Bobby Parikh, Managing Director, BMR Advisors
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Transcript of 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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Implications for Buyers, Sellers, and Investors
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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
Mumbai
3F, Contractor Building
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
Sheetal Bahl
DID: +91 11 30815095 Cell: +91 9811824168
Shivani Nagpaul
DID: +91 22 3021 7165
Cell: +91 99205 91054
Chennai
33, South Beach Avenue
MRC Nagar
Chennai 600 028
Tel: 91 44 4298 7000
Fax: 91 44 4298 7001
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BMR Advisors