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Merger and Acqisition

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Zensars Acquisition of 3i Infotech

Submitted by:Group - 4Arpit BajpaiDimple VijanPuneet ManotSneha Srivastava

Zensars Acquisition of 3i Infotech: A Strategic MoveDeal SummaryAcquisition of 3I Infotech by ZensarDeal Price: Rs. 11.1/ Share (14% Premium from last closing price)Expected Cost Synergy: Rs.127 croresDeal rationale:To match up with the current trend and to explore the new market opportunities, Zensar Technologies is planning to go for acquisition.Zensar to benefit from Cloud Computing and BFSI business of 3I InfotechThe acquisition deal is expected to bring cost and revenue synergy.Company Profile Zensar Technologies Ltd.Zensar technologies Ltd., incorporated on 25 April 1952 is headquartered in Pune, India.The company provides software services to the clients of Manufacturing, Retail, Banking, Financial Services and Insurance sector.It has been doing well in the past 5 years with 25.3 percent average revenue growth.Zensar believe in leveraging the power of innovation to seize new opportunities.In the past, following the industry trend, Zensar has acquired 3 companies named ThoughDigital, OBT global and Akibia Inc. All the acquisition deals have been successful and the company has been growing till now.Now the company wants to grow further and is planning to go for a strategic move to explore new market opportunities.Software Industry OverviewSoftware industry is expected to be the fastest growing industry in the IT space, with the expected growth of 7.1%.The size of the worldwide software industry in 2013 was US$407.3 billion, an increase of 4.8% over 2012.In past years, the largest four software vendors wereMicrosoft,Oracle Corporation,IBM, andSAPrespectively.The software industry has been subjected to a high degree of consolidation over the past couple of decades.From 1988 to 2010, 41,136 mergers and acquisitions have been announced with a total known value of US$1,451 billion ($1.45 trillion). The software industry is highly concentrated with a small number of players dominating the industry and holding relatively high market shares. The confluence of network effects, law of increasing returns, and switching costs associated within the industry is the reason behind that.The industry is on the path of creating giant players by consolidation, who will be capturing the major market share.

Need for AcquisitionZensar needs to diversify its client baseZensar management has clearly stipulated to get future growth from Cloud Computing and E Commerce SectorCurrently Zensar has strong presence in Manufacturing and Retail SectorZensar also needs to diversify in terms of geography to mitigate risk

Target CompaniesTarget IdentificationCompanies/Persistent3i InfotechCignitiStrategic FitLocationProfitabilityPriceLMHHHMLMLHHAcquisition Rationale:Large customer base: 1500 customers, including 62 in the Fortune 500 list, in more than Global presence: 50 countries across 5 continents.Over 9000 EmployeesStrategic partnerships with Dell, Microsoft, Oracle, HP, Redhat, etc.Recently Zensar acquired one of its US divisionsHTarget Overview- 3i InfotechGlobal Information Technology company3i Infotech was ranked No. 10 in the list of top Indian IT companies and overall ranked #288 byFortune India 500in 2011.Caters to a variety of industries- Banking, Insurance, Capital Markets, Asset & Wealth Management (BFSI), Government, Manufacturing, Retail, Distribution, Telecom and Healthcare.Locuz Enterprise Solutions Ltd is a subsidiary of 3i Infotech which specializes in High Performance Computing & Cloud services. Company Overview:Focus on value added services - business intelligence & analytics services, infrastructure management services, testing & compliance, application development & maintenance, consulting and its BPO offerings.Products & services1. Altimis: Altimis is a superior, robust and functionally rich system aimed at the wealth management, stockbroking and clearing market. 2. Orion: Orion is an ERP.Revenue Drivers:RegionsLocationsAsia PacificSingapore,Malaysia, Thailand, ChinaIndiaMumbai, Noida, Pune, Bengaluru, Chennai, Hyderabad, New Delhi, Gurgaon, BhubaneswarMiddle East & AfricaUAE,Kenya, KazakhstanKingdom of Saudi ArabiaSaudi Arabia, BahrainEuropeLondon, Birmingham, Nantwich, Ashby-de-la-ZouchNorth AmericaNew Jersey, California Global Presence:

`Growth Rate5.0%6.0%6.5%7.0%WACC9.0%8.8221.0130.7745.3910.0%1.759.1414.4221.4510.5%-0.825.189.3114.6111.0%-2.972.015.339.479Assumptions3i InfotechRevenue : Initially low growth but significant improvement after 2 yearsDebt : As debt is high, D/E ratio is expected to remain same for next few years and come down to 30% over timeBeta: Bottom up beta has been calculated from comparable companies and it has been re levered using targets D/E ratioGrowth Rate : Growth Rate has been calculated from Reinvestment rate and Return on Invested capitalTax Rate: 33.99%Sensitivity AnalysisDiscount Rate (WACC)Cost of Debt (Kd)14.75%Risk Free Rate8.25Unlevered Beta0.94Equity Risk Premium5.63%Cost of Equity(ke)30.77%D/E5.46SummaryRelative ValuationRatioFY 14Average (Past 5 Years)Price/ Sales2.28


EV/ Sales2.32


Sales (3i Infotech FY 14)326.5 crValue Per Share (Price/ Sales)12.1712.87Value Per Share (EV/ Sales)13.15


DCF ~Rs.9.3Shares outstanding 57.91 croresEnterprise value(At DCF price)Rs.3,188 croresTarget ValuationZensar does not have strong presence in BFSI and E- Commerce Sectors. It also lacks strong presence in cloud computing domain.

3i Infotechs expertise in these industries and Zensars strong growth momentum make a natural fit. Also Zensars sales team can capitalize existing client base for sale in clud computing domain.

10Strategic Rationale for the DealStrategic FitZensar realizes that the future is beyond services and that it will be a combination of services, solutions and platforms. Zensar has invested in building platforms to drive future growth opportunities and will continue to focus on these initiatives as it gains further depth in its verticalised approach. These domain solutions and technology platforms will offer improved revenue leverage versus talent employed in the organisation and will also significantly increase the intellectual property base. Acquisition of 3i Infotech will give Zensar much needed entry into many key sectors with established customer base. Functional Fit3is reach into middle east and Africa can benefit Zensar and will provide much needed hedging benefits.

Middle East, India and Asia Pacific however have been less buoyant for Zensar, and with the proposed acquisition, Zensar can look forward to build strong presence in these regions

Geographical Fit11Synergies and Risks SynergyGeographical Reach3I Infotech has good chunk of business in Africa and Asia. Zensar has opportunity to expand into those markets without much hassleZensar can have access to technologies developed by 3i Infotech team in the BFSI domain.

Cost Synergy CalculationCurrency Hedging: Diversified customer base of 3i InfoTech will provide natural hedging benefits to ZensarHigh cost of start up infrastructure of digitization can be reduced by the combined entity by sharing fixed costs of implementation.

Cost SynergiesCannibalization of exiting cloud computing programs of ZensarNegative SynergiesFigures in Rs. Crores012345Pre-Tax Cost Savings 10 11 12 12 12 Expected Inflation Rate6%6%6%6%6%Growth Rate of FCF (nominal), in perpetuity6%Discount Rate11%Ongoing Investment/Savings (year 3+)2%Pre-Tax Cost Savings, Current Dollars 11 12 14 15 16 Tax Expense (@ .40) (4) (4) (5) (5) (5)After-Tax Cost Savings 7 8 9 10 11 Less: Investment Necessary to Realize the Savings (50) (0) (0) (0)Subtotal (50) 7 8 9 10 10 Terminal Value 239 Free Cash Flow (50) 7 8 9 10 249 Net Present Value of Cost Savings127 Internal Rate of Return of Synergy Investment47%Negative SynergiesRevenue Synergies11Valuation Summary12Discounted Cash Flow Trading ComparablesDCF20%30%30%20%Valuation MethodWeightageFinal Value Per Share = 0.2 * 8.19 + 0.3 * 12.17 + 0.3 * 13.15 + 0.2 * 9.31 = Rs. 11.1Premium from Last Closing Price = 14.43%Proposed Deal:All Stock DealTargetAcquirer3i InfotechZensarEarnings (crores)-110.2187.22Share (crores)57.914.39EPS-1.942.6Price9.7605P/E-5.1014.19Deal Price11.1New Shares from exhange (crores) 1.06Total Earnings77.02P/ E14.13Exhibit 1- Income Statement (Zensar Technologies Ltd.)FINANCIAL INFORMATION OF THE COMPANY FOR LAST 10 FINANCIAL YEARSPARTICULARS(Rupees in Crores)FINANCIAL YEARS03-0404-0505-0606-0707-0808-0909-1010-1111-1212-13Turnover 267.07 344.89 428.79 605.86 782.93 908.08 952.76 1,138.29 1,782.48 2,114.53 Total Income 273.65 349.54 433.42 614.83 795.12 922.16 961.03 983.26 1,824.28 2,132.23 PBIT 17.20 23.06 43.27 76.55 87.34 115.69 151.88 153.99 245.71 270.56 PBT 16.82 22.16 41.66 74.45 81.43 111.82 149.15 150.12 236.37 260.61 PBT including Exceptional Income 16.82 19.54 39.48 73.80 81.43 111.82 149.15 150.12 236.37 260.61 Net Worth 117.12 152.97 181.23 237.82 284.21 258.61 329.70 446.01 575.47 728.90 Gross Fixed Assets 63.97 88.89 88.30 108.72 123.72 184.66 212.79 548.00 613.48 647.80 Total Assets 163.52 228.74 274.59 441.95 467.69 467.37 511.66 982.47 1,208.00 1,257.24 Key indicatorsEarnings Per Share - Rs. 5.40 16.75 14.48 23.91 26.72 36.12 59.12