Cross-border M&A Transactions:The Systech Experience

October 4, 2007

Recent Developments in Cross-border M&A

The Evolution of Systech

Key Learnings

Agenda

Recent Developments in Cross-border M&A

Acquisitive growth in back on the agenda – M&A are on the rise, even in developing Economies.

- Rising aspirations of companies- Globalising economies- Easier access to capital including private equity

Strategic fit, robust valuation and well managed PMI are the key ingredients in making acquisitions successful.

Most value destroying mistakes in M&A are made before the deal is closed

- Specific challenges in developing economies.

A History Lesson: The Six Waves of M&A

Common Thread? – A means to grow

China & India are at the center of the current wave

More Recently – Indian M&A doubled in H1 F2007!

Deal Value growth at 30% (2000-2007)

Indian Cross-border deals haven taken front stage

Consolidation is the name of the game

M&A Volumes and Value have been growing

M&M

Mahindra & Mahindra Other Group Companies

AutomotiveSector

FarmEquipment

InfrastructureDevelopment

SystechInformation

Technology

Group Turnover – $4.5 bn

NasikKandivli

Igatpuri

Kandivli

Nagpur

SatelliteMUSA

SUV

UV

LCV3W

MBT

BristleconeBPO

MHRIL

GESMIPL

MMFSLMahindra Inter.

MSSC

Mahindra Group

$ 1800 mn $ 1000 mn $ 720 mn$ 80 mn$ 320 mn

Trade & Fin

Zaheerabad

Accident, Inspiration, Design?

The process of creation

Challenges & next steps

The Evolution of Systech

Revenue: €1 billion

ROCE> 20%

5X size of FES

Hunt for synergy

Seminal Event – Bid for Valtra

Autocomp circa 2004…

35+ auto part makers file for bankruptcy protection in the past 18 months– Tower Automotive, Collins & Aikman, Meridian, Uni,

Boring, Trim Trends, Delphi, Visteon, Metaldyne, Oxford Automotive

2005 alone:– Standard & Poor's downgrades 25 US-based auto

component suppliers– GM - closes 11 plants & cutting 30% capacity in North

America– Lear - $750 mn 3Q loss, cut 7700 workers, closed 20 plants

-16%

-12%

-8%

-4%

0%

4%

8%

'97 '99 '01 '03 '05

All suppliers

All suppliers less Delphi and Visteon

Delphi and Visteon

-16%

-12%

-8%

-4%

0%

4%

8%

'97 '99 '01 '03 '05-16%

-12%

-8%

-4%

0%

4%

8%

'97 '99 '01 '03 '05

North American Average Profitability(1)

(12 suppliers)Asia Average Profitability(1)

(8 suppliers)Europe Average Profitability(1)

(11 suppliers)

North American Suppliers being hurt

Number of Selected US Auto Parts ManufacturersFiling for Bankruptcy Protection

0

5

10

15

20

25

30

1990-95 1996-2000 2000-05

# of firms filing bankruptcy

ThyssenKruppAutomotive AG

Probability of Default forHigh Risk Auto Suppliers

Probability of default %

Visteon

Faurecia

ArvinMeritor Inc.

Lear Pirelli

AmericanAxle

Valeo

Tenneco

Clarion Sanyo Electric.

TRW Automotive

Foster Electric

39.2

35.9

25.6

20.719.318.1

15

9.9 9.6

5.8 5.7

2.3 1.9

0

5

10

15

20

25

30

35

40

45

For some suppliers, Chapter 11 protection has become a way of life(Harvard Industries filed five times, Amcast twice in two years)

For some suppliers, Chapter 11 protection has become a way of life(Harvard Industries filed five times, Amcast twice in two years)

High Proportion Of US Auto Suppliers Bankrupt or at risk of Bankruptcy

Source: Automotive News, BCG analysis

North America Sales Growth

3.3%

8.6% 9.0%

NA EU Asia

CAGR 1998-2005

European Sales Growth

4.7%

8.1%5.0%

NA EU Asia

CAGR 1998-2005

Asian Sales Growth

6.4%

11.9%

12.5%

NA EU Asia

CAGR 1998-2005

Global Sales Growth

3.8%

8.4%11.3%

NA EU Asia

CAGR 1998-2005

Asian And European Suppliers are growing much faster than North American Suppliers

Chinese Export of Car Components FY 2006 in US$

Americas$5,722M (~42%)

Asia-Pacific$4,161M (~31%)

Australia$260M (~2%)

Africa$565M (~4%)

Europe$1,781M (~13%)

CAGR 00-05:+36%

Middle East$1,079M (~8%)

Car components total $13,567M

• Tires• Chassis, suspension,

steering, breaking parts • Interieur/electronics• Engines, powertrain,

transmission parts• Engine parts(1)

• Exterior/Body• Others

$3,321M (24%)$3,234M (24%)

$2,072M (15%)

$1,146M (8%)$755M (6%)$852M (6%)

$2,196M (16%)

China Rapidly Developing Into An Attractive Base For Automotive Sourcing

Americas$372M (~27%)

Asia-Pacific$231M (~17%)

Australia$20M (~1%)

Africa$146M (~11%)

Europe$408M (~30%)

Car components total $1,357M

• Tires• Engine parts(1)

• Chassis, suspension, steering, breaking parts

• Engines, powertrain,transmission parts

• Others

CAGR 00-04+21%

Middle East$184M (~14%)

$290M (21%)$274M (20%)$230M (17%)

$55M (4%)

$508M(38%)

Indian Export Of Car Components FY 2006 In US$

India Also Developing Into An Attractive Base For Automotive Sourcing

India Advantage: Criteria

Labour Cost Labour Cost

Processing Cost Processing Cost

Raw Material Cost Raw Material Cost

Proximity Proximity

Design Capability Design Capability

• Access to low cost skilled industrial labour

• Low Power and fuel cost • Access to low cost machinery • Access to cheap manufacturing process

• Access to low cost Steel, Castings , Forgings, Aluminum Plastics, Rubber and other raw material

• Access to low cost tooling

• Geographical proximity to a large Auto Manufacturing Location

• Logistics infrastructure and network

• Availability of Educated manpower for Design and development

• Familiarity with English language and design standards

South America• Brazil • ArgentinaMexicoEastern Europe • Czech Republic • Poland • Romania • Slovenia • Slovakia South East Asia • Thailand • Vietnam • Malaysia Africa • South Africa • Morocco India China

Competitive Advantages Low Cost Countries

Systech Space is Congruent with the India AdvantageSystech Space is Congruent with the India Advantage

Misc

Body Parts

Brake Parts

Rubber Parts

Engine Cooling

Drive Train

Electrical

Engine

Product Segments

Control Cables, Filters, Bearings, Gaskets, Die cast products etc.

Door handles, latches and locks, Door hinges, Door strikers, locks, Fuel taps, Fuel cocks, Glove box Locks/latches, Trunk locks/latches

Calipers, Actuators, Discs, Cylinders, Actuators etc.

Hoses, Weather strips, Mountings, Seals, bushes for suspension, "O" rings

Radiator Caps, Pumps, Radiator and radiator components

Transmission Components, Axle Components, Propeller Shafts

Starter Motors, Alternators, Wiring Harness and Lamps

Fuel Systems, Pistons, Shafts and Rods, Valve Trains

Key Components

Advantage India = Domain Systech

India Advantage: Design & Engineering

Number of Engineering Graduates per Year (000)

27

251

598

1078

1337

Poland

Thailand

Brazil

India

China

Visteon , Honeywell ◐Czech Republic / Poland

GM◐Brazil

Johnson Control , GM, Ford, Delphi

◕India

NA◔South Africa

Toyota, Honda ◔Thailand

Valeo, Mando, Nissan, Koito, Volkswagen, Honda

◔China

Examples Number of design centers set up by Global Majors

Country

HighLow

Source : Vision 2015 for Indian Auto Component Industry By ACMA, Websites of Global Auto Comp companies

M&M

Automotive Farm Equipment SYSTECH

Engineering Design

Styling

Assembly

Testing

Marketing / Sales

Gear Manufacturing

Transmission / Axle

Sheet Metal Stamping

Foundry

Engineering Design

Styling

Assembly

Testing

Marketing / Sales

Gear Manufacturing

Transmission / Axle

Sheet Metal Stamping

Foundry

Purchasing Purchasing

MES

Conception

M&M

Automotive Farm Equipment SYSTECHEngineering Design

Styling

Assembly/Mfg

Engine/transmission

Marketing / Sales

Purchasing

Gear Manufacturing

Drive Train / Axle

Sheet Metal Stamping

Foundry

Engineering Design

Styling

Assembly/Mfg

Engine/transmission

Marketing / Sales

Purchasing

Gear Manufacturing

Drive Train / Axle

Sheet Metal Stamping

Foundry

Adolescence

MES

SSBUSSBU

M&M

Automotive Farm Equipment SYSTECH

Styling

Assembly

Testing

Marketing / Sales

Gear Manufacturing

Transmission / Axle

Sheet Metal Stamping

Foundry

Styling

Assembly

Testing

Marketing / Sales

Gear Manufacturing

Transmission / Axle

Sheet Metal Stamping

Foundry

Purchasing Purchasing

SSBU

ACBU

Forging

Sheet Metal Stamping

Foundry

Gear Manufacturing

Growing up

Engineering Design Engineering Design

MES

Mission Statement

To create India’s most Valuable, Innovative,“Art to Part” auto component entitythat partners with its global customersto meet & surpass their business needs

Aspiration

$1Bn

$1Bn

2010

X

X

The Systech Philosophy: Marriages not Acquisitions

Bride HuntingHired a modest matchmakerCore team scouted the marketWhittled down options using specified criteria (content not form)Evaluated possible spousesFell for two

CourtshipOne unwilling, the other played hard to getSold the Indian Blue Blood connection

Royal Alliances – German Empire (Jeco/ Sch) I

Mar’05Mar’05

Mar’05 –Jan’06Mar’05 –Jan’06

Jilted (Again!!!)Thick skin helps in deal making

Continuing the affairThe way to the heart is through “market cap”

Marriages : “Can’t Buy Me Love”JecoSchoneweiss

NavratnasSystech. M&A cell. Legal. Kotak. M&A International. MTJ. Stokes technical team. Corp Fin. Evironmentalauditor

Royal Alliances – German Empire (Jeco/ Sch) II

Mar’06Mar’06

May’06May’06

Oct’06Oct’06

DOWRY

Low cost entry

Size + Momentum

European beach head + Management + Technology

Customers + Aerospace entry

Foothold + Technology + Scale + Management + IPR

Niche products + Leadership

Entry+ Technology + Leadership

“BLESSINGS” OF POLYGAMY!

The Systech VECTOR

Vision

Entrepreneurial culture

Customer – Acquisition and Satisfaction

Team building across geographies and Cultures

Out of the box thinking

Risk-taking - calculated

Vision

$1Bn

$1Bn

2010

X

X

282930010203040506070809101112242526272728192021222324

September

October

SSBU conveys rumor

The

Cast

ings

Sto

ry Contact with Principal & PE fundLunch with Hitachi directorsIn principle clearance from Anand

M&A team + I-bank + Systech huddle

PE exclusivity expiresNon-binding LOI signedDD commences, competitive bid received

Plan B, if board rejects “hostile” bidM&M Board conditional approvalBack to drawing board

NovemberM&M Board approval

Deal closed, private equity backing arranged

Entrepreneurial Culture – Never Say Die

Approach

Focus on key accounts

Cross selling across verticals

– e.g.Benteler, Eaton

Moving up the Value chain

– e.g. machining, assembly etc.

Derisk by focusing on non auto business and exports

Customer Centricity

People

Install HL as sector President !!

Recruit Shakti from FES for M&A

Hire Ashwani from Godrej Customer Service with manufacturing experience from Bharat Forge for Marketing

Took Prashant from FES Engine Development for Business Development at MES

Process

Beg, borrow, steal

Handpicked core team for compatibility

Converted some workhorses into thoroughbreds

Attracted talent for a cause not the job

Used retirees from M&M/ Tata Motors as stop gap

“Boundarylessness”

Team Building

2006

Technology + Markets + Management

Team Building: The Formalities

2006

Team Building of Another Sort: Esprit de Corps

2006

Team Building of Another Sort: Esprit de Corps

2006

Team Building of Another Sort: Esprit de Corps

2007

Team Building : “Oath Taking”

Team Building: Partnerships

Building the Business

M&A BoutiquesBuying a company 5 times our sizeIntegration Pre-AcquisitionTata Stub Axles• Mahindra Forgings Customer or Mahindra

Gears Customer?

SSBU Cost Center or Profit Center?

Financing it

Innovative Deal Structuring – Demergers, Cross-border mergersAligning interests – Jeco SwapUsing newly created currency

Out of the box thinking

) )))

Hired a team for projects/ machine refurbishment without a site finalised

Bought 2 large companies in Germany instead of one

Bought DGP Hinoday – without minority partners concurrence

Leap of faith

Risk Mitigation

First signs of rewards as Mahindra Forging market cap increases from $70 million to $500 million

Continuously wooed companies which fitted our strategy

Acquired companies with pedigree who brought in domain knowledge & management band width

Risk-taking

Key Challenges & Systech Responses I

Choose healthy companiesConvert management to M&MNo auctionsLow multiples

M&A Strategy

Pre sold to the Group Management BoardStrategy

Cause, Passion, Innate capabilitiesTeam

The thrill of the size of challengeVision

ResponseChallenge

Key Challenges & Systech Responses II

WIPPMI

Will flow to the highest returnSurplus does not belong to businessInnovative financing: LBO using listed stock as

currency

Capital Allocation

Businesses are both empowered and responsibleRisk/ Ownership

Vertically focussed teamsTime lines dictated by business needs

M&A Process

ResponseChallenge

PMI: Governance

BEFOREM&M

MFLM&M: 47%

Others: 53%M&M: 100% M&M: 67%

Scholz: 33%M&M: 100%

SCH JECO STOKES

AFTER

M&M: 61%Scholz: 12%Others: 27%

MFL: 100% MFL: 100% MFL: 100%

SCH JECO STOKES

MFL

M&M

$780Million

MSAT

SSBU ACBU MES

MES+ Acqn

$ 10 Million

STEELMUSCO

$ 120 Million

Foundry Unit+ Acqn

$ 0

Sheet MetalKanhe, PSSL, Rudrapur

$ 30 Million

Forging + Acqn, Amforge, UK, Forge, Vauxhall, m/c

$ 40 Million

COMPOSITESSiroplast + Acqn

$ 5 Million

Gear UnitSAR Auto + Acqn

$ 10 Million

$215 Million

SYSTECH

Starting Out……Getting There.

STEEL

$ 155 Million

CASTINGS

$ 50 Million

COMPOSITES

$ 10 Million

GEARS

$ 15 Million

$ 25 Million

MES

STAMPINGS

$ 40 Million

FORGINGS

$ 485 Million

Thank You