bobby parikh, managing director, bmr advisors

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Gazing into the Crystal Ball

M&A in the IT/ITES Industry in 2009

February 13, 2009

Bobby Parikh

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Presentation overview

2008: A recap

2009: Looking ahead

– What factors will impact M&A activity

– When will there be a significant shift in deal

activity

– What will be the key themes

– What will be the key transaction features

Implications for Buyers, Sellers and Investors

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2008: A Recap

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A recap of M&A activity in 2008

Amongst the top 3 ‘active’ sectors in value ($3.4 Bn) and volume (102) terms

Shift towards larger & strategic deals

– Deal value has grown despite significant fall in volumes

– 72% growth in ticket size vs 2007

– 8 big deals of over $100Mn constitute 71% of the total deal value

Gain in domestic transactions

– Domestic transactions up from 13% in 2007 to 23% in 2008 in deal value terms

– Outbound deals, while losing share, still dominate overall activity

Deal metrics 2008 2007

Value (Y-O-Y growth) 18% -0.6%

Volume (Y-O-Y growth) -36% 63.9%

Avg ticket size ($Mn) 69 40

No of Deals> $100Mn 8 7

0

5

10

15

20

25

30

35

40

Q1 Q2 Q3 Q4

0

200

400

600

800

1000

1200

1400

1600

1800

QVG 21%

QVG: 205

%

QVG: 55%

9% of TV

10% of TV

32% of TV

49% of TV

No

of

de

als

Valu

e (U

SD

Mn

)

Quarterly trendTV: total value; QVG: quarterly value growth

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Source of data: Nasscom, ValueNotes, ThomsonOne and BMR internal research

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2009: Looking ahead

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Key factors impacting M&A in 2009

Accelerators

Factor Impact on M&A

Value creation potential for Buyers / Sellers through strategic tie-ups or partial acquisitions / divestments

High

Weak financial positions in many smaller-sized companies

High

Weaker ability to meet target growth rates organically despite lowered expectations

Low

Decelerators

Factor Impact on M&A

Valuations (will attract Buyers, but make targets hold out aggressively)

High

Willingness to buy in weak and uncertain economic environment

High

Poorer (relatively) availability of funds for acquisitions (partial decline in internal accruals and drying up of external funding)

Low

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While value creation opportunities and strained financial positions will boost M&A activity, the pace, timing, and magnitude of deal activity will be impacted also by the

overall state of the global and Indian economy

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Pace and timing of deal activity

Economic indicators point to an inflexion point by the second half of 2009 / early 2010; two potential scenarios could then emerge

Significant deal activity driven by “value buys”

Buyer: Companies of all size

Sellers: Small and mid-sized players and PE funds

Significant deal activity driven by “value buys”

Buyer: Companies of all size

Sellers: Small and mid-sized players and PE funds

Significant deal activity driven by survival need

Buyers: Large companies or PE funds as “aggregators”

Sellers: Small companies and some big boys as well

Significant deal activity driven by survival need

Buyers: Large companies or PE funds as “aggregators”

Sellers: Small companies and some big boys as well

Economic recovery

Downturn deepens

Scenario M&A impact

In either scenario, we expect deal activity to gain momentum from the 2nd half of 2009. That said, in “value” terms, deal activity could be significant even earlier as key large / strategic

deals take place

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Dominant M&A themes

Expansion into new geographies

Acquisition of new customers

Reduce dependence on the US market to de-risk revenues

Tap emerging / under-penetrated markets to boost revenue growth

Reduce dependence on the US market to de-risk revenues

Tap emerging / under-penetrated markets to boost revenue growth

Reduce customer concentration risk (lessons from the recent bankruptcies)

Create stable revenue streams, potentially through captive acquisitions

Create cross-sell opportunities for growth

Reduce customer concentration risk (lessons from the recent bankruptcies)

Create stable revenue streams, potentially through captive acquisitions

Create cross-sell opportunities for growth

Themes Business imperatives

The M&A priority in the short-term would be to de-risk and grow revenues. In the medium-term, however, we see the return of an M&A strategy driven capability expansion

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Key transaction characteristics

Target functions

IT: ERP and consulting, products / platforms / tools

BPO: F&A , BFSI-specific transaction processing, value buys in research and analytics.

Procurement outsourcing has the potential to become a big activity area

Target geographic focus (clients): India, Europe, Japan and Australia

Target industries: BFSI, which is still a large opportunity; Retail has potential, but strongly linked to

global economic recovery; Utilities

Target considerations: Established profitability, high quality client base, strong leadership

Target functions

IT: ERP and consulting, products / platforms / tools

BPO: F&A , BFSI-specific transaction processing, value buys in research and analytics.

Procurement outsourcing has the potential to become a big activity area

Target geographic focus (clients): India, Europe, Japan and Australia

Target industries: BFSI, which is still a large opportunity; Retail has potential, but strongly linked to

global economic recovery; Utilities

Target considerations: Established profitability, high quality client base, strong leadership

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Key implications for M&A participants

Evaluate strategic partnerships / new transaction structures to gain entry into target companies rather than waiting for complete buy-outs

Increase focus on overseas opportunities as relatively smaller drops in value multiples should make these more amenable compared to offshore-based companies

Target India-centric companies to access domestic market and potentially reduce operating costs

Evaluate strategic partnerships / new transaction structures to gain entry into target companies rather than waiting for complete buy-outs

Increase focus on overseas opportunities as relatively smaller drops in value multiples should make these more amenable compared to offshore-based companies

Target India-centric companies to access domestic market and potentially reduce operating costs

Buyers

Actively consider partial divestments for strategic tie-ups with better-capitalized players to ensure capital access and growth opportunities

Shift focus to maintaining profitability and retaining customers as opposed to rapid expansion

Maintain good cash positions, especially given reduced funding availability, to avoid distress sell-outs

Actively consider partial divestments for strategic tie-ups with better-capitalized players to ensure capital access and growth opportunities

Shift focus to maintaining profitability and retaining customers as opposed to rapid expansion

Maintain good cash positions, especially given reduced funding availability, to avoid distress sell-outs

Sellers

Increase engagement with portfolio companies, especially to improve access to customers and funds

Evaluate portfolio aggregation to avoid forced exits

Scout intensively for value buys where able

Increase engagement with portfolio companies, especially to improve access to customers and funds

Evaluate portfolio aggregation to avoid forced exits

Scout intensively for value buys where able

Private Equity

In 2009, the much talked about consolidation of the industry will become a reality, and the fittest will survive and grow

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If you would like further information please contact:

New Delhi

The Great Eastern Centre,

First Floor, 70 Nehru Place,

New Delhi 110 019

Tel: 91 11 3081 5000

Fax: 91 11 3081 5001

CONTACT BMR IT/ BPO M&A TEAM

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41, R. Kamani Marg

Ballard Estate

Mumbai - 400 001

Tel: 91 22 3021 7000

Fax: 91 22 3021 7070

Bangalore

2nd Floor, Embassy Icon Annexe,

2/1, Infantry Road

Bangalore 560 001

Tel: 91 80 4032 0000

Fax: 91 80 4032 0001

www.bmradvisors.com

Vivek Gupta

DID: +91 11 3081 5052

Cell: + 91 98104 04411

[email protected]

Sheetal Bahl

DID: +91 11 30815095 Cell: +91 9811824168

[email protected]

Shivani Nagpaul

DID: +91 22 3021 7165

Cell: +91 99205 91054

[email protected]

Chennai

33, South Beach Avenue

MRC Nagar

Chennai 600 028

Tel: 91 44 4298 7000

Fax: 91 44 4298 7001

bobby parikh, managing director, bmr advisors

Technology