Positioning a Company for Sale

Silicon Forest Forum

November 12, 2004

Leading Firms in Software, Semiconductor and Other Key Technology Sectors and How to Identify and Engage a Banker

Leading Firms in Key Technology Sectors

The Obligatory Commercial

99 High Street Boston, MA 02110 617.371.3900 623 Fifth Avenue 16th Floor New York, NY 10022 646.264.6000 Four Embarcadero Center Suite 3300 San Francisco, CA 94111 415.229.7171

Member NYSE/NASD/SIPC

Leading Firms in Key Technology Sectors

A Variety of Choices
A number of high-quality firms provide technology advisory services. Examples include: CIBC

Jefferies / Broadview
Needham Pacific Crest Piper Jaffray

RBC
SG Cowen SVB Alliant The full, relevant list is probably 25-30 firms - the specific needs, relationships and culture of the clients decision-makers will dictate the best working relationship.

How to Identify and Engage a Banker

Sample Considerations

Industry research Trade commentary Referrals

Lawyers Accountants

Board members
Public company CFOs Those who have gone through the process before
Examples of what to do and what NOT to do
Establish relationships well before taking action
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How to Identify and Engage a Banker

Be Demanding
Who is showing an interest in your industry niche
Long-term commitment Helping to define the space specific investor conferences, etc.

Broader firm commitments

Trading - market making statistics

Venture fund
Specific industry or M&A practice groups

Ask bankers for / about:

Referrals Relationships at potential acquirers Their experience and process - how is it differentiated? Ideas, creativity, perspectives on valuation

Will your deal be important to the firm? Who will be the team?
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How to Identify and Engage a Banker

Focused vs. Bulge Bracket Firms

Particularly required for technology and middle-market transactions: Senior-level attention, experience
Not treated as training ground; less turnover

Importance and relevance to firms strategy Match with rest of firms investment in your industry sector
More consistent contact and influence with relevant decision-makers

Creativity / independent thinking Relationship share of client orientation vs. share of market

How to Identify and Engage a Banker

Typical Fee Arrangements
Retainer Success fee
For sell side, percentage of transaction, usually includes minimum fee

Incentive fee Expense reimbursement

The engagement:
Should align shareholder interests with those of advisor Can be customized, according to prior corporate relationships, etc. Needs to reflect strategy broad auction, narrow list of buyers, etc.

How to Identify and Engage a Banker

What Your Bankers Do
Due diligence
Discuss and discover issues internally first
Understand financial model Understand strengths and weaknesses Understand needs, priorities, objectives

Create Confidential Information Memorandum

Additional required due diligence for offerees

Refine Positioning Customize Offering Strategy

Who gets the call size of list Pre-emptive opportunity? Financial buyers?
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How to Identify and Engage a Banker

What Your Bankers Do

Initiate contact and follow-up, and set expectations

Advisor is sole contact point

Creates formality re: process, timing Protects management, ownership Maintains schedule

Collect, monitor and generate interest

Negotiate terms and agreements

Host spectacular closing dinner

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M&A Process Overview

Technology M&A: Compounding Complexities
The M&A Process

Incremental risk inherent in the industry requires special focus on buyer universe and process.

Valuation Perspectives

Execution Contingencies + Stock Market Volatility + The Perfect Storm

Business Challenges

Stock Market Volatility + The Perfect Storm

The Perfect Storm

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M&A Process Overview

Key Objectives
Primary
Maximize shareholder value Achieve strategic objectives

Maximize Value

Determine effective positioning Access key decision makers Generate competition, if necessary

Design optimal financial structure

Secondary

Maintain corporate values Retain and incent management

Minimize Company Disruption Maintain Control of Process

Stage 1: Screen buyers (more cost-effective) Stage 2: Front-loaded due diligence / informal bidding Use disciplined approach Maintain a level playing field

Minimize management distraction

Minimize disruption of operations Maintain location and employees

Control distribution of information

Move bidders along parallel paths Amend process at any time; maintain flexibility

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M&A Process Overview

Typical M&A Process Timetable
Using an Executive Summary as the principal selling document will sometimes help to compress the preparatory phases of the sale process . Additionally, the preemptive bid approach may expedite the screening and buyer diligence phases.

Phase

1
Company Evaluation

2
Preparation and Research

3
Executive Marketing Strategy

4
Screening and Due Diligence

5
Execution and Closing

Weeks

10

11

12

13

14

15

16

17+
Negotiate definitive merger or purchase agreement Announcement of transaction Close transaction

Conduct due diligence Understand / assess financial and strategic objectives Develop financial models Develop positioning strategy Draft descriptive selling memorandum Develop potential acquiror list Find agreement on all elements of process

Contact potential acquirors Execute confidentiality agreements Distribute descriptive selling memorandum

Schedule visits by potential acquirors Initial due diligence Discuss feedback with management

Evaluate proposals Select final candidates Negotiate agreement in principle Conduct final due diligence

Prepare management presentation

Personal visits 13

M&A Process Overview

Valuation Methodologies
Valuation is in the eye of the beholder

Comparable Publicly Traded Companies

Valuation reflects the public market value for comparable companies

Need to have vs. nice to have

Comparable M&A Transactions

Valuation reflects premiums paid to acquire a control interest in comparable companies

Valuation

Contribution Analysis
Valuation based on relative contribution to NEWCO Quantify amount of EPS accretion

Market Environment / Other Factors

Financial market conditions Appetite of potential acquirors Potential synergies
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Market Positioning and Preliminary Valuation

Critical Considerations
Industry-specific considerations Size of addressable / available markets Competitive landscape Stage of current cycle Technology shift

Buyer- and Target-specific considerations Competitive positioning

Business momentum
Access to capital, flexibility, alternatives Technology position Commitment of key personnel, management strength
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Market Positioning and Preliminary Valuation

M&A in this Environment
Valuation Public buyers have become more focused on accretive transactions; however, exceptions will be made for strategically critical transactions
Deals demanded by customer base; to enhance growth / synergies within established distribution channels and streamline number of suppliers / vendors

In certain sectors, valuations are at or near trough levels

Deals more likely to be strategic vs. opportunistic, potentially limiting buyer universe

Leadership companies increase growth prospects by investing during periods of slowing growth valuations improve as focus shifts to next upturn Structure Balancing act between parting with precious cash in a downturn versus issuing undervalued securities

Sellers can capture additional upside of undervalued stock prices when market recovers
Likely demands for contingency payments / earnouts in transaction structure
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The Effect of Sarbanes-Oxley

Sample Key Issues Affected
Due diligence Target behaving like a public company Comparable financials CFO sign-off at year-end Timing

Many private companies plan to or have adopted:

CEO/CFO financial statement attestation Establishment of whistle-blower procedures Board approval of non-audit services by auditors Adoption of corporate governance policy guidelines
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Middle-Market M&A
Summary of Trends
10 15 years ago: resistance

Becomes fashionable with bull market valuations

A recent pause

Currently: return to action

Realistic expectations due to costs of being public
Less of an instant alternative

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Middle-Market M&A
Summary of Trends
Number of sub-$250 million deals peaked at over 4,000 in 1998
Has declined steadily since
2,220 completed in 2003; perhaps slightly fewer in 2004

Average revenue multiple has increased

From less than 1x to approaching 2x

EBITDA Multiples have remained relatively constant

7x 8x for past six years

Cash consideration for majority of deals

Dropped-off slightly during period of hyper stock valuations Likely to decrease slightly

Earn-outs
If less than 20% of deal, is it worth it?
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Middle-Market M&A
Summary of Trends: Revenue Multiples

Median Revenue Multiple - All Transactions < $ 250MM

2.0x 1.8x 1.6x 1.4x 1.2x 1.0x 0.8x 0.6x 0.4x 0.2x 0.0x 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

*Deals include Mergers, Acquisitions, Asset Acquisitions, and Acquisitions of Marjority Interest Source: M&A Desk
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Middle-Market M&A
Summary of Trends: EBITDA Multiples

Median EBITDA Multiple All Transactions < $250MM

12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

*Deals include Mergers, Acquisitions, Asset Acquisitions, and Acquisitions of Marjority Interest Source: M&A Desk
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Middle-Market M&A
Summary of Trends: Annual Transaction Volume

Total M&A Transaction Volume ($Bn)

6,000

5,000

4,000 3,901 3,000 1,609 1,453 799 1,000 339 743 1,058 Technology Healthcare Consumer 2,000

0 1998 1999 2000 2001 2002 2003 2004(1)

Source: Thomson Financial SDC. Excludes deals less than $20M. (1) 2004 data annualized based on YTD level of activity. As of 10/29/04.

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Final Thoughts
What should privately-held companies implement?
Really, what companies should NOT do
Insider transactions, etc.

Biggest mistakes:
Starting process too late Extending the process too long Having no valuation flexibility Not having good lawyers / advisors

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99 High Street Boston, MA 02110 617.371.3900 623 Fifth Avenue 16th Floor New York, NY 10022 646.264.6000 Four Embarcadero Center Suite 3300 San Francisco, CA 94111 415.229.7171

Member NYSE/NASD/SIPC