning.

[RELATED: Virtusa Continues Acquisition Tear, Buys Business Processing Firm For $7.5M]

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The deal is expected to close in the first three months of 2016, and take a bite out of Virtusa's profits until March 2017. The combined company will have roughly 18,000 employees and $826 million in annual sales, and will bring Virtusa into Canada, Australia and Japan for the first time.

Wall Street responded very unfavorably to the news, with Virtusa's stock price falling 12 percent Thursday, before rebounding a little. It closed at $52.02 a share, down nearly 10 percent.

Though integration challenges and plans by Polaris's main client – Citi – to scale back IT spending will make the acquisition unprofitable in the short run, Virtusa said the deal will start delivering profits in spring 2017 as the combined company becomes capable of engaging much more deeply with existing clients.

"When you combine the two companies, you can actually address 100 percent of the market in banking and financial services," Kris Canekeratne, Virtusa's chairman and CEO, said during the investor call.

Specifically, Canekeratne said Chennai, India-based Polaris has a level of depth in corporate and investment banking that Virtusa never would have been able to build organically. Virtusa, meanwhile, differentiates itself through expertise in retail and consumer banking.

"Polaris's strengths in banking have been in a different part than Virtusa's strengths," Canekeratne said.

The companies expect to generate $100 million of revenue synergies in the next three years as they cross-sell more products and services into their existing customer bases. There is little client overlap between the two companies, Canekeratne said.

Polaris obtains roughly 45 percent of its revenue from Citi today and is responsible for running its entire strategic platform.

"These are guys in the heavy lifting of strategic platforms used by banking and financial services clients," he said.

Canekeratne said the combined company will be designated as one of the only preferred partners for Citi's Global Technology Resource Strategy (GTRS) group.

Although Polaris will continue to be listed independently on the National Stock Exchange of India, Canekeratne said the global financial services practices of Virtusa and Polaris will be run as a single entity and branded Virtusa-Polaris.

The combined company will have a separate business unit focusing on insurance, health care, technology and media, which will report into Raj Rajgopal, currently Virtusa's president of business development and client services. Some 45 percent of Virtusa's revenue – and 15 percent of Polaris's – comes from outside the banking and financial services verticals.

Polaris has a fairly balanced revenue mix by geography, deriving roughly half its revenue from the Americas, a quarter from Europe and a quarter from the rest of the world. Virtusa's revenue mix is more skewed, with the company deriving nearly three-quarters of its revenue from the Americas and more than 20 percent from Europe.

Virtusa will initially spend $180 million to purchase 51.7 percent of Polaris's stock from the company founders and other minority stakeholders. The company has also set aside an additional $90 million to buy up to 26 percent of Polaris's stock from public shareholders.

The deal is being financed through a $200 million loan and a $100 million revolving credit facility.

"The Polaris acquisition is very strategic for us," Canekeratne said. "We are very enthusiastic about this combination."

Polaris is Virtusa's third announced acquisition of 2015. The company bought 60-person business processing management firm Agora Group in July for $7.5 million, and paid $34.2 million in cash and $3.2 million in earn-outs in April to purchase 200-person consulting and infrastructure services provider Apparatus.