M&A in 2009: Gazing into the

crystal ball
 Is M&A a good idea during this downturn?

1,000 US companies studied during (1982–99) that included the US recession of 1990 to
1991. Successful challengers, maintained greater appetite for acquisitions during
recession than the less successful former peers.
Source: Mckinsey Quarterly – 2002

Our analysis of more than 24,000 deals between 1996 and 2006 reveals that the
companies that acquired through the last downturn (2001 to 2002) generated almost
triple the excess returns of companies that made acquisitions during prior boom years
Source: Forbes.com, 2008
1. Frequent acquirers buy through economic cycles
2. M&A as a philosophy is aligned to a Company’s vision and strategic goals
Ram – HCL Tech 2
Current State of Industry…

• Global perspective
– Geo-political risk at the back of 26/11 incident in Mumbai

– Growing Indian and other BRIC emerging markets (Growing IT Spend)

– Growing un-employment rates in major markets may lead to regulations

• IT Industry
– Challenges to grow revenues as significant dependence on US / UK

– Cut down in IT budgets by customers as most of the new projects are deferred

– Few of the companies are cash rich and will be under pressure to make best use of the cash

– Small-Mid players who are niche are hit badly by their over-dependence on few customers or vertical

• M&A
– Deal closure time has increased

– Significant difference in valuation expectations of Buyers and Sellers

– Expectation is that there would be quick turn around and most of the companies will test the 2006-07 highs

Time to have long term strategic view and best time to accelerate…
Ram – HCL Tech 3
Parameters that would drive M&A

Parameters Potential Strategy

 Geographic Penetration: Continental Europe, LATAM, Japan
 De-risking Strategy: Near shore in East Europe, LATAM, Onshore Centers – US, Canada
 Capability Acquisition: Consulting and Blue-printing, Products
Strategic  Dominate in Verticals/Horizontals: Vertical (Micro-vertical) and horizontal specific
acquisitions

 Revenue Addition: Acquire “Me too” Company

 Customer Acquisition: To establish long term relationship
 Carve out or Captive acquisition: Help the customer to monetize the current assets,
Tactical enter into long term relationship

 Scale Acquisition: Acquire large company for cheap valuation

 Takeover of Troubled Assets: Buying assets for really cheap price
Generic Buy’s  Merger of Small to Mid size companies: Survive through the economic downturn

Strategic buyers will be looking to do bolt-on acquisitions at the right price

Ram – HCL Tech 4

Transaction Characteristics

 Drop in number of deals during the first half of 2009 as compared to 2008
Timelines  Longer time to close the deal due significant difference in Buyer & Seller price expectations

 Bolt-on acquisitions – Target size: $10-50 million

Deal Sizes  Some of the transactions would be JV’s with exit defined 3-5 years down the line; sizes
would be around ~$100 million
 High chances of consolidation of small players in the industry

 Very Geographic, Segment and Company Specific

 Product companies would command premium
 Cash positive and Sticky customer oriented company will command a premium
Valuation  Unique assets would also command a premium
 Revenue Multiple: 0.5 – 1.2X forward
 EBITDA Multiple: 5 – 9 X forward

 Company may more likely go for Earn out on agreed business plan than go for retention
Earn-out/ Incentives bonus
 Only Key management / critical employees may be incentivised

 Short term synergies need to be ruled out completely expect for small cost savings due to
Synergy Expectations consolidation of support staff
 Prepare for long term growth story

Most of the transactions although value buys should be looked at from long-term
perspective; not to expect quick wins
Ram – HCL Tech 5
 Take on next 12 months…

• Value buy’s or few bolt-on acquisitions would be flavor of the season and would be

expected to happen during the first half of the year; volumes may pick up during

second half of 2009

• Few large deals but may be pushed to the second half of 2009

• Focus areas would be BFSI (Risk Management, Payments, developing micro-vertical

domain expertise), Infrastructure (Storage management), Enterprise Application

space, Platform based BPO, Internet (Online advertising, Social Networking) and

Physical & IT Security

• See more of carve-out/ hive-off being done to tide over the credit crunch

• See more of Joint-Ventures to de-risk now but realize higher value during the up-turn

Small De-risking deals would be short term transactions; few large deals probably
may happen during the second half of 2009
Ram – HCL Tech 6
Key points…

• Frequent acquirers buy through economic cycles

• Take a long term strategic view – best time to accelerate

• Align M&A activity to Vision and long-term strategic goals

• Good time to do bolt-on strategic acquisitions at a right price

• Although the acquisitions may be cheap don’t expect

immediate synergies to accrue from the transaction

• Deal closure will take longer time; matching of expectations of

buyers and sellers will be a challenge in the short term

Ram – HCL Tech 7

Thank You

Ram – HCL Tech 8