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US-bound Acquisition by Indian Companies Oct 2009

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According to a report released by Virtus Global Partners, USA and ICRA Management Consulting Services Limited (IMaCS), the number of US-bound transactions from India in the first three quarters of 2009 has dropped by 78% compared to last year. This was driven by a sharp decline in global growth projections, lack of acquisition financing, and decrease in US wages and consumer demand. On the other hand, economic downturn has presented opportunities to Indian companies for distress related value buying opportunities. This reflects how Indian companies are adapting to the new economic realities while still being opportunistic about global growth

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US-bound Acquisition by Indian Companies Oct 2009

  1. 1. Vol. 2.2 Oct. 09 US-BOUND ACQUISITIONS BY INDIAN COMPANIES Analysis of Year-to-Date 2009 Transactions October 1, 2009 VG VIRTUS GLOBAL PARTNERS ICRA MANAGEMENT CONSULTING SERVICES LIMITED 501 Fifth Avenue, Suite 302, New York, NY 10017 Logix Park, First Floor, Tower A4 & A5, Sector 16, Noida, India – 201301
  2. 2. US-BOUND ACQUISITIONS BY INDIAN COMPANIES US- October 2009 Significant slowdown in US US- KEY HIGHLIGHTS AND TRENDS bound acquisitions by Indian A sharp decline in growth projections, lack of acquisition financing, decrease in US wages and companies demand due to the global recession has caused A sharp decline in global growth projections, lack of Indian companies to put brakes on their global acquisition financing, decrease in US wages and growth plans in 2009. lower demand due to the global recession has There were only ten US-bound transactions year- caused Indian companies to put brakes on their to-date as compared to 46 transactions in the overseas growth plans in 2009. Compared to the same period last year and 53 transactions in the same period last year, there were 78% fewer US- first three quarters of 2007. This represents a 78% decrease in terms of volume over last year. bound transactions from India in the first nine months of 2009. Most transactions were less than Compared to three one billion plus deals in the $50 million in size compared to the three billion first three quarters of 2008, this year’s transaction sizes were much smaller. Except for S dollar plus transaction sizes seen in the same period Kumar’s acquisition of Hartmax, all other the previous year. Unlike last year, some of these transactions were less than $50 million in value. transactions involved minority stake. This reflects Over 50% of the transactions were motivated by how Indian companies are adapting to the new special situations and distress related value buying economic realities while being still opportunistic opportunity. about global growth. Unlike last year, majority control was not a key feature of these transactions. One of the key aspects of this year’s transactions involves distress and bankruptcy on the part of the A majority of these transactions had an earn-out structure, where a portion of the deal value is sellers. Examples include S Kumar’s acquisition of paid on future milestones. 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. Chemical 10% Print 10% IT/ITES 40% Textiles 10% 53 46 Pharma 10 30% 2007 2008 2009 Industry Breakdown of US-bound Transactions in the first US-bound Transactions in the first three Quarters of 2006 three Quarters of 2009 to 2009 PAGE 1
  3. 3. US-BOUND ACQUISITIONS BY INDIAN COMPANIES US- October 2009 acquire customers and enter into new segments, Key factors contributing to the Quest Global and 3i Infotech sought to further slowdown strengthen and consolidate their business The global credit crisis has resulted in lack of offerings. 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 Indian IT & ITES (Information Technology Enabled acquisition capital in the current environment. Services) industry has come a long way from being providers of lower margin services, such as In addition, the economic recession has led to a software maintenance, payroll processing, and call decline in growth projections for US companies and centre management to providers of high end a decrease in US wages and demand. As a result services like software development, project Indian companies fear making the wrong move in a management, technology consulting, and dismal market with little pricing certainty. 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. Analysis of Transactions by Industry On the other hand ICTEAS’ acquisition of Sapphire International shows the propensity of Indian Information Technology companies to gain scale in terms of size, product Information Technology (“IT”) has been the most offerings, and geography. This particular acquisitive industry so far. In the first three acquisition is targeted not only at cross selling quarters of 2009, this sector accounted for ICTEAS’ business intelligence and business approximately 40% of the total US-bound analytics service (a niche area in which it has transactions. Within this industry, financial strong expertise) to Sapphire’s existing client but services, enterprise resource planning, advanced also delivering on the offshore component of engineering services, and analytics sub-segments Sapphire’s work thorough its development centre were attractive for acquisitions. While ICRA Techno in India. Analytics Limited (ICTEAS) and Rediff sought to PAGE 2
  4. 4. US-BOUND ACQUISITIONS BY INDIAN COMPANIES US- October 2009 Pharmaceutical & Healthcare size of the US market. Relying on third party The Indian pharmaceuticals and healthcare industry marketing agents may not be a good strategy in the sector accounted for over 30% of the transaction long run, thus, Indian companies are expected to volume with three US-bound acquisitions in the first acquire export supporting networks in the US. 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 Automotive & Manufacturing debts. Similarly, Satellite Overseas’ acquisition of a Higher than expected valuation of available minority stake in Novavax is part of several acquisition targets and a significant industry agreements between Novavax and Cadila, the parent contraction in the US has forced Indian automotive company of Satellite Overseas, and included a and manufacturing companies to slow down on the master service agreement and a joint venture. 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 Apart from the special situation deals, Lupin Europe and the US. The acquisition, besides acquired global rights for AllerNaze from Collegium strengthening its foothold in other parts of the world Pharmaceutical Inc in another transaction. This is also expected to establish Cosmo Films as a transaction is targeted to expand Lupin’s brand global player in the thermal lamination segment. business in the US. There was no transaction in the automotive As a target location, the US has traditionally lagged segment; however, with US companies moving their behind Europe in pharmaceutical outbound basic auto-component production to China and acquisitions from India. However, this could change India, assemblies and finishing sub-industries based on the upcoming generic opportunities and represent the interesting segments. PAGE 3
  5. 5. US-BOUND ACQUISITIONS BY INDIAN COMPANIES US- October 2009 Other Industry Segments The road ahead... 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 US-bound acquisitions by Indian companies, in the earlier sought Chapter 11 protection amid a group first nine months of 2009, have been significantly of retail industry bankruptcies brought in by liquidity affected by the economic downturn. However, at the concern in the credit market, rising unemployment same time the economic downturn has presented and the economic recession. The acquisition is opportunities for distress related acquisitions at expected to help the S. Kumar Group establish a attractive valuations. Factors expected to impact US- substantial footprint in the global arena and also bound acquisitions by Indian companies in the near bring significant business volume to the Group’s future are discussed below: operations in India through a ‘front-end back-end Financing challenges: Financing will be one synergy’ strategy. of the most important challenges faced by Indian companies looking to acquire US Alongside, Galaxy Surfactants Ltd., a supplier of companies in the near future as banks and performance products for home and personal care financing institutions are already under based in Navi Mumbai, India, has acquired Tri-K pressure. Industries Inc. TRI-K Industries Inc. is a distributor Distress related value buying: We expect to and producer of specialty ingredients to the see more deals targeted at acquiring control cosmetics and personal care markets. Headquartered of the firms struggling in financial crisis. in Northvale, N.J., the company has operated in the Profitability enhancing and cost saving deals: personal care industry for more than 30 years. This We expect deals targeting consolidation, cost acquisition strengthens Galaxy's global presence and savings and improving profitability rather gives them an expanded product portfolio, allowing than expansion and increasing scale of them to better serve their customers in the operations. cosmetics and personal care industry. Increasingly positive interactions between 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 4
  6. 6. US-BOUND ACQUISITIONS BY INDIAN COMPANIES US- October 2009 Cross Border Acquisitions in the US: Key Considerations Quantitative M&A Considerations Qualitative M&A Considerations As the acquisition strategy is being developed, Several qualitative issues can influence the success consideration should be given to the financial impact or failure rate of the acquired company within the that a poorly constructed and integrated deal can organization and should be taken into consideration have on the acquiring company. during the early planning phase. Valuation – Market comparables, free cash flow Developing Acquisition Criteria – Having a clear analysis, synergy valuation, and earning power strategic need and acquisition criteria, as well as should all be considered when valuing an analyzing the likely impact of an acquisition will acquisition target. help set a robust selection process. Integration Costs – Depending on the level of Selecting Advisors – Advisors with prior alignment, integration costs can be substantial. experience in US-based acquisitions and an Sales/revenue dis-synergies can occur as the understanding of the market will ensure a overall deal process tends to distract key smooth navigation through the acquisition stakeholders during the due diligence and M&A process. integration process. Legal Legal & Regulatory – A major aspect in cross Due Diligence – Comprehensive due diligence border acquisitions is the thorough legal and determines synergy value and uncovers potential regulatory analysis of a transaction. A well issues. US-based companies generally have good planned approach to managing contingent management information systems, which create liabilities and contract issues is essential. fast information flow. 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 – 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. PAGE 5
  7. 7. US-BOUND ACQUISITIONS BY INDIAN COMPANIES US- October 2009 US- H1- List of US-bound Acquisitions by Indian Companies in H1-2009 Tx Value Date Industry Buyer Target ($m) Manufacturing - Thermal films & Jan-09 lamination Cosmo Films Ltd ACCO Brands’ GBC Commercial Print NA Jan-09 IT & ITES Quest Global ASE Technologies NA May-09 IT & ITES 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 About Virtus Global Partners and IMaCS Virtus Global Partners, Inc. (VGP) and ICRA consulting, risk analytics, process consulting, Management Consulting Services Limited (IMaCS) development consulting, and transaction jointly offer advisory/consulting services to advisory services in several verticals including clients based in the US and India. banking and finance, energy, infrastructure, manufacturing, and services. VGP, a boutique financial and business advisory firm based in New York, is focused on advising VGP and IMaCS pool their respective expertise in clients in the US seeking to invest or make their home bases and their complementary skills acquisitions in India or vice versa. VGP provides in consulting and investment banking to offer a cross border mergers and acquisitions advisory, strong value proposition to clients in the US and private equity services, strategic consulting, and India. capital raising services across various industry sectors. VGP - IMaCS provides a full range of investment banking services, including: IMaCS, a wholly owned subsidiary of ICRA • Cross border mergers and acquisitions Limited, is a multi-line management consulting • Fund advisory firm with a global footprint across 35 countries. • Strategic partnerships & joint ventures IMaCS’ practice areas include strategy • India and US entry strategy consulting PAGE 6
  8. 8. US-BOUND ACQUISITIONS BY INDIAN COMPANIES US- October 2009 Key Transactions: has secured senior credit and second- lien financing Advisor to Ultra For more information, visit our websites and OR contact Anil Kumar at Bhaskar Som at Disclaimer 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. PAGE 7