acg case competition 2016 - sierra securities

Looking Toward the FutureStrategic Opportunities for IT

Group

Sierra Securities January 29, 2016

1

Sierra Securities

Our TeamSarang Ananda Rao, Partner

2

Laura Sirk, Managing Director

Jimmy Peng, Chief Investment Officer

Grant Ely, Managing Director

Avinash Korukollu, Partner

Sierra Securities

AgendaI. Strategic Recommendation

II. Recommendations for Increased Liquidity

III. Fundamental Valuations

IV. Available Alternatives

V. Appendix

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Agenda

I.Strategic Recommendation

4

Sierra Securities

ITS + SSIT5

Raise money and increase liquidity

Strategic Recommendation

Pursue field office expansion for territorial

growth

Cost cut to achieve 12% EBITDA margins

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ITGroup + Operating Units: Intrinsic Values6


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7


Operating Performance of ITG and IT Services

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Divesting SSIT

Overall Valuation àReduced by ~$300m

Loss of SSIT weakens long term EBITDA Margins

8

$63M


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Semiconductor Manufacturing in the

USIndustry Trends

9


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IT Consulting in the US

Industry Trends

10


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Alternatives for raising capital:Initial Public OfferingBenefits- Greater visibility in the market- Greater valuation of the company- Possibility of Liquidation

Downsides- More legal compliance- Periodic Reporting- Focus more on short term than

long term

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Direct Public OfferingBenefits- Faster to market- Less equity dilution- Avoidance of “IPO Window”- No Underwriter

Downsides- Less capital raised- Greater legal exposure- Fraud potential

Private EquityBenefits- Immediate Cash- Long term growth- More efficient operations

Downsides- Potential loss of ownership- Valuation from PE side is less

Cost: ~8.8-12% upfront+ On Going Cost

Cost: ~3% of raised capital+ On Going Cost

II. Recommendations for Increased Liquidity

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Sierra Securities

ITGroup has lesser liquidity in terms of Current Assets as compared to its competitors

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2011 2012 2013 2014 Comp

CR

&Q

Rra

tios

ITGroup

Current Ratio Quick Ratio

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1 Monitor Account Receivables to ensure you receive prompt payments

2 Optimize account management: negotiate longer payment terms with vendors

3 Use Sweep accounts

4 Decrease overhead costs

5 Pay off a portion of debt/ Refinance debts for longer period or lower rate

6 Diversify funding sources

7 Look for and request discounts for early payments to suppliers

8 Optimize tax position: consider selling and leasing back assets, tax credits for R&D

As of 2014, IT Group has a $115M cash reserve. Utilize idle funds, gain interest on the cash reserve.

Increase Liquidity

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In order to gain liquidity, collect prompt payments from customers

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0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

50

100

150

200

250

300

350

400

450

2011 2012 2013 2014 2015E 2016P 2017P 2018P 2019P 2020PAR

/Sales(%

)

AR($M

illions)

ITGroup

AccountsReceivable AR/Sales

Over the last 5 years, ITGroup has not been receiving prompt payments from its clients

Re-negotiate terms with customers to ensure prompt payments for the services

TARGET: Bring AR/Sales level to 15%

Increase Liquidity

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Optimize account management in order to gain liquidity

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0%1%2%3%4%5%6%7%8%9%10%

0

5

10

15

20

25

AP/Sales(%

)

AP($M

illion)

ITGroup

AP AP/Sales

Look for and request discounts on early payments to suppliers

Negotiate longer payment terms with vendors

TARGET: Bring AP/Sales level to 4.5%

Increase Liquidity

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Maintain cost cutting strategies

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0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

75%

76%

77%

78%

79%

80%

81%

82%

83%

84%

2011 2012 2013 2014 2015E2016P2017P2018P2019P2020P

SG&A

/Sal

es(%

)

COG

S/Sa

les

(%)

ITGroup

COGS/Sales SG&A/Sales

ITGroup’s cost cutting strategies are working well

For every $100 revenue, current cost-cutting strategy saves $4 in COGS and $1.5 in SG&A costs

Additional savings of $0.5 in SG&A costs per $100 revenue expected by 2020

Increase Liquidity

Sierra Securities

ITGroup has lesser liquidity in terms of Current Assets as compared to its competitors

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2011 2012 2013 2014 Comp

CR

&Q

Rra

tios

ITGroup

Current Ratio Quick Ratio

17

1 Monitor Account Receivables to ensure you receive prompt payments

2 Optimize account management: negotiate longer payment terms with vendors

3 Use Sweep accounts

4 Decrease overhead costs

5 Pay off a portion of debt/ Refinance debts for longer period or lower rate

6 Diversify funding sources

7 Look for and request discounts for early payments to suppliers

8 Optimize tax position: consider selling and leasing back assets, tax credits for R&D

As of 2014, IT Group has a $115M cash reserve. Utilize idle funds, gain interest on the cash reserve.

Increase Liquidity

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Recommendation: Fitting the puzzle together

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IT Consulting

Semiconductor Industry

- Where to invest?- Growth?- New markets?- Cut costs?

- How to improve performance?- How to optimize resources?- How to increase sales?

Attractive US/Overseas Investment

- Regional/Local Player- Uses a lean structure- Effective product management line- Good brand presence- Can be public

- Enter new market, create offshoring- Gain clients- Gain brand presence- Increase revenue

- Use management principles to develop product line

- Increase revenue- Global presence/exports- Restructure company

- Use software from IT Consulting and hardware from semiconductors- Develop global presence- Increase revenue

Long Term Strategy

III. Fundamental Valuations

A. Discounted Cash Flow MethodB. Market ApproachC. Transaction Approach

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2020

Fundamental Valuations

Uses WACC of 10.5-12%

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2121


CYCLICALINDUSTRY

Uses WACC of 15-16.5%

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2222


Uses WACC of 11.5-12.3%

IV. Available Alternatives

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Alternative Strategic

Opportunities

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To provide liquidity and enhance shareholder value

Available Alternatives

1. SellSSIT,goIPOwithITG• IndependentofSSITValuation• IndependentofITGValuation

2. MaintainSSITprivateandgoIPOwithITG– Anoption

3. Keepbothprivateforalongertime

4. ESOPofITG

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Strategic Alternatives cont.Option1:SellSSIT,goIPOwithITG

• Asastand-aloneITServicesvalueis$892Mwhichis$66MlessthanthepackagedvalueofITServicesandSSITgroupedtogether.

• Asastand-aloneSSITvalueis-$7M,whichisincreasedby$18MifITServicesandSSITaregroupedtogether

• Additionalcost incurredinsettingupSSITasaseparatecompanyandasignificantincreaseinannualcoststoSSIT

• ReductioninconsultingrevenuegrowthfromlossofSSITclientssubstantiallyimpactslongtermperformance

*Bestoption istonotseparatebothunitssincebothunitsarestrongly tiedtogether. 25


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Strategic Alternatives cont.Option2:MaintainSSITprivateandgoIPOwithITG– Anoption

• GoIPOwithITServices

• KeepSSITprivateanddeploycost-cuttingmeasurestoincreasenetincome

• CashflowfromITServicescanbeusedtoincreaseassetsofSSIT

• AdditionalcostincurredinsettingupSSITasaseparatecompanyandasignificantincreaseinannualcoststoSSIT

*Bestoption istonotseparatebothunits sincebothunitsarestrongly tiedtogether. 26


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Strategic Alternatives cont.Option3:MaintainITGroupasaprivatecompany

• KeepITServicesandSSITasprivate

• Deploycostcuttingmeasuresandconcentrateonincreasingthenumberofpotentialbuyersforincreaseinrevenue.

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Strategic Alternatives cont.Option4:SellITGsharestoEmployees

• SellcompanysharestoEmployeesforincreaseincash

• AvailabletaxdeductionsfromESOP

• Awardsorbonusesthatcouldotherwisebepaidincashcanbepaidincompanystock

• Retainemployeesforalongerperiod

*Couldbethoughtasalastoptiontoincreasemuchneededcash 28


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Questions?Thank you.

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Conclusion

V. Appendix

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Liquidity Ratios of ITGroup and SSIT

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0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2011 2012 2013 2014 Comp

CR

&Q

Rra

tios

ITGroup

CR QR

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0

2014 Comp

CR

&Q

R

SSIT

CR QR

Appendix

Sierra Securities

A.Industry OutlookSemiconductor Manufacturing

Offshoring | Prices | Volatility

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Annual Growth 10-15*

-6.9%Annual Growth 15-20*

1.7%

*Based on Industry Data generated by IBIS World

Appendix

Sierra Securities

A.Industry OutlookIT Consulting Services

Innovation | Consolidation

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Annual Growth 10-15*

2.6%Annual Growth 15-20*

3.2%

*Based on Industry Data generated by IBIS World

Appendix

Sierra Securities

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IPO: Strategy for the Future

$92 M Raised

~ 65% stakeOwner

16M shares~ 65% stake

Investors

Issue 5M additional shares

Increased Visibility Company

Exit Strategy

Initial Investors

- Lifelong Dream- Liquidity from LT

investment- Retain majority

stake

Owner

$18 /share

29M shares

Liquidity

Growth

IPO

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DCF model assumptions

Growth rate maintains 5% through 2019 , and residual growth set to 1.7%.

Selling, General and Administrative expenses are expected grow at 3%..

Change in Non-Cash Working Capital are expected to be 5.2% of sales.

Interest Expenses are 8% of total debts.

Capital Expenditures are expected to be 3.1% of sales.

Size premium set to be 7%.

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Appendix

Sierra Securities

Comparable Company SelectionMarket Approach:

Companies are selected based on:

- similarities in functioning

- revenue growth margin

- EBITDA margin

- Current Ratio, Quick Ratio, Debt to Equity Ratio, Net Income ROA and ROE

Transaction Approach:

- Identify transactions where Revenue/EBITDA is similar to that of ITGroup/SSIT

- Remove outliers

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Appendix

acg case competition 2016 - sierra securities

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