US-bound Acquisition by Indian Companies Oct 2009

Oct. 09 Vol. 2.2

US-BOUND ACQUISITIONS BY

INDIAN COMPANIES

Analysis of Year-to-Date 2009 Transactions

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October 1, 2009

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ICRA MANAGEMENT CONSULTING

SERVICES LIMITED

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USUSUSUS----BOUND BOUND BOUND BOUND AAAACQUISITIONS BY CQUISITIONS BY CQUISITIONS BY CQUISITIONS BY IIIINDIAN NDIAN NDIAN NDIAN CCCCOMPANIES OMPANIES OMPANIES OMPANIES October 2009

PAGE 1

Significant slowdown in USignificant slowdown in USignificant slowdown in USignificant slowdown in USSSS----

bound acquisitions by Indian bound acquisitions by Indian bound acquisitions by Indian bound acquisitions by Indian

ccccompaniesompaniesompaniesompanies A sharp decline in global growth projections, lack of

acquisition financing, decrease in US wages and

lower demand due to the global recession has

caused Indian companies to put brakes on their

overseas growth plans in 2009. Compared to the

same period last year, there were 78% fewer US-

bound transactions from India in the first nine

months of 2009. Most transactions were less than

$50 million in size compared to the three billion

dollar plus transaction sizes seen in the same period

the previous year. Unlike last year, some of these

transactions involved minority stake. This reflects

how Indian companies are adapting to the new

economic realities while being still opportunistic

about global growth.

One of the key aspects of this year’s transactions

involves distress and bankruptcy on the part of the

sellers. Examples include S Kumar’s acquisition of

Hartmax, Cadila’s investment in Novavax, Cosmo’s

acquisition of ACCO’s print finishing business,

Piramal’s acquisition of RxElite, and 3i’s acquisition

of NRLB.

IT/ITES

40%

Pharma

30%

Textiles10%

Print

10%

Chemical

10%

5346

10

2007 2008 2009

KKKKEY EY EY EY HHHHIGHLIGHTSIGHLIGHTSIGHLIGHTSIGHLIGHTS AND AND AND AND TTTTRENDSRENDSRENDSRENDS

A sharp decline in growth projections, lack of

acquisition financing, decrease in US wages and

demand due to the global recession has caused

Indian companies to put brakes on their global

growth plans in 2009.

There were only ten US-bound transactions year-

to-date as compared to 46 transactions in the

same period last year and 53 transactions in the

first three quarters of 2007. This represents a 78%

decrease in terms of volume over last year.

Compared to three one billion plus deals in the

first three quarters of 2008, this year’s

transaction sizes were much smaller. Except for S

Kumar’s acquisition of Hartmax, all other

transactions were less than $50 million in value.

Over 50% of the transactions were motivated by

special situations and distress related value buying

opportunity.

Unlike last year, majority control was not a key

feature of these transactions.

A majority of these transactions had an earn-out

structure, where a portion of the deal value is

paid on future milestones.

Industry Breakdown of US-bound Transactions in the first three Quarters of 2009

US-bound Transactions in the first three Quarters of 2006 to 2009


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KKKKey factors contributing to the ey factors contributing to the ey factors contributing to the ey factors contributing to the

sssslowdownlowdownlowdownlowdown The global credit crisis has resulted in lack of

acquisition financing available to fund such

transactions. After witnessing extensive capital

inflow in 2007 and 2008, India experienced a

reversal in 2009. Private capital flow in 2009 is

expected to be less than half of their 2007 levels,

posing pressure on investors that were a source of

acquisition capital for the Indian companies

acquiring US based companies. Banks as well as

other institutional funds are reluctant to provide

acquisition capital in the current environment.

In addition, the economic recession has led to a

decline in growth projections for US companies and

a decrease in US wages and demand. As a result

Indian companies fear making the wrong move in a

dismal market with little pricing certainty.

Analysis of Transactions by Analysis of Transactions by Analysis of Transactions by Analysis of Transactions by

IndustryIndustryIndustryIndustry

Information Information Information Information TechnologyTechnologyTechnologyTechnology

Information Technology (“IT”) has been the most

acquisitive industry so far. In the first three

quarters of 2009, this sector accounted for

approximately 40% of the total US-bound

transactions. Within this industry, financial

services, enterprise resource planning, advanced

engineering services, and analytics sub-segments

were attractive for acquisitions. While ICRA Techno

Analytics Limited (ICTEAS) and Rediff sought to

acquire customers and enter into new segments,

Quest Global and 3i Infotech sought to further

strengthen and consolidate their business

offerings.

Indian IT & ITES (Information Technology Enabled

Services) industry has come a long way from being

providers of lower margin services, such as

software maintenance, payroll processing, and call

centre management to providers of high end

services like software development, project

management, technology consulting, and

enterprise software implementation. This has been

achieved through a focused approach of moving

up the value chain. Now, Indian IT and ITES

companies are looking to establish their position

as leading service providers in these high end

services. This is evident in 3i Infotech’s acquisition

of JP Morgan’s national retail lockbox business

(NRLB) and Quest Global’s acquisition of ASE

Technologies.

On the other hand ICTEAS’ acquisition of Sapphire

International shows the propensity of Indian

companies to gain scale in terms of size, product

offerings, and geography. This particular

acquisition is targeted not only at cross selling

ICTEAS’ business intelligence and business

analytics service (a niche area in which it has

strong expertise) to Sapphire’s existing client but

also delivering on the offshore component of

Sapphire’s work thorough its development centre

in India.


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Pharmaceutical & HealthcarePharmaceutical & HealthcarePharmaceutical & HealthcarePharmaceutical & Healthcare

The Indian pharmaceuticals and healthcare industry

sector accounted for over 30% of the transaction

volume with three US-bound acquisitions in the first

three quarters of 2009. This sector has been

characterized by special situation and distressed

related value buying opportunity.

Piramal Healthcare’s acquisition of RxElite Holdings

provides Piramal with a sales and distribution

network in the US and complements its pending

acquisition of Minrad International, a pain

management company, announced in December

2008. At the same time RxElite Inc., the parent

company of RxElite Holdings, will use a significant

portion of the sale proceeds to retire its existing

debts. Similarly, Satellite Overseas’ acquisition of a

minority stake in Novavax is part of several

agreements between Novavax and Cadila, the parent

company of Satellite Overseas, and included a

master service agreement and a joint venture.

Apart from the special situation deals, Lupin

acquired global rights for AllerNaze from Collegium

Pharmaceutical Inc in another transaction. This

transaction is targeted to expand Lupin’s brand

business in the US.

As a target location, the US has traditionally lagged

behind Europe in pharmaceutical outbound

acquisitions from India. However, this could change

based on the upcoming generic opportunities and

size of the US market. Relying on third party

marketing agents may not be a good strategy in the

long run, thus, Indian companies are expected to

acquire export supporting networks in the US.

Automotive & ManufacturingAutomotive & ManufacturingAutomotive & ManufacturingAutomotive & Manufacturing

Higher than expected valuation of available

acquisition targets and a significant industry

contraction in the US has forced Indian automotive

and manufacturing companies to slow down on the

acquisition trail. There was only one transaction in

this sector in the first nine months of 2009.

Cosmo Films Ltd’s acquisition of GBC Commercial

Print Finish of ACCO Brands Corporation is targeted

to boost Cosmo’s technical expertise and marketing

network globally. While Cosmo Films manufactures

bi-axially oriented polypropylene (BOPP) as well as

thermal films, GBC Commercial Print Finishing is in

business of lamination equipment and thermal films.

Cosmo Films already exports thermal laminates to

Europe and the US. The acquisition, besides

strengthening its foothold in other parts of the world

is also expected to establish Cosmo Films as a

global player in the thermal lamination segment.

There was no transaction in the automotive

segment; however, with US companies moving their

basic auto-component production to China and

India, assemblies and finishing sub-industries

represent the interesting segments.


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Other Industry SegmentsOther Industry SegmentsOther Industry SegmentsOther Industry Segments

Over the past years, Indian textile and jewelry

companies have built new manufacturing facilities

and SEZs. These companies have looked to acquire

distribution and retail channels to utilize the

additional capacity. The need to acquire US

companies is driven by the desire of these

companies to acquire new supplier relationships and

distribution channels and not for manufacturing

capacities.

A transaction that stands out is S. Kumar’s

acquisition of the troubled American clothing

manufacturer, Hartmarx Corporation. Hartmarx had

earlier sought Chapter 11 protection amid a group

of retail industry bankruptcies brought in by liquidity

concern in the credit market, rising unemployment

and the economic recession. The acquisition is

expected to help the S. Kumar Group establish a

substantial footprint in the global arena and also

bring significant business volume to the Group’s

operations in India through a ‘front-end back-end

synergy’ strategy.

Alongside, Galaxy Surfactants Ltd., a supplier of

performance products for home and personal care

based in Navi Mumbai, India, has acquired Tri-K

Industries Inc. TRI-K Industries Inc. is a distributor

and producer of specialty ingredients to the

cosmetics and personal care markets. Headquartered

in Northvale, N.J., the company has operated in the

personal care industry for more than 30 years. This

acquisition strengthens Galaxy's global presence and

gives them an expanded product portfolio, allowing

them to better serve their customers in the

cosmetics and personal care industry.

The road ahead...The road ahead...The road ahead...The road ahead...

US-bound acquisitions by Indian companies, in the

first nine months of 2009, have been significantly

affected by the economic downturn. However, at the

same time the economic downturn has presented

opportunities for distress related acquisitions at

attractive valuations. Factors expected to impact US-

bound acquisitions by Indian companies in the near

future are discussed below:

� Financing challenges:Financing challenges:Financing challenges:Financing challenges: Financing will be one

of the most important challenges faced by

Indian companies looking to acquire US

companies in the near future as banks and

financing institutions are already under

pressure.

� Distress related value buying:Distress related value buying:Distress related value buying:Distress related value buying: We expect to

see more deals targeted at acquiring control

of the firms struggling in financial crisis.

� Profitability enhancing and cost saving deals:Profitability enhancing and cost saving deals:Profitability enhancing and cost saving deals:Profitability enhancing and cost saving deals:

We expect deals targeting consolidation, cost

savings and improving profitability rather

than expansion and increasing scale of

operations.

� Increasingly Increasingly Increasingly Increasingly ppppositive interactions between ositive interactions between ositive interactions between ositive interactions between

India and US:India and US:India and US:India and US: Talks on bilateral investment

treaty has already started between India and

the US, which is expected to improve

investment conditions in both India and the

US.


PAGE 5

Quantitative M&A ConsiderationsQuantitative M&A ConsiderationsQuantitative M&A ConsiderationsQuantitative M&A Considerations

As the acquisition strategy is being developed,

consideration should be given to the financial impact

that a poorly constructed and integrated deal can

have on the acquiring company.

Valuation Valuation Valuation Valuation –––– Market comparables, free cash flow

analysis, synergy valuation, and earning power

should all be considered when valuing an

acquisition target.

Integration CostsIntegration CostsIntegration CostsIntegration Costs – Depending on the level of

alignment, integration costs can be substantial.

Sales/revenue dis-synergies can occur as the

overall deal process tends to distract key

stakeholders during the due diligence and M&A

integration process.

Due DiligenceDue DiligenceDue DiligenceDue Diligence – Comprehensive due diligence

determines synergy value and uncovers potential

issues. US-based companies generally have good

management information systems, which create

fast information flow.

Financing Financing Financing Financing –––– Having financing in place during the

acquisition process increases the chance of a

successful transaction. Financing can be through

a combination of internal accruals and debt/

equity financing.

Acquisition Structure Acquisition Structure Acquisition Structure Acquisition Structure –––– While multiple factors

need to be considered for determining the

acquisition structure, jurisdiction, tax incidence,

accounting, access to funds and local regulations

are the most important factors. Generally, US-

bound acquisition structures include an earn-out

clause where a portion of the value is to be paid

over a period of time based on milestones.

Qualitative M&A ConsiderationsQualitative M&A ConsiderationsQualitative M&A ConsiderationsQualitative M&A Considerations

Several qualitative issues can influence the success

or failure rate of the acquired company within the

organization and should be taken into consideration

during the early planning phase.

Developing Developing Developing Developing Acquisition Criteria Acquisition Criteria Acquisition Criteria Acquisition Criteria – Having a clear

strategic need and acquisition criteria, as well as

analyzing the likely impact of an acquisition will

help set a robust selection process.

Selecting AdvisorsSelecting AdvisorsSelecting AdvisorsSelecting Advisors – Advisors with prior

experience in US-based acquisitions and an

understanding of the market will ensure a

smooth navigation through the acquisition

process.

LeLeLeLegal & Regulatorygal & Regulatorygal & Regulatorygal & Regulatory – A major aspect in cross

border acquisitions is the thorough legal and

regulatory analysis of a transaction. A well

planned approach to managing contingent

liabilities and contract issues is essential.

Cross Border Acquisitions in the US: Key ConsiderationsCross Border Acquisitions in the US: Key ConsiderationsCross Border Acquisitions in the US: Key ConsiderationsCross Border Acquisitions in the US: Key Considerations


PAGE 6

List of USList of USList of USList of US----bound Acquisitions by Indian Companies in H1bound Acquisitions by Indian Companies in H1bound Acquisitions by Indian Companies in H1bound Acquisitions by Indian Companies in H1----2009 2009 2009 2009

DateDateDateDate IndustryIndustryIndustryIndustry BuyerBuyerBuyerBuyer TargetTargetTargetTarget

Tx Value Tx Value Tx Value Tx Value

($m)($m)($m)($m)

Jan-09

Manufacturing - Thermal films &

lamination Cosmo Films Ltd ACCO Brands’ GBC Commercial Print NA

Jan-09 IT & ITES Quest Global ASE Technologies NA

May-09 IT & ITES Rediff.com Examville.com LLC NA

Apr-09 IT & ITES 3i Infotech Ltd JPMorgan Treasury Services-NRLB NA

Mar-09 Pharmaceutical & Healthcare Satellite Overseas (Hldg) Novavax Inc 11.00

Jan-09 Pharmaceutical & Healthcare Piramal Healthcare Ltd RxElite Holdings Inc 4.20

Mar-09 IT & ITES ICRA Techno Analytics Ltd Sapphire International Inc NA

Jun-09 Pharmaceutical & Healthcare Lupin Ltd Collegium Pharm - AllerNaze NA

Jun-09 Consumer goods – Textiles S Kumar Hartmarx Corp 119.00

Jul-09 Specialty Chemicals Galaxy Surfactants Ltd Tri-K Industries Inc NA

*Source: CapitalIQ Database

Virtus Global Partners, Inc. (VGP) and ICRA

Management Consulting Services Limited (IMaCS)

jointly offer advisory/consulting services to

clients based in the US and India.

VGP, a boutique financial and business advisory

firm based in New York, is focused on advising

clients in the US seeking to invest or make

acquisitions in India or vice versa. VGP provides

cross border mergers and acquisitions advisory,

private equity services, strategic consulting, and

capital raising services across various industry

sectors.

IMaCS, a wholly owned subsidiary of ICRA

Limited, is a multi-line management consulting

firm with a global footprint across 35 countries.

IMaCS’ practice areas include strategy

consulting, risk analytics, process consulting,

development consulting, and transaction

advisory services in several verticals including

banking and finance, energy, infrastructure,

manufacturing, and services.

VGP and IMaCS pool their respective expertise in

their home bases and their complementary skills

in consulting and investment banking to offer a

strong value proposition to clients in the US and

India.

VGP - IMaCS provides a full range of investment

banking services, including:

• Cross border mergers and acquisitions

• Fund advisory

• Strategic partnerships & joint ventures

• India and US entry strategy consulting

About About About About Virtus Global PartnersVirtus Global PartnersVirtus Global PartnersVirtus Global Partners and and and and IMaCSIMaCSIMaCSIMaCS


PAGE 7

Key Transactions:Key Transactions:Key Transactions:Key Transactions:

For more information, visit our websites www.virtusglobal.comwww.virtusglobal.comwww.virtusglobal.comwww.virtusglobal.com and www.imacs.inwww.imacs.inwww.imacs.inwww.imacs.in OR contact Anil Kumar at

[email protected]@[email protected]@virtusglobal.com/ Bhaskar Som at [email protected]@[email protected]@imacs.in.

Advisor to Ultra

has secured senior credit and second-lien financing

DisclaimerDisclaimerDisclaimerDisclaimer

The information contained in this document is a compilation of public domain data and internal research. Our findings are based on

information available as of September 30, 2009. Virtus Global Partners and ICRA Management Consulting Ltd do not guarantee the

accuracy or completeness of any information contained in this document. Recommendations rendered in this report are not binding.

Any decision or action taken by the recipient based on this report shall be solely and entirely at the risk of the recipient.

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US-bound Acquisition by Indian Companies Oct 2009