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IVG Report US-bound acquisitions in

  1. 1. Vol. 3.2 July ‘10 US-BOUND ACQUISITIONS BY INDIAN COMPANIES Analysis of Transactions in the first half of 2010 July 2010 501 Fifth Avenue, Suite 302, New York, NY 10017 www.ivgpartners.com
  2. 2. US-BOUND ACQUISITIONS BY INDIAN COMPANIES US- July 2010 Strong Surge in US- US-bound Acquisitions by Indian Companies Acquisitions KEY HIGHLIGHTS AND TRENDS Robust economic growth and a surge in demand With twice the deal volume and eight times the deal for natural resources in India combined with high debt-to-equity ratio and lower earnings value of 2009 first half transactions, US-bound potential of US companies is creating value- acquisitions by Indian companies in the first half of buying opportunities for Indian companies in 2010 have surpassed all expectations. There were the US. 23 US-bound acquisitions by Indian companies with In the first half of 2010, Indian companies an aggregate value of over $3.8 billion in the first accounted for a total of 23 US-bound acquisitions with a cumulative transaction value half of 2010. Robust economic growth and a surge of over $3.8 billion. This represents twice the in demand for natural resources in India combined deal volume and eight times the deal value with high debt-to-equity ratio and lower earnings compared to the same period in 2009. potential of US companies is creating value-buying IT/ITES remains the most acquisitive industry opportunities for Indian companies in the US. In capturing over 65% share of the total US-bound transactions by volume, followed by oil & gas addition, increasing domestic competitive pressures, and mining (10% each). Other industries such as changing economic realities and improved US-India pharmaceutical, finance, media accounted for political relations are encouraging Indian companies less than 5% each in terms of volume. to seek acquisitions in the US. This also reflects how Compared to the small-size and distress related transactions of last year, this year’s transaction Indian companies adapted to the new economic sizes were significantly larger and growth realities and are opportunistic about global growth. focused. Six acquisitions in the first half of 2010 were over $100 million in size compared to none during 2009H1. One of the key aspects of this year’s transactions was the focus on natural resources such as A majority of the 2010H1 transactions had an earn-out structure, where a portion of the deal Reliance’s acquisition of stake in shale natural-gas value is paid on future milestones. This is assets of Atlas Energy and Pioneer Natural Resources evident in Reliance’s acquisition of its shale with a total commitment of over $2.8 billion and assets and Mphasis’s acquisition of Fortify. Essar Group’s acquisition of Trinity Coal for $600 million. Pharma Chemicals 30 Oil & Gas 4% 5% 27 Finance 9% 23 23 4% Mining 9% Media 4% 8 7 IT/ITES 65% 2005 H1 2006 H1 2007 H1 2008 H1 2009 H1 2010 H1 Industry Breakdown of US-bound Acquisitions by Indian US-bound Transactions 2005H1 to 20010H1 Companies in 2010H1 by Volume PAGE 1
  3. 3. US-BOUND ACQUISITIONS BY INDIAN COMPANIES US- July 2010 Factors Fueling US- US-bound Acquisitions A robust economy fueling the demand for natural resources, increasing domestic competitive pressures, and changing economic realities are encouraging Indian companies to seek acquisitions in the US. Developed economies like the US are attractive for Indian companies because of their natural resources, large consumer markets, transparent business processes, robust legal environment, advanced technologies, skills, and knowledge capital. Moreover, as the markets in these economies tend to be mature and saturated, it often proves difficult for Indian companies to gain market share without acquisitions. Low interest rates and tariffs coupled with easy access to external commercial borrowings While the strategic rationale for US-based provide Indian companies sufficient liquidity for acquisitions varies by industry and the individual global acquisitions. Sustained growth in company, there are a few common drivers: corporate earnings has improved the profitability and strengthened the balance sheets of Indian US-based acquisitions provide easy access to the companies. world’s largest market and customer base through marketing and distribution channels of Many Indian companies are seeking to expand the acquired company. Indian companies are their distinctive capabilities by acquiring specific able to acquire well-established brands, a wider skills, knowledge, and technology abroad that product portfolio, and readymade distribution are either unavailable or of inadequate quality at networks, thus, globalizing and augmenting their home. Indian companies are able to identify competitive asset base. An organic approach to foreign firms with value-added offerings, which building customer base and gaining market complement their own low-cost products and access in the US could otherwise take many services to create an efficient integrated global years. business model. With lowering of import tariffs, Indian companies Regulatory changes in India have made it easier are facing increased competition within the for Indian firms to become more global in their domestic markets. In order to compete operations. As foreign exchange reserves have effectively, these companies are under pressure grown, the Reserve Bank of India has to access global markets and operating progressively relaxed the controls on outbound synergies. US companies provide one of the best investments making it easier for Indian global platforms in the world. companies to acquire or invest abroad. PAGE 2
  4. 4. US-BOUND ACQUISITIONS BY INDIAN COMPANIES US- July 2010 as leading service providers in these high end Analysis of Transactions by Industry segments. Information Technology With 15 US-bound acquisitions in the first half of 2010, information technology was the most acquisitive industry in India accounting for 65% of the US-bound transactions by volume. Within this industry, healthcare related information technology, remote infrastructure management, specialized business process solutions, and enterprise resource planning sub-segments were attractive for 2010H1 Key Transactions in IT acquisitions, given their untapped offshore Date Buyer Seller opportunities and relatively higher margins. While Bureau of Collection 2-Jun Aditya Birla Minacs Recovery mid-size companies, such as Prithvi Info Solutions, 19-May Avantha Group Pyramid Healthcare Integra Software Solutions, Educomp and Cambridge 18-May Aegis Ltd SLM Corp-Back Office Technologies sought to add new service capabilities 10-May Prithvi Info Solutions Percentix Inc through US-bound acquisitions, large-size 27-Apr Integra Software Svcs Silver Editions Inc companies, such as Aegis, Aditya Birla Minacs, Rolta, 16-Apr Glodyne Technoserve DecisionOne Inc and Glodyne sought to strengthen their current 12-Apr Rolta India Ltd OneGIS Inc capabilities. 8-Apr MphasiS Ltd Fortify Infrastructure 27-Jan Educomp Solutions StudyPlaces Inc 12-Jan Cambridge Tech Ent Vox Holdings Inc Aegis’s acquisition of Sallie Mae’s customer service center Aegis acquisition of US-based education finance service provider Sallie Mae’s customer service center enables it to expand its service offerings with highly skilled customer service professionals. In addition, Aegis will leverage Sallie Mae's expertise in quality Indian IT & ITES (Information Technology Enabled and performance improvement as it integrates their Services) industry has come a long way from being operation into its global delivery platform. providers of lower margin services, such as software maintenance, payroll processing, and call Glodyne Technoserve Ltd’s acquisition of centre management to providers of high end DecisionOne services like software development, project Glodyne’s acquisition of DecisionOne for $104 management, technology strategy consulting, and million allows it to add more than 2,000 employees enterprise software implementation. This has been broaden its portfolio, including offering data centre, achieved through a focused approach of moving networking, server, workstation, storage services, up the value chain. Now, Indian IT and ITES application management, and remote technology companies are looking to establish their position infrastructure management services. PAGE 3
  5. 5. US-BOUND ACQUISITIONS BY INDIAN COMPANIES US- July 2010 Avantha's acquisition of Pyramid Healthcare developed as much as some other regions. The Solutions Marcellus is also attractive because it lies close to Avantha Group’s acquisition of Pyramid Healthcare major consumption centers in the northeastern U.S. Solutions for $20 million strengthens its global presence in the niche healthcare solutions sector, and provides a key platform to scale up domain expertise in the US healthcare market. Mphasis’ acquisition of Fortify Infrastructure Services, Inc. Mphasis’ acquisition of Fortify Infrastructure Services Inc, for $15 million and earnouts enables it to diversify into the offshore-based remote monitoring and operations marketplace, which is currently valued at about $4 billion globally and growing at more than 30% every year. Oil & Gas Mining Reliance’s acquisition of stakes in Atlas' Marcellus Essar Group's acquisition of U.S. coal producer Shale operations for $1.7 billion and in Pioneer Trinity Coal for $600 million, gives the global Natural Resources for $1.2 billion underscores the steelmaker direct access to a key raw material that potential that large Indian companies see in the has seen a recovery in demand. The deal gives Essar, prospects for U.S. shale fields, which have an international conglomerate with interests in steel, produced significant natural-gas reserves for North energy, construction, and shipping, ownership of American independent energy companies. Indian 200 million tons in coal reserves in the Central companies are also eager to learn how to extract Appalachian region. The reserves are split between gas from shale formations, and transfer those metallurgical coal used in steel production and techniques to similar formations around the globe. thermal coal used to fuel power plants. Shale gas accounts for between 15% and 20% of US The deal, in addition to JSW's acquisition of a coking gas production but is expected to quadruple in coal mine in the US is a sign that Indian steelmakers coming years, touching off a scramble among are shopping for raw materials in a bid to own more producers large and small for access to resources. pieces of their supply chain. Essar has steel-making Pioneer’s Eagle Ford shale is seen as an especially operations in North America, with a steelworks in attractive prospect as it is believed to be rich in Ontario, Canada, and a plant planned in Minnesota. natural gas liquids and condensates, which Essar also is developing and operates power command higher prices than regular natural gas. generation in India, which has not been a traditional The Marcellus Shale is among the larger shale market for U.S. thermal coal. formations, containing vast amounts of natural-gas resources, though the area hasn't yet been PAGE 4
  6. 6. US-BOUND ACQUISITIONS BY INDIAN COMPANIES US- July 2010 Cross Border Acquisitions in the US: Key Considerations Quantitative M&A Considerations Qualitative M&A Considerations As the acquisition strategy is being developed, Several qualitative issues can influence the success consideration should be given to the financial impact or failure rate of the acquired company within the that a poorly constructed and integrated deal can organization and should be taken into consideration have on the acquiring company. during the early planning phase. Valuation – Market comparables, free cash flow Developing Acquisition Criteria – Having a clear analysis, synergy valuation, and earning power strategic need and acquisition criteria, as well as should all be considered when valuing an analyzing the likely impact of an acquisition will acquisition target. help set a robust selection process. Integration Costs – Depending on the level of Selecting Advisors – Advisors with prior alignment, integration costs can be substantial. experience in US-based acquisitions and an Sales/revenue dis-synergies can occur as the understanding of the market will ensure a overall deal process tends to distract key smooth navigation through the acquisition stakeholders during the due diligence and M&A process. integration process. Legal Legal & Regulatory – A major aspect in cross Due Diligence – Comprehensive due diligence border acquisitions is the thorough legal and determines synergy value and uncovers potential regulatory analysis of a transaction. A well issues. US-based companies generally have good planned approach to managing contingent management information systems, which create liabilities and contract issues is essential. fast information flow. Financing – Having financing in place during the acquisition process increases the chance of a successful transaction. Financing can be through a combination of internal accruals and debt/ equity financing. Acquisition Structure – While multiple factors need to be considered for determining the acquisition structure, jurisdiction, tax incidence, accounting, access to funds and local regulations are the most important factors. Generally, US- bound acquisition structures include an earn-out clause where a portion of the value is to be paid over a period of time based on milestones. PAGE 5
  7. 7. US-BOUND ACQUISITIONS BY INDIAN COMPANIES US- July 2010 US- Acquisitions 2010 List of US-bound Acquisitions by Indian Companies in 2010 H1 Date Industry Target Name Acquiror Name Tx Val ($m) % share Jun-10 Oil & Gas Pioneer Natural Resources Reliance Industries Ltd 1,150.00 45 Jun-10 Pharma Karalex Pharma LLC Orchid Chem & Pharm Ltd - - EI du Pont de Nemours's non-mixture mancozeb Jun-10 Chemical fungicide business United Phosphorus Ltd - 100 Jun-10 IT/ITES Bureau of Collection Recovery Aditya Birla Minacs - 100 May-10 IT/ITES Pyramid Healthcare Solutions Avantha Group 20.00 100 May-10 IT/ITES SLM Corp-Back Office Unit,TX Aegis Ltd - - May-10 IT/ITES Percentix Inc Prithvi Info Solutions Ltd 3.00 100 May-10 Media IM Global LLC Reliance Big Ent Pvt Ltd - - May-10 IT/ITES TLC Technologies Inc Prism Informatics Ltd - 51 Undisclosed Coking Coal May-10 Mining Mine, JSW Steel Ltd 100.00 100 Apr-10 IT/ITES Silver Editions Inc Integra Software Svcs Ltd 4.00 100 Apr-10 IT/ITES Pacific Crest Technology Prodapt Solutions Pvt Ltd - 100 Apr-10 IT/ITES DecisionOne Inc Glodyne Technoserve Ltd 104.00 - Apr-10 IT/ITES Dynamic Test Solutions Inc Tessolve Services Pvt Ltd - 100 Apr-10 IT/ITES OneGIS Inc Rolta India Ltd - 100 Apr-10 Oil & Gas Atlas Energy Inc-Marcellus Reliance Industries Ltd 1,700.00 40 Apr-10 IT/ITES Fortify Infrastructure Svcs MphasiS Ltd - - American Solutions Inc and Mar-10 IT/ITES United Consultancy Services Spectacle Industries Ltd - 55 Mar-10 Mining Trinity Coal Corp Essar Group 600 100 Feb-10 Finance Northgate Capital Group LLC Religare Enterprises Ltd 200.00 - Comp-U-Learn Tech India Feb-10 IT/ITES Astus Technologies Inc Ltd - - Jan-10 IT/ITES StudyPlaces Inc Educomp Solutions Ltd 1.30 - Jan-10 IT/ITES Vox Holdings Inc Cambridge Tech Ent Ltd - - *Source: Thomson Database PAGE 2
  8. 8. US-BOUND ACQUISITIONS BY INDIAN COMPANIES US- July 2010 About IMaCS Virtus Global Partners IMaCS Virtus Global Partners, Inc. is a New York based advisory firm that offers services to North American companies and funds seeking India related growth and investment opportunities. The firm is a joint venture between Virtus Global Partners and ICRA Management Consulting Services Limited, which is a fully-owned subsidiary of ICRA Limited, one of India's leading credit rating agencies. We have an established track record of over 15 years and 1,000 engagements providing advisory services to a diversified client base across energy, manufacturing, infrastructure, and retail. Our team possesses a deep understanding of the business environment, both in the US and India and is well connected with companies, financial institutions, governmental agencies, and private equity firms in both markets. We also work with multilateral and bilateral government agencies, banks and financial institutions, and regulators. We are headquartered in New York with eight offices in India. OUR SERVICES M&A Advisory • Target Identification • Synergy Valuation • Price Negotiations • Deal Structuring India Strategy & Roadmap • Strategy Recommendations • Implementation Roadmap • Investment Strategy • Market Strategy Partner / Target Search • Joint Ventures • Strategic Alliances • Outsourcing • Distribution and Licensing Agreements Market Assessment • Demand Assessment • Competition Assessment • Industry Landscape Analysis • Customer Acquisition Strategy OFFICES New York (HQ) New Delhi Mumbai Bangalore 501 Fifth Avenue, Suite 302 Buildingo. 8, 2nd Floor, Twr A Electric Mansion, FL 4, Vayudooth Chambers, New York, NY 10017 DLF Cyber City, Phase-II Appasaheb Marathe Fl 2, Trinity Circle USA Gurgaon 122002 Marg, Prabhadevi 15-16 MG Road, Mumbai 400 025 Bangalore 560 001 Kolkata Chennai Pune Hyderabad FMC Fortuna, A-10, FL 3, Karumuttu Centre, 5th Floor 5A, 5th Floor, Range 301, Concourse Fl 3 234/3A AJC Bose Road 634 Anna Salai, Nandanam Hills Road, Shivaji No 7-1-58, Ameerpet Kolkata 700 020 Chennai 600 035 Nagar, Pune 411 020 Hyderabad 500 016 Please visit our website www.ivgpartners.com. For further information, please contact: Anil Kumar at akumar@ivgpartners.com or +001-646-807-9290. PAGE 3