Acquisition of banking software products company Laser Soft Infosystems Ltd by Polaris Software Lab Ltd seems like a good move. Laser Soft has been valued at Rs52 crore, which works out to about 7.5 times estimated earnings for the current fiscal year. It is expected to report revenue of Rs41 crore and a net profit of between Rs6.5 crore and Rs7.5 crore in fiscal year 2009-10. Polaris will pay Rs35 crore upfront for the deal, while the balance will be paid over a period of two years, depending on the acquired company’s performance.
With the acquisition, Polaris will strengthen its position in the domestic market. “We were strong in modular banking products. With this acquisition we can increase our presence in the core banking segment, where our presence in Indian markets was so far limited,” says R. Srikanth, chief financial officer, Polaris. The company will gain around 50 customers through the acquisition, domestic and overseas (mainly in West Asia). Laser Soft has an operating profit margin of 20%, which is better than Polaris’ margins of 17%, and Polaris expects the acquisition to be EPS (earnings per share) accretive. The markets were unmoved by the decision, though, with the stock continuing to trade in a narrow band even after the announcement.
From Laser Soft’s point of view, too, the deal makes sense. It can, on the strength of the Polaris balance sheet, bid for larger orders from state-owned firms where the minimum net worth for bidding for projects is Rs100 crore. This was a major limiting factor for the company.
Analysts and the markets have been sceptical about Polaris’ focus only in the banking and financial services segment.
However, the management’s message is clear—that it sees bright prospects in this domain. And the Laser Soft acquisition confirms this. Funding the acquisition shouldn’t be a problem since Polaris sits on a cash balance of Rs400 crore. In fact, around the same time last year, Polaris had taken over US-based SEEC Inc., which specialized products in the insurance arena.
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