ivca diligence training 0809 final

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.

Due DiligenceIVCA Foundation Course for Investment ProfessionalsAugust 11, 2009

2IVCA Diligence training 0809 FinalThis information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.

NDL

PE firms’ competitive advantage is built on 3 dimensions – today we will discuss diligence

Deal sourcing

• Expertise-driven, proactive deal sourcing

- Deep knowledge of attractive sectors

• Inbound deal flow through brand and reputation in the industry

- Management teams- Bankers and other advisors

Due diligence

• Ability to make the tough calls in due diligence

- Saying “no” when valuation is not supported by underlying potential

• Seeing value where no one sees it

• Focusing on evaluating the right the right issues

• Rigorously testing the right issues by building own proprietary, outside-in view

- Through primary research on customers, suppliers, competitors, etc.

Portfolio company improvement

• Ability to add value to portfolio company strategy and operations

• Powerful network to link portfolio companies to the best possible management talent, customers, suppliers, and advisors

Proprietary deal flow Analytically rigorous, fact-based decision-making

Post-acquisition operational excellence


NDL

Deal professionals sit at the center of a complex process – commercial diligence is most critical

Legal

Accounting diligence

Environmental diligence

Asset appraisal

Selling agent/bank

Legal counsel (own, seller’s)

Target’s management

Funding sources/ lenders

PE fund associate/

VP

Business (commercial) due diligence

• Industry attractiveness• Competitive situation• Target strength and stability• Exit paths• Business plan

• Pending litigation diligence- Legal landmines

• Audit - Accounting landmines

• Environmental liability

• Value of assets- Real estate- PP&E

Managing PE fund partners/

investment committee

• Selling the deal internally

• Auction/transaction process• Data requests/data rooms

• Negotiation, transaction contracts

• Building relationships• Data requests/interviews

• Securing financing- Selling the deal

Managing due diligence Other deal responsibilities


NDL

Agenda

• What are the objectives of commercial due diligence?

• What are the key investment criteria?

• What analyses are required to address criteria effectively and expediently?

• Watch-outs & success patterns

• Q&A


NDL

Objectives of commercial due diligence

• Validation / development of investment thesis by answering key questions:

- Is the market attractive? (size, growth, cyclicality, etc.)

- Is the target company’s businesses well defined?

- Can the target company perform well against competitors? Does its competitive position appear sustainable and can it be further improved?

• Develop perspective on sustainability of target’s cash flows:- Test management plan, model alternative business cases

- Document sustainability of cash flows, risks and opportunities

• Define the equity case and establish clear view of the full potential- What is the full potential value of the company?

- Which post-acquisition upside potential exists?

- What is the prioritized post-acquisition agenda?


NDL

A range of factors conspire to complicate due diligence, and cloud investor judgment

Management motivated to put the best “spin” on information

- Resist temptation to “default” to the management plan

Predicting 5-year financial outcomes inherently complex

- Avoid “boiling the ocean”

PE investors can learn only so much about an industry/target in the limited time available

- Invest heavily in focused independent analysis

Culture and incentives of funds bias investment professionals to make, not avoid, investments

- Foster a “truth seeking”culture with a rigorous deal review process

Focus is critical given the limited timeframes frequently associated with due diligence efforts

Information imbalance

Managing complexity

Bias toward “putting money to work”

Drinking the management ‘Kool-Aid’


NDL

To stay on top of these factors, firms must follow five due diligence imperatives

Reality check

Find thehidden gold

Think theunthinkable

Talk, talk,talk to

customers

Drive work from own, independent thesis

Thesis-driven work-planning focuses due diligence efforts immensely

No single element of business diligence is more important

Visualize the true downside case

Few great deals are characterized by “more of the same”

Ensure that new actions/ strategies required to reach targets are realistic


NDL

Investment thesis: A foundationfor due diligence

Limits influence of seller/ management forecasts

Unbiased framework

Sets up the deal model

Highlights critical value drivers Focuses team effort

All activities drive to proving/disproving the thesis

Investment thesis

Business due diligence

Develop early

… but frequently revisited

‘80/20’

Answers critical deal questions without descending into a morass of detail

Structured

Few, logical categories

• Focus on the right deal sub-questions

• MECE – mutually exclusive, collectively exhaustive

Specific

… enough to allow it to be disproved


NDL

Talk to customers: No substitute for first-hand perspective

In India primary research invaluable for informing all aspects of business due diligence

-Industry attractiveness-Competitive position-Target strength and stability-Business plan & P&L forecast-Exit paths

Interviews with target customers, competitors, consumers, industry experts, analysts, management team, and others provide insight into:

-Industry dynamics and trends-Health of target with key customers and/or consumer segments-Validity of key components of the deal thesis

Primary research is a critical component of any business due diligence


NDL

Think the unthinkable: Downside case is not just the base case –5%

Base Case Downside Case Sustained Downside

Volume “setpoint:”

•X units in Q4•X + Y units in 2002

•X units (for 5 quarters) •X units (for 3+ years)

Actions: •X FTE reductions•300mm COGS improvement

•Reduced shift schedules•Y additional FTE reductions•Pay cuts •Reduced IP expenses

•Mothball equipment•Z additional FTE reductions

One-time costs:

•Severance •Severance •Severance•Shutdown & restart

COGS savings:

•$68M (relative to 2Q 01) •$20M relative to base case •$12M in 2002•$35M net over 3 years

MAT savings:•$17M (18% FTES, 24% of cash costs)

•$11M relative to base case(19% of FTEs, 40% of cash costs)

•$0M

The downside case can turn out to be the base case

Chemical Co


NDL

Find the hidden gold: Multiple expansion driven by…

Note: All indexes are aggregated by Standard & Poor’sSource: S&P Compustat

Jan-

95

May

-95

Sep

-95

Jan-

96

May

-96

Sep

-96

Jan-

97

May

-97

Sep

-97

Jan-

98

May

-98

Sep

-98

Jan-

99

May

-99

Sep

-99

Jan-

00

May

-000

10

20

30

40

EV/EBITDA

141% increase

Target6/96

EV/EBITDA = 12.62

5/00EV/EBITDA=30.43

Technology Co(s)

Commentary

Company split into 2 post-acquisition to unleash value

- Tele-communications manufacturing

- Fabless semITservice Coductors


NDL

Reality check: Few companies hit“base case” targets

Upside and downside cases just as frequent as base case

LTM Revenue EBITDA %-40%

-30%

20%

-15%

-10%

-5%

0%

5%

10%

25%

35%Company A

(Better)

(Worse)

Company B

Company C

Company DCompany ECompany FCompany G

Company HCompany I

Company JCompany KCompany LCompany M

Company NCompany O

Company NCompany CCompany GCompany LCompany BCompany ACompany OCompany DCompany ICompany FCompany MCompany JCompany KCompany H

LTM

Per

form

ance

vs.

Model


NDL

Agenda





• Q&A


NDL

Questions answered through business due diligence drive investment decisions

• What is the underlying market growth?• Do participants earn attractive returns?• What key trends will shape the market going forward?

• What is the target’s performance relative to the industry?

- Growth/share gain- Economic return

• How healthy are current customer relationships and base?

• What are the true drivers of profit performance?- Product and customer level

• How strong is the existing management team and organization?

• What is the likely P&L?• Is there a realistic plan in place to realize forecast

financial results?- Base case, downside, upside

• What are the probabilities and values of various exit pathways?

- Strategic or financial buyers- IPO

Industry attractiveness

Competitive position

Business plan & P&L forecast

Exit paths

Strength & stability

Investmentdecision

Primary focus of diligence effort will vary deal by deal

More industry-focused

More target-specific


NDL

Agenda





• Q&A


NDL

Investment thesis

Scope and issues of a commercial due diligence

MarketReview Customers, Cost,

Capabilities

Company Review

Management Plan Review

Bottom-line CashTopline

• Competitor overview- Value chain - Profiles

• Market shares- Development- Consolidation trends

• Competitive positioning- Competitor profitability

(ROS/RMS)- e.g. growth/relative

price position- Relative cost position

• KSF and relative performance of key competitors

• What is the likely range of exits (IPO, sale to financial buyer, sale to strategic buyer)?• What operational and strategic changes in the company will be required post acquisition to achieve a successful exit?

• Sources/users of cash

• Net working capital• Inventory• A/P• A/R• CAPEX

• Sales bridges and drivers (e.g. price volume, region, product etc.)

• Mgmt plan assumptions, Bain assessment

• Growth/share analysis

• Growth/growth analyses- vs. historic- vs. market

• New products/R&D pipeline

• Risk assessment (for product by product review)

• Scenarios and sensitivities (e.g. mgmt. case vs. Bain case)

• Profit bridge and drivers

• Mgmt plan assumptions, Bain assessment

• Raw materials- Pass-through of cost- Supplier structure

• Production/ logistics- Production footprint

• Distribution costs- Catchment area

• SG&A- Marketing- R&D- Admin. overhead

• Upside/downsides• PLP

3 4

Competition Review

1 2

• "First impressions"• Business definition

(market)• Five forces

(incl. regulation)• Market size

- Segments- Regions

• Market growth- Growth driver logic- Underlying market

growth- Macro analysis- S-curve analysis- Price, volume - Volatility, cyclicality

• Industry value chain• Industry profitability

development and profit pool- Industry supply/

demand- Industry experience

curves- Industry cost curves

• Trends, dynamics

Exit options5


NDL

What is the underlying market size, segmentation, and projected growth?

1

First impressions Business definition

RThis information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.

MUN

First impressions / SummaryMarket

Key attractions Key concerns Key open issues

• Global in-flight catering industry sizeable with approx $11B sales in 2005

• Growth strongly differentiated by region and flight type (segmentation):

- Asia positive due to increase in passenger volume

- Catering for long-haul flights relatively stable business

• Drivers: Airline industry with attractive growth rates; potential for catering industry to participate at least in selected segments

• Structure: European and US market highly consolidated; Asian market un-consolidated with sizeable captive in-house volumes: growth potential through consolidation and outsourcing

• Growth: US in-flight catering market flat; Europe flat despite increasing PAX volume; growth largely through LFC w/ decreasing meal provision

• Continued margin pressure of airline customers puts strong price pressure on caterers for economy class/low-cost carriers

- Steady decrease of airline catering unit spend since 1991

• Industry profit pool highly volatile; over-proportional negative impact during airline industry downturn after 09/11

- Avg. industry ROIC ~6.5%

• Avg. duration of catering contracts decreasing

• Price/volume scenarios to generate market forecast for relevant segments

• Key industry trends and potential impact

- Downside potential in short-haul flights from volume reduction, buy-on-board, pre-packaged food competitors

- Upside opportunities in in-flight retail, full in-flight solutions and other adjacencies

• Market consolidation potential in Asia

2

R

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.

MUN

IMM: Injection molding; EXT: Extrusion; BLM: Blow molding; THF: ThermoformingSource: Bain analysis

Costsharing

Customersharing

High

Low

Low High

One business

Separate businesses

One business with potential

for substitution

IMM/THF

IMM/BLMIMM/

EXT4.5

Comb. market

size(in €B)

• Low application overlap• Limited capability sharing

with respect to process technology (plasticizing, screw mechanism, forming) and plastics materials used

• High application overlap mainly in packaging

• IMM and BLM machines integrated into systems at customers’ site (e.g. PET)

• Some application overlap in packaging/electronics

• Different input materials (IMM: pellets, THF: sheet/ rolls, mainly PE)

One business with potential for differentiation or niche position

Separate businesses with potential for cost leadership

Separate businesses with

potential for bundling

Business definition framework2

Market size


MUN

Market size and segmentation

Source: IATA, Bain analysis

0

20

40

60

80

100%

Manu-facturers

51

Operators

Airlines

326

Services

FuellingCatering

Groundhandling

Maintenance

Freight forwarders

Airports

186

Reser-vation

CRS

Tra

velag

ents

45

Global aviation industry 2004 ($B)

Lessors

Total = 608

2

Market growth Growth driver logic

R

This information is confidential and was prepared by Bain & Comp any solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.

MUN

Industry growth

Source: Bain analysis

0

200

400

600

800

1995

209 218

305 285

379

2000

746

612

528 514

386

2005E

464512 520

565 589

2010E

612

Shipments of raw material for capacitor manufacture(in M $)

6%

11.8%

5.1%

CAGR: 05-10-4% mg/unit

Raw materialvolume scenario

2


MUN

100

120

140

160

180

200

220

2000 2005 2011

Latex Carpet Market(in Tsd. t/p.a.)

Low

Carpet recycling, is a factor for future carpet purchasing decisions due to difficulty of carpet disposal. However, this is a directive only, not legislation as yet

Medium

Switch to other materials for carpet XXXX. Increasing pressure to reduce costs for carpet manufacturers mean "unseen" elements i.e. XXXX, have been seeing substitution

High

Carpets under pressure from other flooring systems. Popularity of hard surfaces especially laminates & wooden flooring. Regional differences occur and level of substitution is slowing

High

Total flooring market growing withGDP and construction

Relative importance

Growth impact

Key drivers

-

+

-

-

+ = positive = neutral - = negative

AAGR~-4%

AAGR~-1%

Growth drivers2


NDL

What are the drivers underpinning the industry? How will these impact the target?

S-curve Cyclicality

Experience curvesIndustry profitabilityIndustry profit pool

Industry value chain


MUN

Technology S-Curves: Examples

Time

Early adoption/trial Mass adoption

Saturation/ substitution

Decline

Driven by people who always adopt new things early and fuel initial growth

The product becomes accepted by the market; characterized by rapid growth

The product has either saturated the market, or is already being substituted

The decline of the product, driven by complete substitution or replacement

Cum

ula

tive

sal

es

pen

etra

tion

S-Curve Driving Factors

• Historical penetration growth

• End-point saturation

Bain S-Curve Model … … typical for technological innovations in history

Actual

Model (1956-)

19551960 1965 1970 1975198019851990 19950

20

40

60

80

100%

% of US household

Actual

Model(1980-)

Model (1965-)

1955 1960 1965 1970 1975 1980 1985 1990 1995 20010

20

40

60

80

100%

% of French households

Actual

Model (1965-)

1955 1960 1965 1970 1975 1980 1985 1990 1995 20010

20

40

60

80

100%

% of French households

Actual Outdoorgas grills

1985 1990 1995 20000

20

40

60

80

100%

% of US household

Analog cable TV

Refrigerators

Washing machines

Outdoor gas grills

2


MUN

Industry Cycles

Source: S&P, EU, Company information, analyst reports, industry associations, Bain analysis

-20

-10

0

10

20

30

40%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Y-o-Y change

Electronics

Medical equipment

Aviation& aerospace

Hard & heavy metals

Energy

Automotive

Chemicals

Weighted average

0

20

40

60

80

100%

2005A

OtherEnergy

Medical eq.

Aviation &aerospace

Automotive

Hard &heavymetals

Chemicals

Electronics& Optics

€910M

Sales by end market

2

R

This information is confidential and was prepared by Bain & Comp any solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.

MUN Source: Bain analysis

Manufacturer

Critical aspects

Barriersto entry:Clay

Concrete

• Access to clay/ concrete (sourcing market generally local)

• High invest-ments needed in the production capacity

• Well-distributed nation-wide sales force

• Relationship with distri-butors (over 90% of sales indirect)

• Relationship with roofers/ contractors (very influential advertising agents)

• Relationship with architects (very influential advertising agents)

Barriers to entryHigh Low

Rawmate-rials

Produc-tion

Marke-ting

Mer-chants

BuildingContrac-

tors

Archi-tects

End users

Industry value chain2


MUN

Note: ROIC = NOPLAT/invested capital* Average ROIC weighted by revenuesSource: IATA, Bain analysis

0

5

10

15

20

25%

AverageROIC*

Man

ufac

turers

Less

ors

Airline

s

Cate

ring

Groun

dhan

dling

Fuellin

g

Freig

htforw

arde

rs

Maintena

nce

Airp

orts

Trav

elag

ents

CRS

AverageROIC 1996-2004

Industry profit pool2


MUN

0

5

10

15

20

25%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Caterin

g

Airline

s

Less

ors

Groun

dhan

dling

Manufac

ture

rs

Airp

orts

CRS

Fuell

ing

Trav

elag

ents

Mainten

ance

Freigh

t

forw

arde

rs

Average ROIC 1996-2004 (%)

Average ROIC*

Upturn ROIC / Downturn ROIC

Average volatility

More volatile, instable returns Less volatile, more stable returns

Note: ROIC = NOPLAT/invested capital* Average ROIC weighted by revenuesSource: IATA, Bain analysis

Industry profitability/ volatility of earnings2


MUN

Experience curves

Source: Bain Cost Model 200X

0

20

40

60

80

100%

Extrusion

SG&A

PlantOverhead

PackagingCost

Printing

Depreciation

Labor

Raw Material

$67

Costs per 1000 in $(excluding SG&A and OH)

0.0

0.1

0.2

0.3

$0.4

20 50 100 200 500 1,000

Millions of Units Produced (Log Scale)

2,000 3,000

Cost per 1000 units (excluding cap)

Global plastics scale effects

Plant-level tube scale effects

National packaging scale effects Regional

playersNational players

Global players

FEB

C D

Player A

Global players can develop significant cost advantage in plastic packaging manufacture

2

1


NDL

Other Key Questions: How would you answer them?

• What is the competitive landscape, and the competitive positioning of the target?

• How has the target performed, and what have been the detailed drivers of performance?

• What is the base case of target’s revenues, and the scenarios and sensitivities?

• What is the base case of target’s EBITDA, and the scenarios and sensitivities?

• What is the target’s cash situation?

• What are the probable exit options and what is required to achieve a successful exit?

2

3

4

4

4

5


NDL

Case study: Diligence of IT service provider

• A non-India based PE fund wanted to acquire an Indian IT services company

• The PE fund was moderately familiar with India and IT services separately but had not done a deal in the Indian IT space

Background

Investment

The opportunity & the challenge

• Target is a relatively young IT services company (only 1.5 years of operating history)

• Target serves 3 industry verticals in the US with a broad range of services include application testing, development and maintenance and testing, offsite/remote database management and systems integration/consulting

• The target expects revenue growth of ~80% per annum between FY08 and FY11

• Target has experienced dramatic growth in its 1.5 years of existence and has an aggressive plan to be a major player in IT services

• Demand for IT outsourcing services has grown rapidly and appears to be a good space for PE investment and the target is one of the few sizable private players remaining in the market

• The lack of operating history and a customer base outside of India makes it very difficult to predict how the company will perform


NDL

Case study IT services: Scope of commercial diligence

• How does IT service Co’s business model compare to other ITOs in the U.S. and India? How will it rate in as $500M company?

- What is the nature of the IT services provided by IT service Co? Are these services differentiated

- Does IT service Co have any proprietary products?

- What is the nature of the company’s contracts (i.e. project-based vs. staff augmentation)?

• How scaleable is IT service Co’s human capital model?

- What are historic recruitment rates and attrition levels?

- What is mix b/t green card, H1 and citizens

• Can IT service Co meet inorganic revenue targets?

• Can IT service Co evolve business model?

• Who are the company’s main competitors today? What are their strengths and weaknesses relative to IT service Co?

- Who will be IT service Co’s competitors in the future when it is $500M?

- Will IT service Co be able to compete effectively with future competitive set?

• How does the company’s pricing and contract terms for customers compare to competitors?

• Is the company’s current mix of onshore & offshore services optimal given market trends and competitors’ strategy?

• Are IT service Co’s profitability expectations reasonable given competitor benchmarks?

• How is IT service Co viewed by customers?

- What are customers’ key selection criteria and how does IT service Co rate on these criteria

- How frequently do customers switch from one IT services vendor to another?

- Has the propensity to switch increased/decreased? How will it shift in future?

• Can IT service Co grow its share of IT spending in its core customers to meet the organic growth targets?

- What is IT service Co’s current share of wallet in key customers?

- What is a reasonable forecast for SOW by 2011?

• Can IT service Co acquire new customers with its current footprint?

• What is the size of the current ITO market in the U.S. that IT service Co serves? How does the market segment by vertical?

• What is the expected market growth in India?

• What are the underlying drivers of growth for the U.S. market and how have they trended?

• Are the customer verticals targeted by IT service Co in the U.S. attractive verticals (i.e. retail, manufacturing, services & technology?)

• What are the broader market trends as it pertains to IT service Co’s business model? What are the implications?

What are the market dynamics?

Is IT service Co’s current customer base attractive

and committed?

Can IT service Co compete effectively today

and in the future?

Is IT service Co’s business model

sustainable & scaleable?

1 2 3 4


NDL

Case study IT services: We built a “derived demand” model to forecast market growth

IT service co Target Market

IT Spend in US (in target’s verticals)

% of US IT spend outsourced

% off-shored vs. on-shore

FY02 = 6%

FY07 = 14%

41-44%NAGDP Growth = 5.9%CAGR (02-07)/ Percentage

Level of certainty

CAGR (07-11)/ Percentage

Drivers

GDP Growth = 3.9%

• GDP slowdown in the US in the next 2 years because of sub-prime crisis; expected to pick up from late 2009-10

• Retail is expected to slowdown faster than GDP, Manufacturing and Services track nominal GDP growth

FY07 = 14%

FY11=20%

44-46%NA

• % off-shored is rising as significant cost differentials exist and significant increase in high quality off-shore capabilities are built up in India

• IT Spend being out-sourced is likely to stabilize/stagnate as market matures, and companies cut investments in the slowdown

• IT spend outsourced is low in Healthcare, high in Retail/ Manufacturing

• Tech upgrade cycle is slowing down, because of cautious spending on new applications in slowdown years; the upgrade frequency being pushed from 4 to 6 years

Source: Bain Analysis

a b c

Nominal GDP/Vertical

GrowthTech upgrade cycle


NDL Notes: CAGR weighted for target’s mix is based on the business mix in FY07, FY09 and FY11Source: Forrester, IDC, Bain Analysis

Case study IT services: This suggested that the market will experience decelerating growth

0

20

40

60

80

$100B

Icon's Market(FY07-FY11)

2002

56

2007

72

2011

On-shore

Off-shore

83

07-'11CAGR

24.4%

3.1%

5.0%

02-'07CAGR

13.3%

1.8%

3.7%

Weighted for IT service co’s mix 3.0% 3.2%

0

20

40

60

80

$100B

Icon's Market(FY07-FY11)

2002

56

2007

72

2011

Services

Manu-facturing

Retail

Govt.

Healthcare

Telecom

83

5.1%

4.6%

4.7%

5.6%

4.4%

6.8%

02-'07CAGR

2.7%

3.9%

4.7%

2.7%

3.5%

4.5%

07-'11CAGR

5.0%3.7%

IT service co core target verticals

IT service co non-core target verticals


NDL

Case study IT services: We built scenarios around the base case by ranging key drivers

Outsourcing penetration (FY11)

Off-shoring penetration (FY11)

Implied IT service co target market growth (07-11)*

3%

46% 50%

20% 25% 20% 25%

2.6% 1.9% 4.7% 4.1%

4%

46% 50%

20% 25% 20% 25%

3.2% 2.5% 5.4% 4.7%

5%

46% 50%

20% 25% 20% 25%

4.0% 3.3% 6.2% 5.5%

GDP Growth (FY07-11)

Off-shoring

Outsourcing penetration

US GDP Growth

• Assumes that recent historical trend in outsourcing penetration of slow upward climb continues

46% in FY11

• Third party forecast which assumes slowdown in ’08 and 1H ’09, and normal growth through ’11

3.9% (FY07-11)

• Off-shoring as a % of overall outsourcing is calculated assuming recent off-shoring trajectory continues

20% in FY11

Driver Value Base Case Rationale

Base case assumptionsOther scenarios

Low case Base case High case

*Target market growth reflects IT service co’s mix of onshore and offshore in 2011


NDL

Case study IT services: We conducted in depth interviews with the companies top 20 customers

How satisfied are you with IT service co’s

service offering?

Where would you place IT service co relative to other IT vendors your firm

uses?

How likely are you to recommend IT service

co to your peers?

0

20

40

60

80

100%

Icon

9

10

100NPS* (%)

On a scale of 0-10, how likely are you to recommendIcon to a colleague? (10= very likely)

“In terms of quality, other vendors bring in the quality people for the presentations, then send people ‘right out of high school’ for the work. IT service co doesn’t do that.”

CIO, Customer F

“In my experience, other vendors haven’t come with the right level of resources. IT service co is able to come in and hit the ground running.”

Director of Contract Services, Customer H

“I’ve even recommended IT service co to do work for our competitors.”

Director of Contract Services, Customer L

“I don’t see IT service co going away. I see them being our prime, number one alliance partner.”

CEO, Customer G

“IT service co is our most trusted alliance partner. We know the IT service co’s shareholders personally and we know we will get 24/7 responsiveness.”

CEO, Customer A

“Would definitely recommend. They have been flexible, dedicated, worked around the clock, and went above and beyond.”

Senior IT Director, Customer M

“IT service co’s price was better, but their knowledge base differentiated them.”

IS Manager, Customer I

“From a project stand point, IT service co brought core people with experience in the latest software. They understood exactly what our need was.”

IS Manager, Customer D

“I would rank IT service co at the top of all the vendors I’ve dealt with.”

CIO, Customer E

“I was very comfortable with the consultants provided by IT service co. They were very trustworthy, and I was never concerned that they were there for the money.”

CIO, Customer B

“If I need something, IT service co is the first one I talk to.”

CIO, Customer J

“IT service co treats our business as if it is their own. If there was a vendor of the year award, I would give it to them.”

VP Operations, Customer C

“I’ve already recommended IT service co to others.”

CIO, Customer K

* NPS (Net Promoter Score) defined as percent of respondents rating company ‘9’ or ’10’Source: IT service co customer interviews


NDL

Case study IT services: We evaluated IT service Co’s competitive set today

* Primarily staff augmentation refers to companies with >50% revenues accruing from supplying temp. resources, Project/Task outsourcing refers to companies that mainly execute fixed price projects with clear deliverables, Managed services refers to companies that can provide end-to-end solutions or provide complete IT management. Note: managed services companies will sometimes do fixed price projects, but Project/Task companies typically do not have the capabilities to offer managed services

Source: Analyst interviews, Analyst reports, Company websites; Literature search

US Onshore Players

Indian Players

• Primarily Fortune 500 clients (with some Fortune 500-1000)

- Complete IT services outsourcing or cross-country product implementation

• Most clients are Fortune 1-2000- Few large contracts with marquee

Fortune 500 clients

• Primarily SME clients (with some Fortune 2000 clients)

- Projects from Large clients involve small tasks or part of larger contracts (sub-contracting)

Icon's competitive set (Current/Future) IBM($55B)

Accenture($21B)

EDSCSC

TCS

Infosys

BearingPoint

Wipro

CTS

Satyam

HCL

CIBER

Keane

MicrosSyntel

iGate

Retalix

Mastek

Zensar

Birlasoft

L&TInfotech

Intelligroup

NSBUS Tech

Icon

Large

Primarily Staff Augmentation

Primarily Managed Services

Business Model*

Avera

ge C

on

tract

Siz

e

Small

Primarily Project/Task Outsourcing

Medium

1

2

3

4

IT service co


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Low

~$60/$17 (Onsite/offsore)

- Strong in ERP solutions implementation

- Short duration fixed price projects

- Solutions for mid-tier clients

- Application outsourcing

- ERP implementation and maintenance

- POS, warehousing, transportation products

$145M

Low

~$55/$20 (Onsite/offsore)

-Generalist companies with low vertical expertise

-Involved in sub-contracted projects

-Staff augmentation

-Legacy system up-gradation and maintenance

-Small product implementation and app. maintenance projects

$ 100 - 200M

Small contract - Primarily staff augmentation companies

- Strong in Life science, retail and telecom

$337M

- Focused on outsourcing for Insurance and FS

$307M

- Expertise in Insurance and Govt. verticals

$200M

Small contract – Project/Task outsourcing companies

Medium

$75-100

- Niche retail players$110M

IT service Co

IT service Co’s competitive strength

Pricing

(Coding FTE/hr)

Relevant Domain expertise

Breadth of servicesRevenueIllustrative list of companies

1

2

Case study IT services: We assessed how IT Co. “stacks up” to each class of competitor


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Case study IT services: All this led to a revenue & EBITDA forecast lower than managements’

0.0

FY08

Utiliz

ation

Offsho

remov

emen

t

Scaleleve

rage

Other

FY11

Mgmt

Utiliz

ation

Offsho

remov

emen

t

Scaleleve

rage

Other

FY11

Bain

IT service Co EBITDAmargin expansion (FY08-11)

0

IT services Co RevenueForecast

FY08

Organ

ic

Acqu

isitio

ns

Growth

ofac

quitn

s(U

S)

Grow

thof

acqu

itns(Ind

ia)

FY11

Mgm

t

Organ

ic

Acqu

isitio

ns

Growth

ofac

quitn

s(U

S)

Growth

ofac

quitn

s(Ind

ia)

Bain


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Agenda





• Q&A


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Due diligence: Watch-outs

Roll-up theses

“Gold rush”markets

Snowball effects

Market disruptions

“OK”managemen

t

Hockey stick forecasts

• Need a compelling rationale, detailed plans, seasoned management and patience for roll-ups

• Execution/ integration extremely challenging

• Avoid “irrational exuberance”around new technologies, regulatory changes, etc.

• Changes can create extra-ordinary wealth but often creates more losers than winners

• Consider “auto-correlation” of industry success variables

• Single variable sensitivities can often over-/under-estimate true impact on valuation (e.g. insurance companies)

• Model the extremes of “exogenous”market disruptions in downside cases

- Regulatory/ legislative changes, bailouts, etc

• Take a hard look at management

• “OK” or “acceptable”management rarely is

• More than 40% of senior executives are replaced over time following a private equity change in ownership

• Pressure test management and base case forecasts extensively

• Few companies achieve the P&L forecasts laid out in a private equity deal model, especially in the early years


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Where is the industry, target positioned in relevant cycles (equity, macro, industry lifecycle, etc.)?

Over the last 20 years, approximately 2/3rds of all private equity returns have come from multiple expansion

Is the business fundamentally sound but under-managed, over-burdened?

Under-performing, non-core businesses of conglomerates are often under-managed and flourish under new, focused management

If strategic exit is likely in the future, why is the future buyer not interested today?

Strategic buyers can afford higher multiples than financial buyers

- Strategics will pay for prospective synergies

Is the company failing for controllable (e.g. management) or structural reasons?

One simple fix or complex, multi-faceted fix?

How much time will be required?

Distressed situations offer motivated sellers, limit the number of competing investors

- Can lead to attractive deal terms

What is the likely future growth rate?

Key questions:

Growth can hide other flaws

Growth provides flexibility

- Cash flow- Debt reduction - Expansion - Exit

Rationale:

Due diligence: Success patterns

Growth companies that keep growing

Successful turnarounds

Exits to strategic buyers

Corporate spin-outs (sellers in

need)

Well-timed cycle plays


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Agenda





• Q&A


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Appendix: Profile of Bain & Company


NDL

Bain is, by far, the global leader in consulting to PE funds

Critical component of Bain’s global business– >20% of firm’s business– Eight-fold growth since 1997

Vast global network of experience in due diligenceand post-acquisition performance improvement

– 300+ professionals dedicated to serving PE clients in North America, Europe and Asia

500 transaction assignments annually– Advised on 60% of large cap ($1B+) transactions in North

America and Europe in last 10 years– 4X the next largest firm serving LBO funds

Fully aligned incentives - Bain partners have invested $500M+ of after tax cash in PE deals and funds over last ten years – with top quartile returns

Significant penetration of key deals – have worked on 60% of all deals above $2B in US and Europe

Bain Capital founded on Bain principles and toolkit.One of the most successful funds to date

0

1

2

3

Deal returns multiple

Industry mean

1.4X

Bain diligencesupport

2.2X

Bain portfoliosupport

2.9X


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We work with almost all of the large funds, in the US, Europe, and Asia

0

20

40

60

80

100%

Active U.S. LBO funds(as of Dec 2007)

$10B+

139

$5-10B

89

$2-5B

101

$1-2B

70

<$1B

89

Total = $488B

0

20

40

60

80

100%

€4B+

86

€2-4B

22

€1-2B

18

Active European LBO funds(As of December 2007)

€750M-1B

Total = €130B

0

20

40

60

80

100%

>$2B

95

>$1B

58

>$500M

37

Asia capital under management(2005, in US$ B) Total = $191B

AMERICAS EUROPE ASIA

BainPene-tration

100% 62% 56% 25% 92% 100% 43% 60% 63% 39% 13%

Source: …


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Bain has a 25-year history in Asia with over 1,000 projects

• Clients served include established multinationals and private equity funds from the US, Europe, Australia, Japan, Korea and large Asian companies across the region

• Extensive network of offices in the region with 500+ professional staff. In each market, most of the professionals are Asian nationals supplemented by experienced consultants from our global network

• Bain has worked across a full range of industries in the region. Expertise groups have been established to cover major industry sectors: financial services, industrial goods/services, technology/media/telecom, consumer products/retail, LBO/private equity, healthcare/pharma, and auto/transportation

• Bain has completed over 1,000 projects in Asia. Our capabilities extend to all areas of strategy, performance improvement, M&A/private equity,organization/change management, and IT

• Our approach to consulting is completely consistent with the Bain worldwide approach, characterised by a strong and constant focus on results

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.NDL 37

We have significant experience in India, along with a strong senior team

Delhi

Mumbai

• Growing presence in New Delhi with over 100 consulting staff, and 180+ total staff

- Mumbai office in 2009

• Deep experience in 30+ industries: media, industrial products/services,private equity, FMCG, telecom, technology, healthcare, financial services

• Project experience includes growth strategy, full potential, market entry, M&A, performance improvement, change management

• Global expert-access business model


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Select senior team profiles

•Leader of Bain India’s Private Equity and Industrials Practice. Member of the Telecommunications, Technology and Media Practice

•Significant experience in developing value creation strategies including organic growth and M&A for enterprise software, wireless infrastructure and service providers.

•Prior to Bain, worked for DEC in Boston and Mumbai

•MBA in Strategy and Multinational Management from The Wharton School (Palmer Scholar). Graduate of the Indian Institute of Management

Sri RajanPartner

Ashish SinghManaging Director

• 14 years in consulting• Co-founder of Bain’s Enterprise

Software (1996), Media & Entertainment (1998), and Pharmaceutical practices (2001)

• Led major client relationships across consumer products, tech, financial services, pharma, media/entertainment

• Significant experience in India: consumer products, financial services, private equity, tech & telecomm, healthcare, industrial

• Prior to Bain, worked for Citibank in Delhi and Mumbai

• BA Economics, Harvard College (Hons)

• MBA, Harvard Business School (Distinction)

David Mountain Partner

• 14 years in consulting

• Deep experience in financial services and private equity

• Managed multiple client engagements including strategic planning, risk management, performance improvement, growth strategy and mergers and acquisitions

• Prior to Bain founded a UK-based credit card company, Accucard, now Lloyds Create

• BSE, Princeton (Hons)

ivca diligence training 0809 final

Documents

influential

ve ra ge

prior written

address criteria

uf ac tu

key investment

commercial

tech upgrade