Robin A. Graham Needham

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Robin A. GrahamNeedham Company, Inc.
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The Emerging Growth Investment Bank for
Technology Leaders
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Todays MA discussion

• Understand the MA environment that you are in
• How to find and engage the right investment bank
  for MA advice
• Working with an investment banker to prepare for
  a negotiation/sale
• The range of services provided by bankers in the
  MA process
• Issues in selecting the best merger or
  acquisition partner
• Where MA bankers are focused today and why

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The Mergers and Acquisitions Environment
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Market Capitalization Over Time
Valuation corrections in 2001 altered the Market
Cap landscape dramatically

• More than half of large-cap companies (1bn)
  reassigned to the middle market (500M - 1bn)
• Only 93 companies went public in 2001, yet the
  small-cap sector continued its growth trend grow
  due to devaluation of large and mid-cap stocks

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Macro Trends in MA

• An extended period of high valuations followed by
  tight credit markets have caused financial buyers
  to be an insignificant factor in the overall MA
  market as compared to earlier periods.

• Overall MA volume has retreated dramatically
  from the past few years all-time highs
• MA activity is still driven by corporate buyers
  fulfilling strategic imperatives

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The Impact on Technology MA
Technology MA volume was most significantly
impacted

• 2001 tech MA volume was down more than 60 from
  2000 levels after an unprecedented run that began
  in 1994.
• Broken deals were prevalent as business
  fundamentals and expectations eroded.
• 2002 YTD MA volume is even more depressed

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Mergers Acquisitions Environment
MA Currency - what is different now?

• Cash is King - reversing the accelerating use of
  high p/e stock seen 1995-2000
• New FASB rules no longer penalize creative
  structures using stock and cash
• Cash is an increasingly attractive currency to
  sellers and low P/E buyers.

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The Public/Public MA Story
MA dollar volume between public companies fell
dramatically after Q1 2001

• Most of Q1s dollar volume were CY 2000
  transactions that closed in early 2001
• Public companies froze merger discussions due to
  valuation uncertainty and eroding business
  performance at both buyers and sellers.
• The number of transactions consummated declined
  6x Q1/Q1

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The Private Company Liquidity Path
Private companies found liquidity paths scarce in
2001

• Of the 93 IPOs in 2001, just 19 were technology
  companies
• This compared to 308 tech IPOs in 1999 and 221
  tech IPOs in 2000
• The period 1980 1998 averaged just 61 IPOs per
  year
• MA continually reinforced as the most likely
  liquidity path for private companies

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The Good Old Days
The BOOM Economy
Unprecedented wealth creation and high consumer
confidence
Low cost and easy access to capital
Investors seeking abnormal returns increasingly
turned to private equity
Public Venture Capital Phenomenon
Proliferation of venture funds
MA outpaces IPOs 11-1
Explosion of young VC-backed tech and Internet
companies
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Mergers Acquisitions Environment

• Significantly reduced MA activity seen in 2001
  will continue
• Classic Buyers Market, yet the universe of
  buyers contracted dramatically
• The number of sellers remain high as the
  valuation-sensitive sellers are more than
  outnumbered by the illiquid desperate sellers
• Distressed public companies and stranded /
  capital-starved private companies
• Industry leaders that had built their businesses
  through aggressive acquisition were on the MA
  sidelines -- until very recently
• In 2001, corporate buyers were waiting for
  valuations and their businesses to stabilize.
  Examples Cisco, Lucent, Nortel, Broadcom
• However, Gorilla acquisition appetites are
  renewed in 2002
• Cisco just announced two spin-in acquisitions
  and 2002 MA intentions
• Broadcom just re-entered with acquisition of
  Mobilink (258M)

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Mergers Acquisitions Environment

• The results are
• Fewer MA transactions and lower valuations for
  MA transactions
• Longer cycle times for transactions
• Much greater emphasis on detailed
  financial/business due diligence
• Management cautious throughout process
• Greater degree of Board involvement in
  acquisitions
• Slow, difficult negotiations every point counts
• More carefully structured MA transactions
• the return proliferation of earn-outs for
  acquired companies
• Passing EPS accretion/dilution acid test is
  critical

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Mergers Acquisitions Environment

• MA Market Outlook for 2002
• Significant transition made in 2001 from Sellers
  market to Buyers market
• Companies with strong balance sheets, experienced
  management teams and profitable business models
  are now the drivers of the MA market.
• MA transactions will continue to suffer higher
  attrition rates and lower net valuations
• An increasing percentage of transactions will
  bedistressed sales or bankruptcies
• Leveraged companies and undercapitalized
  companies will be at a tremendous negotiating
  disadvantage
• Choosing and using the right MA advisor and
  experienced legal counsel will be all the more
  critical to a successful outcome

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The MA transaction
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Assembling the Transaction Team

• The Core Working Group
• Senior management team, legal counsel, Investment
  Banker their MA team
• Getting to know investment bankers
• Who can make the right introductions
• Directors
• Venture Capitalists
• Legal counsel
• If your company is an attractive acquisition
  candidate, bankers have probably been beating
  down your door
• Take the time to get to know bankers well before
  a transaction is imminent a long-standing
  relationship benefits everyone involved

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Selecting the Right Banker

• Bankers who know your industry sector and its
  competitive dynamics
• Active MA team with current recent experience
  on transactions
• An investment bank with a tradition of
  representing companies that are your size and
  profile
• Research analysts who cover your industry sector
  and follow its public companies
• Leverage the relationship with your banker
• Hire a full service investment who can advise you
  on a multitude of possible alternatives to MA
  (alternatives negotiating leverage)

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Current Structure of the Investment Banking
Industry
Independent National Emerging Growth
Firms Needham Company Thomas Weisel Partners
Wit Soundview Emerging Growth Firms NowOwned by
Major Commercial Banks ABN Amro / ING Barings /
Furman Selz Bank of America Securities /
Montgomery JP. Morgan / Chase / HQ CIBC World
Markets / Oppenheimer Deutsche Bank / Bankers
Trust / Alex. Brown Firstar / US Bancorp / Piper
Jaffray Fleet / BancBoston / Robertson
Stephens Royal Bank of Canada / Dain Rauscher /
Wessels SG / Cowen Major Bracket Institutional
Firms Bear Stearns UBS Warburg / Paine Webber
Special Bracket Firms Citigroup / Salomon Smith
Barney CS First Boston / DLJ Goldman Sachs Lehman
Brothers Merrill Lynch Morgan Stanley Dean
Witter Regional Retail, Institutional or
Emerging Growth Firms A.G. Edwards (St.
Louis) Adams Harkness Hill (Boston) Janney
Montgomery Scott (Philadelphia) KeyCorp /
McDonald Company (Cleveland) Morgan Keegan
(Memphis) Raymond James Financial (St.
Petersburg) SunTrust Equity Securities
(Atlanta) Stephens Inc. (Little Rock) Robert W.
Baird (Milwaukee) Wachovia (Richmond) Wells
Fargo/FSVK (San Francisco) William Blair
(Chicago)
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The Role of an Advisor

• extracts from a standard engagement letter
• Reviewing with the Board of Directors and
  management the Company's financial plans,
  strategic plans and business alternatives
• Reviewing and analyzing the historical and
  projected financial information of the Company
  and the Other Party provided by the respective
  managements of the Company and the Other Party
• Assisting the Company's Board of Directors and
  management in the valuation of the business(es)
  involved in the Transaction
• Assisting the financial due diligence efforts of
  the Company with respect to the Other Party
• Advising the Company with regard to the financial
  structure and terms of any Transaction that might
  be realized in the current market environment and
  assisting the Company in structuring and
  negotiating the financial aspects of the
  Transaction

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Preparation is Key

• Discuss your business history and prospects with
  MA advisors in detail
• Realistic assessment of financing/MA options
  with advisors
• Avoids death-march or firesale scenarios
• Prepare realizable, bottoms-up, detailed
  financial forecasts
• Outline non-financial concerns to your advisors
• Employee treatment, cultural and strategic fit
  with each potential buyer
• Establish reasonable valuation expectations up
  front
• Determine initial preference for cash, stock or
  combination thereof
• Help your advisors build a Negotiating Plan

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Assessing Negotiating Leverage
Multiple Elements Drive Negotiating Leverage

• Competition
• Strategic Alternatives
• Necessity/Desire
• Resources
• Time

Negotiating Leverage (5 key elements)
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Building the Negotiating Plan
Planning is an Important Component of Successful
Negotiations
Collecting Information
Assessing Leverage
Negotiating Plan
Achieving Resolution
Establishing Expectations
Determining Response
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Critical Transaction Parameters
Successful Negotiation Can Usually Result in
a Broad Range of Outcomes
Valuation Structure Liquidity
Buyers Minimum Terms
Financial Terms
Sellers Minimum Terms
Strategic Fit Culture Timing
Non - Financial Terms
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Structure of MA Advisor Fees

• Sellers pay advisory fees as a of Total
  Transaction Value
• Sometimes staggered for additional incentive 1
  plus 2 over 100M
• Advisors minimum fee common in this business
  environment
• Example Fee is the greater of 1.5 or 750,000
• Interim fees sometimes charged and credited
  against total fees due on closing
• Retainer fee on signing engagement letter
• Milestone Fees on signing of Letter of
  Intent/Agreement or Announcement
• Fairness Opinion fees (Only necessary for public
  companies)
• Set amount charged is independent of
  transaction completion

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Where Advisors are Focused Today

• The Investment Banking industry is itself
  retrenching
• Many firms are pre-occupied with their own MA
  and restructuring
• MA professionals spending more time advising
  Acquirers in a buyers market
• In 2000, Needham represented Buyers in just 27
  of transactions
• In 2001 2002, Needham represented Buyers in 47
  of transactions
• Public companies who are building market
  leadership through MA
• Still very active in representing sellers, but
  Very cautious in assessing valuation and
  probability of transaction completion prior to
  committing resources
• Sellers business stability and negotiating
  leverage, strategic drivers of transaction are
  critical
• Acquisitions of stand-alone private companies by
  public companies are difficult in todays MA
  market

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Where Advisors are Focused Today

• Needham Company remains committed to Emerging
  Growth companies
• Supporting client-base through the downturn
• Follow-on equity offerings
• Private Placements
• PIPEs
• Grew headcount in 2001 and YTD 2002 while
  maintaining profitability every quarter
• Strong Q1 2002 -- our second best Q1 in 15 years
• Taking market share in Emerging Growth MA
• Ten MA transactions announced YTD
• Including four public/public MA transactions

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Appendices
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The MA Transaction
A Typical Sale / Divestiture Process
Preparation Weeks 1 - 4
Canvas Buyers Weeks 5 - 8/10

• Engagement of Needham
• Review Co. Financial and
• Operational Information
• Needham Values Co.
• Prepare Memorandum,
• Executive Summary and
• NDA with co. counsel
• Prepare List of Likely Buyers

Due Diligence Weeks 8/10 - 12/14
Final Negotiation Weeks 12/14 - 16/18

• Contact Buyers
• Send Executive summary
• Sign NDAs
• Distribute informational
• memorandum / materials
• Prepare management team
• for diligence presentations
• Request and receive initial
• non-binding bids in writing.

• Setup Data Room
• Select Qualified Bidders
• for D.D.
• Schedule and Conduct
• Visits
• Provide Draft Definitive
• Agreement
• Receive Final Bids

Closing (TBA)
Phase/Action Items

• Select Winning Bidder
• Negotiate Execute
• Definitive Agreement
• Press Release
• Submit HSR Filing
• (50 million threshold)

• Shareholder Approval
• Process

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Week
The length depends on such factors as the size
of canvas, the overall market and the geographic
location of contacts.
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The MA Transaction
Acquisitions Transactional Issues
Financial Positioning

• Press release announcing transaction
• Backgrounder on the acquisition
• Guidance for analysts forecasts
• Prepare and conduct conference call
• Plan and execute roadshow to sell the deal, if
  necessary

Due Diligence
Steps to successful transactions

• Interview key management
• Financial due diligence
• including analysis of historical
• and projected financial statements interview
  independent auditors
• Third-party interviews and
• reference checks
• Facility visits
• Legal due diligence

Negotiations

• Financial advisor or principal
• Cash or stock preferable
• Understand potential synergies
• Employee issues such as
• Acceleration of options
• Employment agreements
• Non-compete agreements
• Key issues to be negotiated
• Condition of closing
• Financing outs
• Reps warranties
• Break-up fees
• Shopping restrictions
• Topping offers
• Material adverse change
• Shareholders vote
• required (either company)

Structuring

• Determine ability to use either
• cash or stock
• Analyze respective proforma
• effects of a stock or cash
• acquisition
• Balance sheet
• PL
• Goodwill (write-off upon impairment)

Valuation

• Analyze financial statements
• Discuss business history and
• prospects with management
• Analyze comparable public companies trading
  multiples
• Analyze comparable transactions

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Representative Financial Advisory Assignments
160,000,000
Acquiring Innoveda Inc. Pending
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Representative Public Equity Offerings
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Representative Public Equity Offerings
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Representative Private Placements
CurrentStatus
CurrentStatus
CurrentStatus
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Representative Corporate Investment Transactions