M&A in 2009: Gazing into the crystal ball

Is M&A a good idea during this downturn? Source: Mckinsey Quarterly – 2002 Source: Forbes.com, 2008 1,000 US companies studied during (1982–99) that included the US recession of 1990 to 1991. Successful challengers, maintained greater appetite for acquisitions during recession than the less successful former peers. Our analysis of more than 24,000 deals between 1996 and 2006 reveals that the companies that acquired through the last downturn (2001 to 2002) generated almost triple the excess returns of companies that made acquisitions during prior boom years Frequent acquirers buy through economic cycles M&A as a philosophy is aligned to a Company’s vision and strategic goals

Frequent acquirers buy through economic cycles

M&A as a philosophy is aligned to a Company’s vision and strategic goals

Current State of Industry… Global perspective Geo-political risk at the back of 26/11 incident in Mumbai Growing Indian and other BRIC emerging markets (Growing IT Spend) Growing un-employment rates in major markets may lead to regulations IT Industry Challenges to grow revenues as significant dependence on US / UK Cut down in IT budgets by customers as most of the new projects are deferred Few of the companies are cash rich and will be under pressure to make best use of the cash Small-Mid players who are niche are hit badly by their over-dependence on few customers or vertical M&A Deal closure time has increased Significant difference in valuation expectations of Buyers and Sellers Expectation is that there would be quick turn around and most of the companies will test the 2006-07 highs Time to have long term strategic view and best time to accelerate…

Global perspective

Geo-political risk at the back of 26/11 incident in Mumbai

Growing Indian and other BRIC emerging markets (Growing IT Spend)

Growing un-employment rates in major markets may lead to regulations

IT Industry

Challenges to grow revenues as significant dependence on US / UK

Cut down in IT budgets by customers as most of the new projects are deferred

Few of the companies are cash rich and will be under pressure to make best use of the cash

Small-Mid players who are niche are hit badly by their over-dependence on few customers or vertical

M&A

Deal closure time has increased

Significant difference in valuation expectations of Buyers and Sellers

Expectation is that there would be quick turn around and most of the companies will test the 2006-07 highs

Parameters that would drive M&A Strategic Tactical Generic Buy’s Strategic buyers will be looking to do bolt-on acquisitions at the right price Scale Acquisition: Acquire large company for cheap valuation Takeover of Troubled Assets: Buying assets for really cheap price Merger of Small to Mid size companies : Survive through the economic downturn Revenue Addition: Acquire “Me too” Company Customer Acquisition: To establish long term relationship Carve out or Captive acquisition: Help the customer to monetize the current assets, enter into long term relationship Geographic Penetration: Continental Europe, LATAM, Japan De-risking Strategy: Near shore in East Europe, LATAM, Onshore Centers – US, Canada Capability Acquisition: Consulting and Blue-printing, Products Dominate in Verticals/Horizontals: Vertical (Micro-vertical) and horizontal specific acquisitions Potential Strategy Parameters

Scale Acquisition: Acquire large company for cheap valuation

Takeover of Troubled Assets: Buying assets for really cheap price

Merger of Small to Mid size companies : Survive through the economic downturn

Revenue Addition: Acquire “Me too” Company

Customer Acquisition: To establish long term relationship

Carve out or Captive acquisition: Help the customer to monetize the current assets, enter into long term relationship

Geographic Penetration: Continental Europe, LATAM, Japan

De-risking Strategy: Near shore in East Europe, LATAM, Onshore Centers – US, Canada

Capability Acquisition: Consulting and Blue-printing, Products

Dominate in Verticals/Horizontals: Vertical (Micro-vertical) and horizontal specific acquisitions

Transaction Characteristics Deal Sizes Valuation Timelines Synergy Expectations Bolt-on acquisitions – Target size: $10-50 million Some of the transactions would be JV’s with exit defined 3-5 years down the line; sizes would be around ~$100 million High chances of consolidation of small players in the industry Very Geographic, Segment and Company Specific Product companies would command premium Cash positive and Sticky customer oriented company will command a premium Unique assets would also command a premium Revenue Multiple: 0.5 – 1.2X forward EBITDA Multiple: 5 – 9 X forward Drop in number of deals during the first half of 2009 as compared to 2008 Longer time to close the deal due significant difference in Buyer & Seller price expectations Short term synergies need to be ruled out completely expect for small cost savings due to consolidation of support staff Prepare for long term growth story Earn-out/ Incentives Company may more likely go for Earn out on agreed business plan than go for retention bonus Only Key management / critical employees may be incentivised Most of the transactions although value buys should be looked at from long-term perspective; not to expect quick wins

Bolt-on acquisitions – Target size: $10-50 million

Some of the transactions would be JV’s with exit defined 3-5 years down the line; sizes would be around ~$100 million

High chances of consolidation of small players in the industry

Very Geographic, Segment and Company Specific

Product companies would command premium

Cash positive and Sticky customer oriented company will command a premium

Unique assets would also command a premium

Revenue Multiple: 0.5 – 1.2X forward

EBITDA Multiple: 5 – 9 X forward

Drop in number of deals during the first half of 2009 as compared to 2008

Longer time to close the deal due significant difference in Buyer & Seller price expectations

Short term synergies need to be ruled out completely expect for small cost savings due to consolidation of support staff

Prepare for long term growth story

Company may more likely go for Earn out on agreed business plan than go for retention bonus

Only Key management / critical employees may be incentivised

Take on next 12 months… Value buy’s or few bolt-on acquisitions would be flavor of the season and would be expected to happen during the first half of the year; volumes may pick up during second half of 2009 Few large deals but may be pushed to the second half of 2009 Focus areas would be BFSI (Risk Management, Payments, developing micro-vertical domain expertise), Infrastructure (Storage management), Enterprise Application space, Platform based BPO, Internet (Online advertising, Social Networking) and Physical & IT Security See more of carve-out/ hive-off being done to tide over the credit crunch See more of Joint-Ventures to de-risk now but realize higher value during the up-turn Small De-risking deals would be short term transactions; few large deals probably may happen during the second half of 2009

Value buy’s or few bolt-on acquisitions would be flavor of the season and would be expected to happen during the first half of the year; volumes may pick up during second half of 2009

Few large deals but may be pushed to the second half of 2009

Focus areas would be BFSI (Risk Management, Payments, developing micro-vertical domain expertise), Infrastructure (Storage management), Enterprise Application space, Platform based BPO, Internet (Online advertising, Social Networking) and Physical & IT Security

See more of carve-out/ hive-off being done to tide over the credit crunch

See more of Joint-Ventures to de-risk now but realize higher value during the up-turn

Key points… Frequent acquirers buy through economic cycles Take a long term strategic view – best time to accelerate Align M&A activity to Vision and long-term strategic goals Good time to do bolt-on strategic acquisitions at a right price Although the acquisitions may be cheap don’t expect immediate synergies to accrue from the transaction Deal closure will take longer time; matching of expectations of buyers and sellers will be a challenge in the short term

Frequent acquirers buy through economic cycles

Take a long term strategic view – best time to accelerate

Align M&A activity to Vision and long-term strategic goals

Good time to do bolt-on strategic acquisitions at a right price

Although the acquisitions may be cheap don’t expect immediate synergies to accrue from the transaction

Deal closure will take longer time; matching of expectations of buyers and sellers will be a challenge in the short term

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