M & A Pitch Book ProjectInfosys acquires Tieto

Industry Analysis:

The rise in the software industry over the last five years has been due to a technological shift by organisations towards using cloud, mobility and social technologies. According to NASSCOM, spending on software topped $392 billion in 2013 from $272 billion in 2009, which is a CAGR of 9.5 per cent. However, in 2013, growth in software spends decelerated sharply to a mere 5.9 per cent vis-a-vis 37.5 per cent y-o-y registered in 2012, as a slowing global economy forced corporate firms to postpone their IT spends. India continues to command a substantial edge over competitors, with its share in the global offshoring market reaching 55 per cent in 2013. Though India currently accounts for over half of the global offshoring market, offshoring is a very small part of the global IT services market. This indicates that there is considerable headroom available for growth.

2009 2010 2011 2012 20130

200

400

600

800

1000

1200

Services total spendSoftware spendHardware spend

Worldwide IT spending

$ Bil-lion

Source: Crisil Research

Region wise spend in IT/ITes

India's share in global offshoring market reaches 55 per cent in 2013 .India continues to command a substantial edge over competitors, with its share in the global offshoring market reaching 55 per cent in 2013. Though India currently accounts for over half of the global offshoring market, offshoring is a very small part of the global IT services market. This indicates that there is considerable headroom available for growth.

20%

34%

46%Asia PacificEurope,Middle East and AfricaAmericas

Analysing the exports from India

Revenue based on geography for 2013-14:

10%

29%61%

Rest of WorldEuropeUS

Revenue based on verticals for 2013-14:

41%

17%

16%

26%

BFSIHi-Tech TelecomManufacturingOthers including retail,enrgy and utilities and transport

BFSI:Typically, the financial services segment has shown more willingness to outsource a large share of its requirement of IT/ITeS services. The financial services segment (includes securities, banking and insurance services) comprises the largest segment of the Indian IT services industry. Most of the Indian IT services companies have a significant presence in financial services.

Telecom:The telecom vertical accounts for the second-largest share in IT services. There are several Indian software companies that focus on the telecom sector, including the telecom equipment and service provider segments. Several global telecom equipment firms such as Nokia, Nortel, Cisco, and Lucent, and service providers like British Telecom, AT&T and Vodafone outsource a significant portion of their IT services requirement to Indian companies.

Manufacturing:The manufacturing sector is also a major contributor to the revenue. Given the intensifying competition in the manufacturing space and the sector's close linkages with economic cycles, the primary focus of IT investments by the manufacturing sector is on improving competitiveness through enterprise software such as product lifecycle management (PLM), supply chainmanagement (SCM),

Majority of the revenue comes from US due to which most of the companies’ revenue is pegged to fluctuations in the dollar.

Companies are diversifying into Europe,Asia-Pacific, the Middle East and Australian markets to increase business opportunities as well as provide a cushion against fluctuations in the dollar.

customer relationship management (CRM), enterprise resource planning (ERP) and e-business initiatives. Growth in IT investments in the manufacturing sector is likely to be largely driven by small- and medium-sized companies.

Utilities:The utilities sector accounts for about 4 per cent of Indian IT/ITeS exports. In several developed countries, especially the US, the UK, Europe, Australia and Japan, utilities like electricity, gas and water supply are being gradually deregulated and opened to competition as opposed to regulated and monopolistic markets in the past. As a result, several new entities such as power generating companies, independent power producers, energy service providers, independent system operators, utility distribution companies, and power exchanges have emerged. Growth in utilities are being driven by government mandates and green technology.

Revenue based on service lines:

2009 2010 2011 2012 2013 20140

10000

20000

30000

40000

50000

60000

Support and trainingIT OutsourcingProject oriented services

Revenue by service lines$ million

Geography Analysis on Europe

Source: European commission

The European recovery remains intact in spite of the poor growth rate in some region. Growth rate would be modest this year but gather momentum in 2015. Euro-wide GDP will rise by 1.2% in 2014 and 1.7% in 2015. The two Baltic states of Latvia and Lithuania will grow at 3.8% and 3.3% respectively in 2014

and 4.1% and 3.7% respectively in 2015. The main impetus behind the euro zone’s recovery this year will be Germany, which makes

up nearly 30% of the currency club’s collective output, and which is predicted to grow by 1.8%.

Outside the euro area, Britain is now experiencing a robust recovery and GDP wil expand by 2.7% in 2014 and 2.5% in 2015.

Acquiring company: Infosys

Infosys Technologies Ltd is a global IT services company. It provides end-to-end business solutions that leverage technology to enable clients enhance

performance. It provides solutions that span the entire software life cycle, encompassing consulting,

designing, development, maintenance, systems integration and package evaluation and implementation.

In addition, the company offers software products for the banking industry and business process management services.

The company provides an array of services like, application development and maintenance, corporate performance management, enterprise quality services, Infrastructure services, packaged application services, product engineering and systems integration.

Key Financial ratios of Infosys:

Mar '14Mar '13 Mar '12

Mar '11 Mar '10

Investment Valuation Ratios        Face Value 5 5 5 5 5

Dividend Per Share 63 42 47 60 25

Operating Profit Per Share (Rs) 219.23 191.82 175.21 146.55 128.3

Net Operating Profit Per Share (Rs) 776 640.24 544.28 442.13 368.4

Bonus in Equity Capital 93.58 93.26 93.26 93.26 93.26

Profitability Ratios        Net Profit Margin(%) 21.72 23.38 25.6 24.28 26.36

Adjusted Return on Net Worth(%) 24.21 25.05 26.83 26.29 25.89

Return on Assets Excluding Revaluations 736.64 627.95 518.21 426.73 384.02

Return on Assets Including Revaluations 736.64 627.95 518.21 426.73 384.02

Return on Long Term Funds(%) 33.26 34.03 37.28 36 33.69

Cash Flow Indicator Ratios        Dividend Payout Ratio Net Profit 35.49 26.45 31.86 53.46 28.84

Dividend Payout Ratio Cash Profit 32.03 23.94 29.13 47.96 25.32

Earning Retention Ratio 64.51 73.3 66.21 46.54 70.67

Cash Earning Retention Ratio 67.97 75.86 69.26 52.04 74.31

Earnings Per Share 178.4 158.75 147.5 112.22 101.13

Book Value 736.64 627.95 518.21 426.73 384.02

Target company:TIETOCompany Profile

TietoOyj (until April 2009 TietoEnator) is an IT service company providing IT and product engineering services. Active in more than 20 countries with approximately 16,000 employees, Tieto is one of the largest IT service providers in Europe. Tieto is domiciled in Helsinki, Finland, and the company's shares are listed on the NASDAQ OMX Helsinki and Stockholm.

The company provides services to the following sectors: financial services; manufacturing, retail & logistics; public, healthcare & welfare; telecom, media and energy.

Tieto Personnel are present in various fields and several countries mainly based in Nordic Europe and Asia as shown below:

Operating Model of Tieto

As of 1 January 2013, the operations are divided into service lines and industry groups. The service lines develop offerings, support in sales and provide the resources to IT projects and service deliveries to customers. They are also responsible for capabilities needed and competence development. The industry groups drive sales within their defined areas and develop customer relationships. The service lines work across all industry groups. The service lines and industry groups collaborate through a project based model.

In addition, Product Development Services, PDS, provides services in the field of communications and embedded technologies for its global customer base. PDS’ aim is to be its customers’ preferred product development partner throughout the product lifecycle.

Operating Model

Service Lines and Performance of Each:

Industry Groupings

Product Development Services

Here we have glimpse of the financial performance of all the service lines

Now we look at the existing Nordic IT market

DUE DILIGENCE:

The approach we have followed for evaluating a proposed merger is characteristically pragmatic: Stick to the fundamentals. M&A can deliver significant competitive advantage and value to shareholders, but the criteria by which to assess just how much must answer fundamental business questions:

Is the proposed merger strategically logical? Will it deliver cost, revenue, or other financial synergies? Will it build management or other capabilities? Is the combined company capable of delivering the synergies?

Following process has been used for the same:

Post the overall due-diligence, since the target and acquirer belong to Information technology industry, a thorough due-diligence has been performed using a framework as below:

Deal Rationale

The revenue from the Infosys’ European operations has increased to $2 billion, far higher than for the rest of Infosys, mainly not by mere chance but led by the consulting business which is far ahead of Infosys.

After the acquisition of Lodestone, the Zurich based consulting firm Infosys purchased for $350 million, Infosys now looks towards a Lodestone or its alike in the Nordic region. France and Germany have been the main focus of Infosys over the past decade and with the growth potential of the Nordic IT market valued at $19.1Billion there is ample amount of scope for Infosys to increase its local presence in the region.

One of the ways to grow Infosys revenue is to expand the company's local presence in non-English-speaking European markets, especially the Nordics and Benelux (Belgium, Netherlands, and Luxembourg), where it plans to appoint a regional head and local sales team over the next six months.

Secondly on June 30, 2014, Infosys held cash and cash equivalents of around Rs 30,000 crore. The company has not gone for a share buyback since its listing on the stock exchanges in 1993. Infosys had so far not articulated its strategy for use of its cash effectively, We believe the combination of the company's unprecedented cash levels, robust net income growth and tremendous borrowing capacity, being a zero-debt company, provides more than enough cash for any necessary ongoing strategic investments for innovation or merger & acquisition.

Citing these above developments we have identified and propose that Infosys acquires Tieto, the largest player in the Nordic IT sector and product engineering services. Tieto is domiciled in Helsinki, Finland, and the company's shares are listed on the NASDAQ OMX Helsinki and Stockholm. Specific expertise areas offered to customer services are within Banking and insurance; Telecom, automotive and media; Healthcare & welfare; Forest, Energy, Manufacturing; Retail and logistics; Public; ICT operation management.

Legalities

Given the export potential and employment-generating opportunities in the IT Industry, the Indian government has taken severalinitiatives to promote the development of the IT industry in the country.

Recognised as one of the priority sectors for the economy,the Indian IT industry has received abundant support from central and state governments.

Given below is a detailed description of the policy environment, laws and regulations concerning software and IT companies in India.

Information Technology Act

Introduced by an act of Parliament in June 2000, the Information Technology (IT) Act provides legal recognition to all transactions carried out by means of electronic data interchange and other means of electronic communication. Some of the issues addressed by the IT Act, 2000, include the following:

Chapter II states that any subscriber can authenticate an electronic record with his digital signature, and subsequently any

person can verify that document by using the subscriber's public key.

Chapter III states that all electronic records and digital signatures have legal acceptance. The chapter also confers rights to the central government to make rules with respect to digital signatures.

Chapter IV deals with the attribution, acknowledgement and dispatch of electronic records and digital signatures.

Chapter VI deals with the regulation of certifying authorities. It also lists powers of the controller to investigate any contraventions to the provisions of the act.

Chapter VII and VIII state the conditions under which a digital signature may be suspended or revoked.

Chapter IX states that any person who accesses, downloads, copies, extracts data without authorisation is punishable. The section also states that any person tampering with, damaging, denying unwarranted access to or manipulating any

computer/computer system shall be liable to pay damages by way of compensation not exceeding Rs 10 million to affected persons. Introducing viruses or causing disruptions in a computer are also punishable under the Act.

Chapter X describes the role of the Cyber Regulations Appellate Tribunal.

Chapter XI deals with offences such as wrongful loss or damage or destruction of information, deletion or alteration of anyinformation in a computer network, hacking, etc, and prescribes their punishment. It also includes offences such astampering with computer source documents, publishing obscene information, misrepresentation, and breach of confidentiality and privacy.

Chapter XII states that if a network provider/intermediary can prove that he has taken diligent steps to prevent the offence he has been charged with, or that it was unintentional, he is not punishable under the Act.

Digital signatures

Digital signatures were accorded legal acceptance by the IT Act. The controller of certifying authorities, set up to implement the IT Act, has issued licenses to four players who can issue digital signatures. These are Safescrypt Ltd, National Informatics Centre(NIC), and Institute for Development and Research in Banking Technology (IDRBT), and Tata Consultancy Services (TCS).

In July 2001, the Government of India issued a set of laws known as the Information Technology (Certifying Authority) Regulations,2001. These regulations detail the functioning of the certifying authorities in issuing digital signatures.

Intellectual property right laws for computer software

Under the Indian law, computer programmes have copyright protection, but not patent protection. A software programme is an algorithm, and patent law does not protect algorithms per se. The term 'software' includes computer programmes, databases, computer files, preparatory design material and associated printed documentation such as users manuals.

Under Indian Copyright Act, copying from an engraving is an infringement of the copyright, but an engraving produced independently from the same picture is not. Copyright laws generally do not protect the owner from independent creations or reverse engineering.

Therefore, many software and hardware companies have been able to take advantage of the copyright law's lack of protection against reverse engineering.

A major development in the area of copyright was the amendment to the Copyright Act of 1957 in 1999 to make it fully compatible with provisions of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. Known as the Copyright (Amendment) Act, 1999, this Act came into force on January 15, 2000.

The 1994 amendment of the Copyright Act of 1957 brought sectors such as satellite broadcasting, computer software and digital technology under Indian copyright protection. The present Copyright Act conforms fully to TRIPS obligations.

The other important development in 1999 was the issuance of the International Copyright Order, 1999, which extended provisions of the Copyright Act to nationals of all World Trade Organisation (WTO) members.

As per the provision in the Indian Copyright Act, 1957, and as amended in 1994-95, any person who knowingly makes use of an infringing copy of computer programme shall be punishable. According to Section 63 B, copyright infringement attracts a minimum jail term of 7 days. The Act further provides for fines, which shall not be less than Rs 50,000, but may extend up to Rs 200,000, and a jail term of up to 3 years or both.

PrivacyPrivacy issues are dealt with by the IT Act of 2000. Chapter XI, section 72: Penalty for breach of confidentiality and privacy, statesthat any person who secures any electronic record, book, register, correspondence, information, document or other material withoutprior consent and discloses the information to a third-party is punishable under the Act. The punishment ranges from imprisonmentor a fine, which may extend to Rs 100,000 or both.

A draft of proposed amendments to the IT Act 2000 is currently under review and incorporates inputs from a thorough gap analysisof current Indian laws vis-a-vis international laws, as well as progressive inclusions based on recommendations of a panel ofexperts. Highlights of the proposed amendments are:

Definition of computer-related offences with provisions for specific recourse in case of dishonest, fraudulent or unauthorisedaccess, copying, movement and storage of data.

Tampering, impairment or containment and abetting of the same. Provisions relating to transmission and publishing of undesirable content. Provisions for recourse in case of breach of confidentiality and privacy. Liability and compensation for negligence in following reasonable security practices. Review of provisions relating to electronically signed contracts, making them valid and binding;

provision for inclusion of asuitably qualified expert as an examiner of evidence in case of legal proceeding.

Review of the liability of an intermediary.

Policies relating to inbound and outbound investments

Relaxation of limits on overseas investmentGiven the global nature of remote services, building multi-country delivery capabilities is an essential requisite. The Indiangovernment has progressively relaxed limits on overseas investments allowed to Indian companies, enabling them to enhancedelivery capabilities across geographies. Earlier in around 2002-03, the limit for overseas investments through automatic approvalwas increased from $50 million to $100 million, while the limit for joint venture investments was increased from 25 per cent of networth to 50 per cent. Over the years, there has been a significant development on this front. The current ceiling on overseasinvestment for Indian companies stands at 200 per cent of their net worth.

Foreign exchange-related policy According to RBI guidelines, Indian software companies need to repatriate 30 per cent of the value of

on-site contracts. Therest 70 per cent can be utilised for expenses abroad. However, in the case of offshore projects, 100 per cent of the value ofcontract needs to be repatriated to India.

Overseas offices of Indian software firms are not allowed to create liabilities for their India head offices. They are also notallowed to invest their surplus funds overseas, without the prior approval of the RBI.

Incentives provided under the Exim Policy

Depreciation of 100 per cent can be availed over a period of 5 years for computers and computer peripherals for units inexport-oriented units (EOU), electronic hardware technology parks (EHTP) and special economic zones (SEZ).

Import of all kinds of computers into India without obtaining licences.

An EOU/EPZ/EHTP/STP unit may import, without any payment of duty, all types of goods, including capital goods requiredby it for its activities.

Import of second-hand capital goods (without any age limit) by units located in EOU/EPZ/EHTP/STP is allowed.

The sale of units manufactured in an EOU/EPZ/EHTP/STP to the domestic tariff area (DTA) is permissible for up to 50 percent of FOB value of exports and/or 50 per cent of net foreign exchange earned, where the payment of such services isreceived in free foreign exchange

Positive net foreign exchange earnings as a percentage of exports for the hardware sector, now needs to be met over 5years instead of every year.

Domestic sales of 217 items falling under the Information Technology Agreement (ITA-1) from EHTPs will be considered asfulfilment of export obligation, provided these components attract zero duty in the domestic market.

Extension of incentives for units located in a EOU/SEZ for a year

Profits of companies that are located in or registered under Software Technology Parks of India (STPI) are exempted under Section10A of the Income Tax Act for 10 years from the commencement of operations, or up to March 2011, whichever is earlier. However,in the union budget 2011-12 the scheme was withdrawn. The non-extension of STPI benefits is expected to increase tax rates,thereby affecting the cash flows of ITeS companies.

Other policy-related aspects

Beneficial depreciationBeneficial depreciation provisions have been provided to enable IT / ITeS companies to claim depreciation on computers andcomputer software at a higher rate of 60 per cent of written-down value at the beginning of the relevant financial year for income taxpurposes. Therefore, under the written-down value method, 84 per cent of the cost of computers and software can be depreciated inthe first 2 years. This has been specifically done in view of the rapid pace at which the computer/computer software technologybecomes outdated.

Fringe Benefit Tax (FBT) and its impact on IT/ITeSFBT was introduced in 2005-06 as a tax paid by employers on employee benefits that don't form part of the salary. It taxed certainportion of the expenditure on concessional tickets for private journeys, employee stock options, gift etc. that companies dole out toreward their employees. The rate of FBT on the value of fringe benefit was 30 per cent plus surcharge and education thereon.However, in the union budget of 2009-10 the fringe benefit tax was abolished. According to new rules, the perquisites are nowtaxable at the hand of employees. The move benefitted the industry as it had a high incidence of FBT due to ESOPs. This helpreduced the employee compensation cost.

Minimum Alternate Tax (MAT)

Under the existing provisions of section 115JB of the Income Tax Act, a company is liable to pay MAT on its book profit in case thetax on its total income computed under the provisions of the Act is less than the MAT liability. Book profit for this purpose iscomputed by making certain adjustments to the profit disclosed in the profit and loss account prepared by the organisation inaccordance with the Companies Act, 1956.

In the union budget 2011-12, the MAT was increased from 18 per cent to 18.5 per cent while the surcharge was decreased from 7.5per cent to 5.0 per cent. Thus in effect, the increase in MAT rate was offset by the decrease in surcharge. The rates remainedunchanged in the union budget 2012-13. Further, in last year's budget the MAT was also levied on units in SEZs as well, whichcontinued in the 2012-13 budget. This is expected to leave a marginal negative impact on the cash flows of the ITservices players. In the 2013-14 budget, the surcharge has been increased from 5 per cent to 10 per cent for companies withtaxable income higher than Rs 100 million will increase the effective MAT levied to 21 per cent, from the current 20 per cent.However, the additional surcharge will be applicable only for the financial year 2013-14.

Customs/excise duty for hardware products

National Policy on Information Technology – 2011

The National Policy on IT focuses on application of technology-enabled approaches to overcome monumental developmentalchallenges in education, health, skill development, financial inclusion, employment generation, governance etc. to greatly enhanceefficiency across the board in the economy. The focus of this policy is on deployment of ICT in all sectors of the economy and onproviding IT solutions to the world.

The policy has the following goals:

Bringing the full power of ICT within the reach of the whole of India.

Harnessing the capability and human resources of the whole of India to enable India to emerge as the Global Hub andDestination for IT and ITeS Services by 2020.

The policy attempts to optimally leverage India’s global edge in ICT to advance national competitiveness in other sectors,particularly those of strategic and economic importance. The Policy will promote an inclusive and equitable society. The Policy isoriented towards use of ICT to consciously promote decentralization and empowerment of citizens.