2016 ACG Case Competition strategy by Sierra Securities at University of Cincinnati. Work by Sarang Ananda Rao and team.

1. Looking Toward the Future
Strategic Opportunities for IT
Group
Sierra Securities January 29, 2016
1

2. Sierra Securities
Our Team
Sarang Ananda Rao, Partner
2
Laura Sirk, Managing Director
Jimmy Peng, Chief Investment Officer
Grant Ely, Managing Director
Avinash Korukollu, Partner

3. Sierra Securities
Agenda
I. Strategic Recommendation
II. Recommendations for Increased Liquidity
III. Fundamental Valuations
IV. Available Alternatives
V. Appendix
3
Agenda

4. I.Strategic Recommendation
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5. Sierra Securities
ITS + SSIT
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Raise money and increase liquidity
Strategic Recommendation
Pursue field office
expansion for territorial
growth
Cost cut to achieve 12%
EBITDA margins

6. Sierra Securities
ITGroup + Operating Units: IntrinsicValues
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Strategic Recommendation

7. Sierra Securities
7
Strategic Recommendation
Operating Performance of ITG and IT Services

8. Sierra Securities
Divesting SSIT
Overall Valuation à
Reduced by ~$300m
Loss of SSIT weakens
long term EBITDA
Margins
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$63M
Strategic Recommendation

9. Sierra Securities
Semiconductor
Manufacturingin the
US
Industry Trends
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Strategic Recommendation

10. Sierra Securities
IT Consulting in the
US
Industry Trends
10
Strategic Recommendation

11. Sierra Securities
Alternatives for raising capital:
Initial Public Offering
Benefits
- Greater visibility in the market
- Greater valuation of the company
- Possibility of Liquidation
Downsides
- More legal compliance
- Periodic Reporting
- Focus more on short term than
long term
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Strategic Recommendation
Direct Public Offering
Benefits
- Faster to market
- Less equity dilution
- Avoidance of “IPO Window”
- No Underwriter
Downsides
- Less capital raised
- Greater legal exposure
- Fraud potential
Private Equity
Benefits
- Immediate Cash
- Long term growth
- More efficient operations
Downsides
- Potential loss of ownership
- Valuation from PE side is less
Cost: ~8.8-12% upfront
+ On Going Cost
Cost: ~3% of raised capital
+ On Going Cost

12. II. Recommendations for Increased Liquidity
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13. Sierra Securities
ITGroup has lesser liquidity in terms of Current Assets as compared to its competitors
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2011 2012 2013 2014 Comp
CR&QRratios
ITGroup
Current Ratio Quick Ratio
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1 Monitor Account Receivables to ensure you receive prompt payments
2 Optimize account management: negotiate longer payment terms
with vendors
3 Use Sweep accounts
4 Decrease overhead costs
5 Pay off a portion of debt/ Refinance debts for
longer period or lower rate
6 Diversify funding sources
7 Look for and request discounts for early payments to suppliers
8 Optimize tax position: consider selling and leasing back assets, tax
credits for R&D
As of 2014, IT Group has a $115M cash reserve. Utilize idle funds, gain interest on the cash reserve.
Increase Liquidity

14. Sierra Securities
In order to gain liquidity, collect prompt payments from customers
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0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
50
100
150
200
250
300
350
400
450
2011 2012 2013 2014 2015E 2016P 2017P 2018P 2019P 2020P
AR/Sales (%)
AR ($ Millions)
IT Group
Accounts Receivable AR/Sales
Over the last 5 years, ITGroup has not
been receiving prompt payments from its
clients
Re-negotiate terms with customers to
ensure prompt payments for the services
TARGET: Bring AR/Sales level to 15%
Increase Liquidity

15. Sierra Securities
Optimize account management in order to gain liquidity
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0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
5
10
15
20
25
AP/Sales (%)
AP ($ Million)
IT Group
AP AP/Sales
Look for and request discounts on early
payments to suppliers
Negotiate longer payment terms with
vendors
TARGET: Bring AP/Sales level to 4.5%
Increase Liquidity

16. Sierra Securities
Maintain cost cutting strategies
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0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
75%
76%
77%
78%
79%
80%
81%
82%
83%
84%
2011 2012 2013 2014 2015E2016P2017P2018P2019P2020P
SG&A/Sales(%)
COGS/Sales(%)
ITGroup
COGS/Sales SG&A/Sales
ITGroup’s cost cutting strategies are working well
For every $100 revenue,currentcost-cutting strategy
saves $4 in COGS and $1.5 in SG&A costs
Additional savings of$0.5 in SG&A costs per $100
revenue expected by 2020
Increase Liquidity

17. Sierra Securities
ITGroup has lesser liquidity in terms of Current Assets as compared to its competitors
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2011 2012 2013 2014 Comp
CR&QRratios
ITGroup
Current Ratio Quick Ratio
17
1 Monitor Account Receivables to ensure you receive prompt payments
2 Optimize account management: negotiate longer payment terms
with vendors
3 Use Sweep accounts
4 Decrease overhead costs
5 Pay off a portion of debt/ Refinance debts for
longer period or lower rate
6 Diversify funding sources
7 Look for and request discounts for early payments to suppliers
8 Optimize tax position: consider selling and leasing back assets, tax
credits for R&D
As of 2014, IT Group has a $115M cash reserve. Utilize idle funds, gain interest on the cash reserve.
Increase Liquidity

18. Sierra Securities
Recommendation: Fitting the puzzle together
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IT Consulting
Semiconductor
Industry
- Where to invest?
- Growth?
- New markets?
- Cut costs?
- How to improve performance?
- How to optimize resources?
- How to increase sales?
Attractive US/Overseas
Investment
- Regional/Local Player
- Uses a lean structure
- Effective product management line
- Good brand presence
- Can be public
- Enter new market, create offshoring
- Gain clients
- Gain brand presence
- Increase revenue
- Use management principles
to develop product line
- Increase revenue
- Global presence/exports
- Restructure company
- Use software from IT
Consulting and hardware
from semiconductors
- Develop global presence
- Increase revenue
Long Term Strategy

19. III. Fundamental Valuations
A. Discounted Cash Flow Method
B. Market Approach
C. Transaction Approach
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20. Sierra Securities
2020
Fundamental Valuations
Uses WACC of 10.5-12%

21. Sierra Securities
2121
Fundamental Valuations
CYCLICAL
INDUSTRY
Uses WACC of 15-16.5%

22. Sierra Securities
2222
Fundamental Valuations
Uses WACC of 11.5-12.3%

23. IV. Available Alternatives
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24. Sierra Securities
Alternative
Strategic
Opportunities
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To provideliquidity and enhance
shareholder value
Available Alternatives
1. Sell SSIT, go IPO with ITG
• Independent of SSIT Valuation
• Independent of ITG Valuation
2. Maintain SSIT private and
go IPO with ITG – An option
3. Keep both private for a
longer time
4. ESOP of ITG

25. Sierra Securities
Strategic Alternatives cont.
Option 1: Sell SSIT, go IPO with ITG
• As a stand-alone IT Services value is $892M which is $66M less than the packaged value of IT
Services and SSIT grouped together.
• As a stand-alone SSIT value is -$7M, which is increased by $18M if IT Services and SSIT are
grouped together
• Additional cost incurred in setting up SSIT as a separate company and a significant increase in
annual costs to SSIT
• Reduction in consulting revenue growth from loss of SSIT clients substantially impacts long term
performance
* Best option is to not separate both units since both units are strongly tied together. 25
Available Alternatives

26. Sierra Securities
Strategic Alternatives cont.
Option 2: Maintain SSIT private and go IPO with ITG – An option
• Go IPO with IT Services
• Keep SSIT private and deploy cost-cutting measures to increase net income
• Cash flow from IT Services can be used to increase assets of SSIT
• Additional cost incurred in setting up SSIT as a separate company and a
significant increase in annual costs to SSIT
* Best option is to not separate both units since both units are strongly tied together.
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Available Alternatives

27. Sierra Securities
Strategic Alternatives cont.
Option 3: Maintain IT Group as a private company
• Keep IT Services and SSIT as private
• Deploy cost cutting measures and concentrate on increasing the number of
potential buyers for increase in revenue.
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Available Alternatives

28. Sierra Securities
Strategic Alternatives cont.
Option 4: Sell ITG shares to Employees
• Sell company shares to Employees for increase in cash
• Available tax deductions from ESOP
• Awards or bonuses that could otherwise be paid in cash can be paid in
company stock
• Retain employees for a longer period
* Could be thought as a last option to increase much needed cash 28
Available Alternatives

29. Sierra Securities
Questions?
Thank you.
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Conclusion

30. V. Appendix
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31. Sierra Securities
Liquidity Ratios of ITGroup and SSIT
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0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2011 2012 2013 2014 Comp
CR&QRratios
ITGroup
CR QR
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2014 Comp
CR&QR
SSIT
CR QR
Appendix

32. Sierra Securities
A.Industry Outlook
Semiconductor Manufacturing
Offshoring | Prices | Volatility
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Annual Growth 10-15*
-6.9%
Annual Growth 15-20*
1.7%
*Based on Industry Data generated by IBIS World
Appendix

33. Sierra Securities
A.Industry Outlook
IT Consulting Services
Innovation | Consolidation
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Annual Growth 10-15*
2.6%
Annual Growth 15-20*
3.2%
*Based on Industry Data generated by IBIS World
Appendix

34. Sierra Securities
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IPO: Strategy for the Future
$92 M Raised
~ 65% stake
Owner
16M shares
~ 65% stake
Investors
Issue 5M
additional shares
Increased
Visibility
Company
Exit
Strategy
Initial
Investors
- Lifelong Dream
- Liquidity from LT
investment
- Retain majority
stake
Owner
$18 /share
29M shares
Liquidity
Growth
IPO

35. Sierra Securities
DCF model assumptions
Growth rate maintains 5% through 2019 , and residual growth set to 1.7%.
Selling, General and Administrative expenses are expected grow at 3%..
Change in Non-Cash Working Capital are expected to be 5.2% of sales.
Interest Expenses are 8% of total debts.
Capital Expenditures are expected to be 3.1% of sales.
Size premium set to be 7%.
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Appendix

36. Sierra Securities
Comparable Company Selection
Market Approach:
Companies are selected based on:
- similarities in functioning
- revenue growth margin
- EBITDA margin
- Current Ratio, Quick Ratio, Debt to Equity
Ratio, Net Income ROA and ROE
Transaction Approach:
- Identify transactions where
Revenue/EBITDA is similar to that of
ITGroup/SSIT
- Remove outliers
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Appendix