The Current M

1
CONFIDENTIAL DRAFT
The Current MA And Capital Markets Environment
For Israeli Technology Companies
NEW YORK SILICON VALLEY BOSTON LONDON
Presented to December 9, 2004
BROADVIEW INTERNATIONAL A DIVISION OF JEFFERIES
COMPANY, INC
2
CONFIDENTIAL DRAFT
Capital Markets Update
3
The Technology Markets Are Generally At Their
Healthiest Levels Since The Bubble

• 2004 forecast IT spending up 3.9but a 2.1
  trillion market1
• NASDAQ up 9.1 over last twelve months2
• IPO market thawingthe bar remains high
• MA continues to reboundsector specific

Private Equity Funds Continue To Adapt Their
Investing Strategies To The New Environment
1 Source Gartner Dataquest Global Market Sizing
January 2004 2 As of 12/06/04
4
The Dramatic Rationalization Of The Public
Markets Has Contributed To The Markets Health
Number Of NASDAQ Listed Public Companies1Mar
2000 Dec 2003
CHANGE 00-03
DEC 2000
DEC 2001
DEC 2002
DEC 2003
MAR 2000
5,181
5,000
(1,800)
3,800
(35)
3,500
3,300
56 of NASDAQ Listed Public Companies Have No
Research Coverage3
Trading Values
Companies 2
of Total
ltCash
46
1
lt100m
1,019
31
lt250m
1,285
39
1 Source NASDAQ 2 Source FactSet 3 Source
Thomson Financial First Call
5
The IPO Market Is Demonstrating A Recovery On A
Selective Basis For High Quality Issuers
Tech IPO Activity Number of Transactions
Historic Tech IPOActivity
23
32
20
20
25
16
20
78
2003
9M 2004
2001
2002
Current IPO Environment
Q1 2003 - Q3 2004 IT Sector IPOs1

• Recent strengthening of the IPO and equity
  capital markets
• The IPO market is stronger than it has been for
  over three years, particularly in technology (but
  the bar is high)
• Comparable public companies are now benefiting
  from improved economic conditions and trading at
  healthier multiples, but IPO backlog is increasing

IPO Backlog
IPOs
1 Source Capital IQ.
6
What IPOs Are Getting Done?
Technology IPO investors are demanding
profitability
Profitable Quarters Before IPO
25
22
20
15
of Companies
8
10
6
4
4
3
5
0
0
1
2
3
4
5
51job, AlphaSmart, Blackbaud, Blue Nile, China
Finance, Global Signal, Google, InfoSonics,
Kanbay International, KongZhong, Leadis
Technology, Lipman Electronic Engineering,
Multi-Fineline Electronix, Navteq, PeopleSupport,
PlanetOut, Shanda Interactive Entertainment,
Shopping.com, Staktek Holdings, Telvent GIT S.A.,
Ultra Clean Holdings, Xyratex
Archipelgo Holdings, Greenfield Online,
Interchange, Linktone, Marchex, Motive,
Salesforce.com, TOM Online
Blackboard, CallWave, Cogent, Ness Technologies
Freescale Semiconductor, Hutchinson
Telecommunications, JAMDAT Mobile, RightNow
Technologies, SiRF Technology Holdings,
WebSideStory
eCOST.com, Phase Forward, Semiconductor Manu.
Intl., Volterra Semiconductor
Atheros Communications, NetLogic Microsystems,
PowerDsine
LTM Revenue
lt25 MM
19
26-50 MM
17
LTM Revenue Profiles of Recent IPOs
51-75 MM
15
76-100 MM
13
101-200 MM
19
200 MM
17
(1) Data from 2003 to Oct, 2004.
7
Summary Of Median Performance For Tech IPOs
TTM
TTM
Change
Offering
TTM
Revenue
Quarters of
EBIT
1
Amount
Revenue
Growth
Profitability
Margin
From IPO
H2 2003 Median Performance
85,000
72,493
36.3
6
4.5
21.8
H1 2004 Median Performance
86,000
87,357
54.8
5
7.6
(20.5)
H2 2004 YTD Median Performance
68,650
43,167
66.6
3
5.2
27.2
IPO Performance Statistics
H1 2003
H1 2004
H2 2004 YTD
Companies with Revenue lt 25MM
11
10
37
Companies Unprofitable
16
19
37
Median Quarters of Profitability
6
5
3
Companies Trading Below IPO
37
57
23
1 As of 11/1/04. Source Broadviews IPO Database
/ Hoovers IPO Central / Capital IQ
8
Israeli Companies Have Been Unable To Tap The
Public Capital Markets In The US
1 Source Broadview IPO Database and IVA 2004
Yearbook. Includes capital raised in IPOs and
follow-on financings in the United States as of
6/28/2004. 2 Significant public offerings in 04
include PowerDsine, Tower Semi., Ness Tech.,
Shopping.com, Lippman Elec., and M Systems.
9
Yet Many Public Companies Have Weathered the
Market Correction and Recovery Extremely Well
Total Equity Market Cap of Israeli NASDAQ Listed
Companies
45.0
40.2
39.0
40.0
32.9
35.0
30.0
25.9
25.3
Market Cap ( Billions)
25.0
20.0
15.9
13.6
15.0
10.0
5.0
0.0
1998
1999
2000
2001
2002
2003
2004
of Israeli NASDAQ Listed Companies
90
83
79
76
80
73
72
69
69
70
60
50
Of Companies
40
30
20
10
0
1998
1999
2000
2001
2002
2003
2004
1 Annual data as of December 31. 2004 data as of
December 6. Source NASDAQ includes both
technology and non-technology companies
10
However, Most Publicly Traded Israeli Companies
Are Small-Caps
Total Equity Market Cap 39B
23
25
21
20
15
10
Companies
10
6
6
3
5
0
lt50
50-100
100-250
250-500
500-
gt1000
1000
Market Cap (MM)
Three Largest Publicly Traded Israeli
Companies Market Cap Partner
Communications 1,468 MM Checkpoint
Software 6,032 MM Teva Pharmaceuticals 17,54
6 MM 25,046 MM
Data as of December 6. Source NASDAQ
includes both technology and non-technology
companies
11
CONFIDENTIAL DRAFT
Trends In Private Equity
12
The Venture Industry Is Stabilizing, But Serious
Challenges Remain
Historic VentureFunding Activity
US IT Venture Funding Activity Number of
Transactions Amount Raised1
Amount Invested (B)
453
7
450
Number of Deals
426
6
362
375
347
334
327
317
321
4.8
310
305
4.7
302
5
280
272
300
3.9
Number of Deals
4
Amount Invested (B)
3.2
3.3
225
3.1
2.8
2.9
3
2.7
2.7
2.6
2.5
2.3
150
2
75
1
0
0
3Q01
4Q01
1Q02
2Q02
3Q02
4Q02
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
Current VentureFunding Environment

• Venture groups have been deploying the huge
  amounts of capital raised in recent years
• Deployment is at/above 1997 levels
• IPO market is no where close to comparable
• High-value MA exits have also fallen
  dramatically
• High proportion of funds will be fundraising in
  05

1 As of 12/06/04 Source Ernst Young Venture
Capital Report
13
Later Stage Private Equity And Buyout Market Is
In A Dynamic, Rapidly Evolving State
Secular Changes
Implications

• Large private equity capital pools interested in
  technology
• Hedge funds entering the private market
• Acceptance of sponsors selling companies to other
  sponsors
• Historically low borrowing costs
• Sarbanes-Oxley and lack of research and trading
  support hollowing out low end of public market

• Reduced required rate of return / IRR driving
  pricing higher for later stage deals
• Sponsors more comfortable about ultimate exit as
  other sponsors provide safety net
• Companies valued between 100 and 300m have an
  attractive alternative to an IPO for capital
  raising

14
Israeli Invested Capital Has Stabilized, Though
The Number Of Deals Has Declined More Than In The
U.S.
Equity into Venture-Backed Companies with Offices
in Israel
Amount Invested (M)
Number of Deals
Source VentureOne/Ernst Young
15
CONFIDENTIAL DRAFT
Trends In MA
16
MA Activity Has Stabilized At 1996 Levels
MA Activity 1992 H1 2004 Number Of
Transactions North America - IT, Media,
Communications
Median Deal Size (MM)
8.5
10.0
11.0
13.5
12.2
12.0
15.0
21.9
28.1
18.3
13.5
17.0
16.4
Source Broadview's Global Mergers
Acquisitions database
17
The Venture Capital Industry Has Seen A Dramatic
Reduction In Higher Value Private Company Exits
Middle Market Transactions Will Drive Venture
Capital Returns In The Current Environment
2000
2002
H1 2004
2003
gt20MM 563 172 138 97 gt50MM 397 84 80 51 gt150MM
193 30 23 14
39 of These Companies Were Venture
Capital-Backed
Source Broadview's Global Mergers
Acquisitions database. North American private
seller transactions.
18
Most Buyers Are Paying Up Only For Later Stage
Companies
STAGE
VALUE/ PROOF
1
Technical Feasibility
Product is possible to do
Technology Acquisition
2
Product does what it is supposed to do
Product Functionality
3
Customer Acceptance
Customers care
Size Of Addressable Market Drives Valuation
Product Acquisition
4
Customers are willing to pay a rational economic
price
Economic Model Works
5
Business Model Works
Company can be profitable
Business Acquisition
6
Increasingly profitable growthis possible
Scalability Proven
19
Israeli Technology MA Evolution
Pre 2000

• The first acquisition of an Israeli company by an
  American high tech firm occurred in October l994,
  3-Com bought Nice Systems for 58 MM (Broadview
  advised)
• Cisco made its first acquisition in Israel in
  1998, acquiring Class Data Systems for 50 MM,
  and to date has completed seven acquisitions
  totaling more than 1 BB in consideration
• The Israelis have a strong tradition of
  innovation in engineering and a strong technical
  tradition. Its similar to what we see in Silicon
  Valley Ned Hooper, Senior Director, Corporate
  Development Cisco Systems1
• In the mid and late 1990's a huge pick up in
  networking and semiconductor MA took place
  beginning with AOL's 350 MM acquisition of
  Mirablis, peaking in 2000 with Lucent's 4.8 B
  acquisition of Chromatis
• With less interest in technology buys and a shift
  to later stage companies, Zeev Holtzman of Giza
  comments that valuations have come back down to
  earth2

Post 2000
1,2 BusinessWeek, September 2004
20
Israeli Seller MA Transaction Activity
Select 2003 2004 Announced MA Involving
Israeli Technology Sellers
Israeli Median Seller Valuations Are Higher Than
The Global Median
1 Estimated. As of December 6, 2004. Source
IVA 2004 Yearbook, Broadview MA Database,
Mergerstat, Capital IQ Broadview deals are
highlighted in bold
21
The Quest For Growth In EARNINGS Is Driving Even
Strategic MA

• Buyers are often applying their own multiples to
  target financials
• Higher gross margins
• Leveraging sales/channel costs
• Responding to customers rationalizing vendors
• Access to new/larger markets
• Make vs. Buy (avoiding PL hit)

22
Israeli MA Class Of 2004 Has Been Relatively
Later Stage, With Virtually All Targets Shipping
Product
Select 2004 Announced MA Involving Israeli
Technology Sellers
2004 Israeli MA By Segment
US European Buyers Tend To Seek Israeli
Companies Which Are More Mature Than The Typical
Target Elsewhere
There's no secret recipe for successful
startups. It's just having the right technology
when the big boys need it," Giora Yaron1,
Co-Founder of P-Cube and Pentacom, both sold to
Cisco
As of December 6, 2004. Source IVA 2004
Yearbook, Broadview MA Database, Mergerstat,
Capital IQ Broadview deals are highlighted in
bold 1BusinessWeek, September 2004
23
Reviewing The New Rules Of The Road For Israeli
Start-Ups

• Restructure liquidation preferences NOW
• Target IRR on the first 75MM of enterprise value
  the best deals will use lt15MM total investment
• If you need to deploy more than 20MM per deal,
  youre no longer a VC
• Continue to drive towards profitability
• Develop visibility and partnerships with
  marketplace gorillas (G100 and wannabes)
• Dont fight industry rationalization, like
  fighting the rising/falling tide
• At the same time however, dont sell too early in
  the evolution
• Though a form of cheap capital, OCS and other
  grants are generally viewed by U.S. buyers as
  negative because of perception of IP transfer,
  manufacturing and other potential liabilities
• U.S. buyers strongly favor U.S. incorporation to
  avoid complications around governance and
  deal-making

VCs
Private Company CEOs
Israeli MA Specific Issues
24
Recent Israel Technology Transactions
Broadview has been very active and successful
working with leading Israeli technology companies
to reach liquidity events