M

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MA Banking for the Best Deal . . . Any Deal . .
. In the Current Market Erik J.
Krieger November 2001
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Just When Things Looked So Good

• Youve carefully thought out all the angles
• Everything has falling in place so far
• You know what youre doing, its what youve been
  trained to do, youre an expert
• Its instinctual and comes naturally to you
• Nothing could possibly go wrong . . . right?

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Think Again!
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Agenda

• Brief Market Overview - Perspective
• MA Advisor/Investment Banker
• Why hire an advisor
• Who to hire
• What an advisor should do
• What the advisor wants
• MA - The Transaction
• Valuation
• Process
• Timing

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Erik J. Krieger

• Co-Founder/Chairman/Sr. Managing Director
  Pacific Crest Securities
• Led efforts in Capital Markets, Research and
  Banking
• 15 years Investment Banking experience
• New York Chicago
• Native Oregonian

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Pacific Crest Securities
Services
Full-Service Investment Bank
Focus
Institutional, Next Generation Communications
Technology
Employees
90 Professionals
Research Coverage
Over 125 Public Companies
Institutional Reach
250 active technology buyers
Trading
1 market maker in US under 150 Companies 85
million shares traded in October 2001
Banking
Offices
Boston, Seattle, Portland, San Francisco
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Market Overview
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M A Drivers

• General economic trends
• Outlook/confidence
• Company health
• Investor views toward consolidation
• Credit availability
• Supply of quality companies
• Public equity markets
• Volatility
• Valuations
• Availability to raise capital

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What a Difference a Year Makes!

• 1999-2000
• Sellers market
• Set initial pricing/terms
• Record activity
• Silly valuations
• Mega deals in vogue
• Strategic buyers dominate
• Speed to market rage
• Stock deals dominate
• Positive market responses to announcements
• Easy access to capital
• Any deal had value

• 2001
• Buyers market . . . Terms Pace
• deals off 50, lowest level since 1996
• Valuations pushed to low end
• Tech/Comm deals biggest drop of all industries
• Lack of capital (debt equity)
• End of pooling
• Negative responses to announcements
• Equity orphans everywhere
• Many can not be sold

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Perspective . . .
Total MA Market Past 30 Years
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Stock Prices Influence MA Market
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Tech Deals 1993 - 2001
Note 2001 figures through November 5 only
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Communications Deals 1993 - 2001
Note 2001 figures through November 5 only
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Tech/Comm Deals by Size
Note 2001 figures through November 5 only
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Tech/Comm Deals YTD by Size
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Tech/Comm Pricing Trends
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Payment Trends
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Reaction to Public MA Announcements
Change One Day Prior to One Day After Deal
Announcement
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Premiums Paid For Public Deals
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Technology by Space
1999
Household Appliances
Semiconductors Capital Equip.
Components
Graphics
Networks
2000
Mainframes
Memory Devices
PC's
Peripherals
Services
2001
Software
Semiconductors
Measuring Devices
Miscellaneous
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Communications by Space
1999
Radio/TV Broadcasting
Cable TV
9
18
10
Cellular
14
Equipment
Services
4
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13
Wireless
Telephone
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Bottom Line!

• Feels worse than it is
• People still have memories of 1998, 1999 2000
• Wall Street geared up as if it would last forever
• Need time to flush out system
• Deals are still happening . . . And will continue
  to happen

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Why are Transactions Happening?

• Bigger is better . . . Scale provides for
  traction and stability . . . Customers are
  demanding it!
• Buyers filling gaps
• Lack of capital . . . survival
• No hope of really growing on own . . . Feature
  versus Benefit (Business)
• Orphan syndrome . . . Deal fatigue
• Liquidity

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Whats a Company to do?

• Concentrate on internal operations
• Take advantage of low prices and become a
  buyer
• Wait for better environment . . . If you can
• Hire quality advisor to help evaluate
  alternatives and execute well thought out strategy

Tough times require extra care. Cover all the
bases
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Todays Better MA Spaces

• Services
• New media
• eLearning
• Technology
• Enterprise software - applications
• Security
• Communications
• Wireless applications
• Convergent technologies

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MA Advisory
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Why Hire an MA Advisor?

• Selling or buying a business is a full time job
• Reduce buyer/seller friction
• Increase number of alternatives
• Maximize shareholder value
• Drive the process and resolve trouble spots

None of it really matters unless deal closes .
. . Advisor ensures closure
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Tangible Things an Advisor Does

• Evaluate marketplace
• Strategic analysis of alternatives
• Valuation analysis
• Create marketing plan materials
• Execute marketing plan
• If necessary, arrange financing
• Help with due diligence
• Execution, Negotiation, Close

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Bankers Role After the Deal

• Sell side
• Spin control - internal and external
• Wealth management
• New sell/buy side engagements
• Help old management find new jobs

• Buy side
• Spin control - internal and external
• Financing
• New buy side engagements

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What to Look for in an Advisor

• Transaction experience
• Commitment
• Banker commitment
• Firm commitment
• Resources
• Knowledge of space
• Understanding of dynamics/drivers of value
• Connection with buyers
• Good listener of clients needs

Hire an advisor that can adapt to succeed in
any situation
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Changing Banker Landscape
Date
Investment Bank
Acquiror
Survivor
BT Alex. Brown
09/02/97
Alex. Brown Inc
Bankers Trust New York Corp
09/02/97
Dillon Read Co
SBC Warburg
SBC Warburg Dillon Read
10/01/97
Montgomery Securities
NationsBank Corp
NationsBanc Montgomery Securities
10/08/97
Furman Selz LLC
ING Barings
ING Barings Furman Selz
11/03/97
Oppenheimer
CIBC Wood Gundy Securities Inc
CIBC Wood Gundy Oppenheimer
11/28/97
Salomon Inc
Travelers Group Inc (Smith Barney)
Salomon Smith Barney
02/02/98
Wheat First Butcher Singer
First Union Corp
Wheat First Union
Dain Rauscher Wessels
04/06/98
Wessels Arnold Henderson LLC
Dain Rauscher Corp
Cleary Gully Freedom
04/15/98
Cleary Gull Reiland McDevitt
Freedom Securities Corp
Bowles Hollowel Conner
05/01/98
Bowles Hollowell Conner Co
First Union Corp
US Bancorp Piper Jaffray
05/01/98
Piper Jaffray Cos
US Bancorp
SG Cowen
06/30/98
Cowen and Co
Societe Generale Securities
10/08/98
Salomon Smith Barney
Citicorp
Salomon Smith Barney
06/04/99
BT Alex. Brown
Deutsche Bank
Deutsche Banc Alex. Brown
07/01/99
BankBoston Robertson Stephens
Fleet Financial
Fleet Boston Robertson Stephens
11/01/99
Hambrecht Quist
Chase Manhattan Corp.
Chase HQ
Volpe Brown Whelan Co J.C. Bradford PaineWebber
Donaldson, Lufkin, Jenrette J.P. Morgan Dain
Rauscher Wessels Prudential Securities Wasserstein
Perella Epoch Partners, Inc. Alliant
Prudential Securities PaineWebber UBS AG Credit
Suisse First Boston Chase HQ Royal Bank of
Canada N/A Dresdner Bank The Goldman Sachs Group,
Inc Silicon Valley Bank
Prudential Volpe Technology
12/15/99 06/12/00 07/12/00 08/29/00 09/13/00 09/28
/00 12/18/00 01/04/01 06/14/01 09/28/01
PaineWebber
UBS WArberg
Credit Suisse First Boston
JP Morgan Chase Co. RBC Dain Rauscher
Wessels Prudential Exits Investment
Banking Dresdner Kleinwort Wasserstein The
Goldman Sachs Group, Inc. Silicon Valley Bank
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Advisor Type

• Global Full Service
• Goldman Sachs, Morgan Stanley, Merrill Lynch
• National Full Service
• Piper Jaffray, Robertson Stephens, First Union
• Boutique Full Service
• Pacific Crest, Soundview, Friedman Billings
• MA Boutique
• Alliant, Lincoln Partners, Houlihan Lokey
• Local/Regional Generalist
• DA Davidson, Van Kasper, Veber

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Large versus Mid Sized /Smaller Deals

• Larger Deal
• Commitment
• Board considerations
• Global reach
• Financing

• Mid Sized/Smaller Deal
• Commitment
• Sr. Banker Attention
• Resources
• Location

MA advisory is not dependent on capital base
Match deal size and MA advisor size
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Middle Market Advisor Profile
Many
Global - Full Service
National - Full Service
Boutique- Full Service
Local/Regional Generalist
Industry Knowledge
High
MA Boutique
High
Business Broker
Commitment Level
Resources/ Capabilities
Low
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What Motivates an Investment Banker?

• Size of Transaction
• Time it takes to close deal
• Additional business
• Good client . . .

Show me the Money
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What Makes a Good Client Good?

• Realistic expectations
• Honesty . . . Complete disclosure
• Advisor versus Servant role
• Clarity in decision making (fewer leaders)
• Few owners . . . Or Public

Nobody likes surprises . . . Especially your
advisor! Advisor needs to know everything
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What Makes for an Attractive Deal?

• Strong financial performance . . . plenty of
  runway
• Excellent internal controls
• Scale . . . Client base
• Brand/market leadership/technology
• Real commercial partnerships
• Strong external space influences (many buyers)
• Definable business . . . Simpler the better

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Things that are Unattractive

• Little/no revenue
• Lack of real customers . . . More than one
• Real validation of technology
• Cash burn
• Few buyers
• Unrealistic expectations
• Just employee bases/management teams

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What Does it Cost to Hire an Advisor?

• Fees are negotiated . . . To a point
• Supply demand
• You get what you pay for
• Insignificant cost if successful

• Success Fee
• of transaction . . . Lehman formula
• Incentives minimums
• Buy side capped
• Retainer
• Flush out real clients
• Credited toward Success Fee
• Expenses
• Disincentive if not paid
• Proximity/Experience reduce cost

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Fee Case Study
Company Profitable enterprise software firm with
30 million in revenue and no debt Valuation 95
to 105 million
Fee Structure Retainer 75,000 paid 50 at
signing of engagement letter and 50 within 30
days. Credited to Success Fee. Expenses All out
of pocket. Client approval over
25,000. Success 1.25 up to 95 million plus,
3 of amount over 95
million 750,000 minimum
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Deal Process
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Two Sides to Every Deal
Buyer and Seller
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Core Issues in Any Deal

• Technology/business fit
• Fill the gap
• Make versus buy
• Time to market
• Philosophical similarity
• Direction
• Culture/Style/Intangibles
• Relevance
• Good value . . . Buyer and seller
• Structure dictates motivations
• High, low or fair will influence outcome
• Ease of integration (size, location, systems,
  etc.)

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MA Realities

• Emotions will create high anxiety throughout
  process
• Integration is 99 of success
• Expect significant disruption
• Time consuming
• Dont lose control of business
• After the deal . . . Nothing will be the same

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Buyer Seller Valuation Perspectives

• Buyer
• Back to fundamentals . . . Bubble has popped
• Justification matrices long gone
• Many companies can not be sold
• Comparable public companies
• Discount private companies
• Must look at compare fundamentals
• Comparable MA transactions
• Discounted cash flow
• Asset/technology valuations
• Liquidation analysis

• Seller
• Be prepared with knowledge of buyer
• Understand impact of make versus buy decision
• Evaluate impact on Buyers business
• Impact on growth rates
• Earnings accretion/ dilution . . . synergies
• Operations/ unique technology
• Resultant share price impact

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Sale versus Buying Process

• Sale
• Business evaluation analysis
• Full due diligence
• Valuation analysis
• Financial strategic alternatives
• Marketing strategy
• Proper positioning . . . Value creation
• Marketing materials
• Identify screen buyers
• Execution
• Market, coordinate, negotiate, close
• Create sense of urgency/scarcity

• Buy
• MA strategy
• Develop objectives, criteria, parameters
• Create Deal Flow
• Identify screen targets
• Value
• Evaluate impact (external and internal)
• Execution
• Due diligence, negotiate, close
• Financing
• Manage expectations and process to best position
  buyer

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MA Timeline (Sale)

• Banker pre-marketing prep 3 weeks
• Marketing 8 weeks
• Negotiation 4 weeks
• Due diligence 2-4 weeks
• Documentation 4-8 weeks
• Regulatory/shareholder 4-8 weeks
• Public company deals adds certain time elements

• Expect 4 to 6 months from start to close

Be prepared for a long process
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How to Prepare for Sale?

• Get controls in place
• Prepare detailed forecasts
• Control costs
• Develop strategic/commercial partnerships
• Identify buyers strategic fit
• Mentally prepare for process
• Run business as if not selling . . . Focus on
  operations

Clean up Shop - Like selling a house
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Summary

• Evaluate alternatives . . . Dont do it in a
  vacuum and be honest
• Hire Advisor to maximize options . . . Maximize
  value
• Be prepared knowledgeable
• Deals are still being done . . .