TMT Q1 Review by Jefferies


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Review of technology, media and telecom capital markets for Q1 2009.

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TMT Q1 Review by Jefferies

  1. 1. Jefferies TMT Equity Capital Markets Update 2009 First Quarter Review Jefferies TMT ISSUE HIGHLIGHTS: Equity Capital Markets Alex Lehmann • A Tale of Two Quarters: Negative sentiment in January and February is Managing Director replaced by cautious optimism in March TMT Equity Origination 212.323.3946 • Current Trends in TMT New Issue Activity: Jefferies & Company, Inc. – IPO activity gains momentum 520 Madison Avenue New York, NY 10022 – Convertible Markets re-open – Structured Equity activity remains strong APRIL 2009
  2. 2. Quarter in Review: The 2009 “New World Order” We entered 2009 in the cliché of a “new world order”. After US QUARTERLY DEBT ISSUANCES SINCE 2006 the so-called “bulge bracket” had been acquired, bankrupted, Number of Offerings or converted into bank holding companies during the last US High Yield Corporate Debt 600 four months of 2008, the entire sell- and buy-side landscape US Investment Grade Corporate Debt had changed. As one example, Jefferies entered the year as 507 486 500 466 the largest independent full-service U.S. investment bank. 459 399 390 This “new world order” applied to the Technology, Media, 400 and Telecom (“TMT”) sector as well. While most companies – 289 private and public – seemed to be doing well and continuing 300 264 to grow, very few were immune to the impact of the broader 219 217 economic slowdown. Moreover, dislocations in the equity and 200 173 fixed income markets resulted in public and private valuations 110 99 93 that were substantially lower than they were just six months 82 83 77 100 67 62 49 42 earlier and often didn’t take into account the growth 24 20 14 14 4 prospects of their relevant companies or industries. 0 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 This attitude prevailed for much of the first quarter of 2009. Source: Dealogic As Q4 results – and projections – were as dismal (or perceived to be dismal) as expected, the sector traded down with the investor sentiment towards equities. As a result, March was rest of the broader markets. Moreover, as credit markets the strongest month performance-wise in six years, and TMT continued to remain unstable and financial services stocks benefited particularly well. companies were deemed to be increasingly questionable, those conditions carried over to virtually every other vertical The level of M&A activity has been particularly pertinent with of the economy, impacting stocks, bonds, consumer a strong ‘barbell’ shape to the activity. The first quarter saw confidence, and enterprise-level conditions. In short, the 31 U.S. deals in the TMT sector valued at less than $250 financial services industry – and the lack of resolution to its million in size coupled with the select, speculated larger many troubles – dragged the rest of the economy down. transactions like IBM’s potential acquisition of Sun and Cisco’s potential purchase of EMC. This level of activity has multiple A Tale of Two Markets impacts on the financing markets. First and foremost, some This sentiment – and its impact – prevailed through early of these deals will likely require funding, which could lead March. At that point, a combination of the Federal to debt, equity and convertible activity. Second, as some government’s statement regarding a detailed plan to deal companies are speculated to be potential acquisition targets, with “toxic” loans on many banks’ balance sheets, along with investors will likely move into those stocks. Third, it re-focuses increased levels of M&A activity, managed to turn around investors on the fundamentals of the TMT sector rather than FIRST QUARTER TMT SNAPSHOT TMT STOCKS PERFORMED SIGNIFICANTLY BETTER IN MARCH Percent 120 115 110 S&P 500 Index NASDAQ Composite Index 105 PHLX Semiconductor Index 100 S&P 500 Computers & Peripherals Index 95 S&P 500 Diversified Telecommunication 90 Services Index 85 S&P 500 Internet Software & Services Index 80 75 70 9 09 9 9 9 9 9 09 09 09 09 09 09 /0 /0 /0 /0 /0 /0 1/ / / 7/ 4/ 4/ 1/ 14 28 18 25 18 25 11 11 2 1/ 2/ 3/ 4/ 2/ 3/ 1/ 1/ 1/ 2/ 2/ 3/ 3/ Source: Capital IQ Jefferies TMT Equity Capital Markets Update | APRIL 2009 1
  3. 3. Quarter in Review: Drivers of the Equity Markets the broader emotion around the equity markets – and for the MONTHLY EQUITY MUTUAL FUND FLOW DATA most part that is a positive for TMT companies. Fourth, it appears that private equity firms are cautiously wading back $ in Billions into the M&A markets, which adds to the overall tension of $10.0 $4.9 M&A processes and thus to equity valuations. $0.0 Additionally, the attitude towards Q1 earnings has become ($10.0) increasingly benign. First, there is a belief that earnings from ($20.0) financial services companies could come in much stronger ($18.3) ($18.3) ($25.1) ($30.0) ($24.4) ($25.2) than reported – due primarily to two factors: one, many of ($40.0) the assets that they wrote down were written down to levels where they may need to be written up; and two, their core ($50.0) ($47.4) businesses have been profitable due to fewer active banks in ($60.0) Sept Oct Nov Dec Jan Feb Mar the traditional investment banking activities of trading, 2008 2009 financing, and advisory work. For TMT companies, visibility seems to have improved and there is a growing belief among Source: Bloomberg many buy-side investors that the current stock prices take into account the uncertainty of how the next three quarters will fare for these companies. through IPOs and public companies looking to grow Finally, the markets have turned as investors have re-focused organically or through acquisitions through equity funding. on their desire to have growth assets in their portfolios. In 2009, it is very likely that up to 70% of publicly-traded Equity New Issue Activity companies will not grow; as a result “growth” companies The TMT equity markets look like they will be led by four to are now those that may grow 5-10% this year and “hyper”- five products for the remainder of the year: growth companies are those that may grow more than 20%, • IPOs: we are seeing a re-opening of companies coming to certainly bars that have been re-set relative to where they market and others accelerating their IPO preparation were just 12 months ago. As investors start to re-invest in growth assets, this will undoubtedly help feed the equity • PIPE and Registered Direct (“RD”) activity: this has been funding markets, particularly in the TMT sector: those who somewhat strong to-date and should get stronger will benefit will include private companies raising capital TMT ANNOUNCED M&A TRANSACTIONS 2009 US YTD ANNOUNCEMENT DEAL VALUE DATE ACQUIROR TARGET INDUSTRY ($ MM) 04/01/09 Fidelity National Information Services Metavante Technologies Software 2,978.3 04/01/09 Rockwell Collins DataPath Software 129.6 03/25/09 Hearst Corporation Hearst-Argyle Television Media 67.5 03/23/09 Cox Enterprises Cox Radio Media 65.2 03/23/09 Deloitte & Touche BearingPoint Services 350.0 03/19/09 Cisco Systems Pure Digital Technologies Hardware 590.0 03/12/09 Carl Icahn Lions Gate Entertainment Media 175.0 03/05/09 TriNet Group Gevity HR Services 98.8 03/02/09 TNS VeriSign Services 230.0 02/27/09 Kudelski OpenTV Services 87.2 02/09/09 CSR PLC SiRF Technology Software 128.6 01/15/09 Nuance Communications Zi Corporation Software 175.0 Source: Dealogic Jefferies TMT Equity Capital Markets Update | APRIL 2009 2
  4. 4. Quarter in Review: Equity New Issuance Activity • Reverse enquiry PIPEs by private equity firms: a growing TMT IPO BACKLOG trend that has seen some activity and should see more in AMT. FILED coming months ISSUER FILING DATE ($MM) SECTOR • Public accelerated follow-on and convertible financings: OpenTable Inc 01/30/09 40.0 Internet a recent trend in the past month Medidata Solutions 01/26/09 75.0 HCIT FriendFinder Networks 12/23/08 460.0 Internet • Potential rights offerings: a lot of discussion on this topic Bridgepoint Education 12/22/08 230.0 Internet but there has been a minimal amount of activity in the Rosetta Stone 09/23/08 115.0 Software TMT space thus far Avago Technologies 08/21/08 400.0 Semiconductors NextG Networks 06/05/08 150.0 Telecom Services IPOs Open Link 05/12/08 200.0 Software There are currently 19 TMT companies on file for IPOs, Gomez 05/07/08 80.5 New Media with total proceeds of approximately $3.5 billion expected. Digitalglobe 04/14/08 250.0 Software The mix of companies on file is reasonably well distributed Solarwinds 03/21/08 250.0 Software between Software, Internet, Telecom Services, IT Services, LogMeIn 01/11/08 86.3 Software and Hardware companies. We have not seen many Intelius Inc 01/10/08 143.8 IT Services semiconductor or traditional media filings. Source Photonics 12/26/07 130.0 Semiconductors After a lull in pricing activity (the last TMT IPO to price was Education Management 12/21/07 500.0 Internet the Grand Canyon IPO in November 2008), we have seen ExactTarget 12/14/07 86.3 Software one IPO price recently (Changyou, a Chinese mobile gaming Broadview Networks 11/30/07 250.0 Telecom Services company); two others that have launched and should price Intcomex Inc 07/27/07 125.0 Computer Equipment in mid-April (Rosetta Stone and Bridgepoint Education); and 06/20/07 57.3 Internet many others that we expect to be priced between now and the end of the second quarter. In total, we may see as many Source: Dealogic TMT FIRST QUARTER PIPE TRANSACTIONS GROSS FIXED CONVERSION COMPANY NAME CLOSING PROCEEDS PREMIUM/DISCOUNT INTEREST OR WARRANT AT CLOSING DATE ($MM) AT ANNOUNCEMENT DIVIDEND RATE COVERAGE SECURITY SOLD LoopNet, Inc. 3/30/09 50.0 10.0% N/A N/A Convertible Preferred Stock Lecere Corporation 3/30/09 7.1 N/A N/A N/A Common Stock CommScope, Inc. 3/19/09 100.0 10.0% 3.5% N/A Convertible Senior Subordinated Debentures China Tel Group Inc. 3/9/09 300.0 N/A N/A 0.0% Common Stock ParkerVision, Inc. 3/3/09 6.2 N/A N/A 0.0% Registered Direct Paradigm Holdings, Inc. 3/3/09 6.2 N/A 12.5% 167.7% Non-Convertible Preferred Stock Advanced Micro Devices, Inc. 3/2/09 124.7 N/A N/A 60.3% Common Stock Clearwire Corporation 2/27/09 10.0 N/A N/A N/A Common Stock Genius Products, Inc. 2/24/09 5.0 N/A 5.0% 776.4% Promissory Notes ImageWare Systems, Inc. 2/12/09 5.0 N/A 5.0% 17.1% Non-Convertible Secured Promissory Notes Pipeline Data Inc. 2/2/09 15.0 103.3% 16.0% 0.0% Convertible Preferred Stock Omniture, Inc. 1/27/09 25.0 N/A N/A 0.0% Common Stock Nuance Communications, Inc. 1/13/09 175.2 N/A N/A 22.2% Common Stock Dealogic, transactions below $5 million not included. N/A - Not available or undisclosed. Jefferies TMT Equity Capital Markets Update | APRIL 2009 3
  5. 5. Quarter in Review: Equity New Issuance Activity as 4-6 TMT IPOs price in Q2 2009. While for the most part PRECURSORS TO A RETURN OF THE IPO MARKET these offerings are coming at relatively cheap pricing levels (Grand Canyon was priced at a 30% discount to its comparables, and Changyou priced at 8x PE, a 40% discount to its comparables), we believe there is an increasing level ry” cove e to “R of reconciliation between the buyside and boards and s Step management teams around valuation expectations. Improved Early Stage More Active IPO Market PIPEs and RDs Mid/Large- More Active Cap IPO Non-traditional PIPE and RD activity has remained strong Follow On Market Increased and Convert M&A despite the market turmoil since last September. Some Activity Improved Activity Sector examples include another investment by Warburg Pincus in Improved Valuations Overall Nuance Communications and a second funding by Elevation Market Partners in Palm. Sentiment However, more recently we have seen more traditional PIPEs and RDs be marketed (e.g. to multiple buyers) and while this has been less prevalent among TMT companies we do expect that activity to pick up as issuers continue to try to avoid market exposure and risk. That said, we are hearing more discussion among corporates and advisors regarding rights offerings, and have seen one Reverse enquiry PIPEs by private equity sponsors offering marketed within the TMT industry. This could be a bellwether for future offerings. As private equity investors continue to have reasonably strong levels of cash, they are increasingly approaching companies In sum, it does feel as if the market tone has improved and directly about making investments in those companies. The activity can pick up for at least a month or two before structures are usually convertible preferreds and they are potentially slowing down, depending on market conditions. usually a 3-5 year maturity based on a cash-on-cash return Fund flows for mutual funds have stabilized and based on of 2.0 – 3.0x or roughly a 20-30% IRR. Depending on the anecdotal conversations, many hedge funds are doing very company and its relative need for capital, some of these well so far this year. As a result, they are looking for new suggested structures are gaining traction with corporates. investment ideas. We would encourage almost every public company that can Public follow-on and convertible offerings to get on file with a shelf to take advantage of this window After a period in January and early February in which there and for those with IPO aspirations to consult their advisors were no marketed follow-on offerings and no convertible about the viability and timing of a potential public exit for transactions pricing since the demise of Lehman Brothers in their companies. September of 2008, the market for both products began to thaw in late February. In the TMT sector, Teradyne (a test As always, please feel free to contact us if you would like to and measurement company) raised $150 million with terms discuss any of these topics further. of a 4.5% coupon and 25% conversion premium. In the follow-on market, there have been very few transactions but we do expect that overnight or 1-2 day marketed offerings will pick up. Rights offerings Finally, rights offerings have become more visible. A staple of European and some Asian countries for years, there have been very few rights offerings of any size in the U.S., as investors typically prefer to take their chances with a marketed follow-on. Additionally, the regulatory environment in Europe and Asia is more conducive to rights offering as opposed to the more stringent U.S. environment. Jefferies TMT Equity Capital Markets Update | APRIL 2009 4
  6. 6. About Jefferies Jefferies, an independent, full-service global securities and investment banking firm, has served companies and their investors for more than 45 years. Headquartered in New York City, with offices in more than 25 cities around the world, Jefferies provides clients with capital markets and financial advisory services, institutional brokerage, securities research and asset management. The firm provides investors with fundamental research and trade execution in equity, equity-linked, and fixed income securities, including corporate bonds, high yield bonds, US government and agency securities, repo finance, mortgage- and asset-backed securities, municipal bonds, whole loans and emerging markets debt, as well as commodities and derivatives. Jefferies offers companies capital markets, merger and acquisition, restructuring and other financial advisory services. Jefferies & Company, Inc. is the principal operating subsidiary of Jefferies Group, Inc. (NYSE: JEF: Jefferies International Limited, a UK-incorporated, wholly owned subsidiary of Jefferies Group, Inc., was established in London in 1985 and is authorised and regulated by the UK Financial Services Authority. For corporate clients, the Firm is a top M&A and restructuring advisor and underwriter of high yield and equity new issues. Serving institutional investors and high net worth individuals, the Firm is a leading provider of trade execution in equity, convertible, and high yield securities and a market maker of investment grade fixed income and commodity-linked products. Jefferies also offers top-tier private client services, prime brokerage, securities lending, correspondent clearing and NYSE brokerage services. The Firm has an award-winning research practice, covering equity, high yield and convertible securities, as well as a growing asset management practice utilizing a variety of asset strategies. Jefferies was founded in the capital markets as a third-market equity trading firm and has flourished over the past five decades. The Firm’s reputation has been built on a high level of client attention and service, and the ability to execute large block trades with minimal market impact. Today, Jefferies is seen by many as the investment bank of choice for companies and their investors. A creative, hands-on approach, combined with experience, expertise and widespread relationships, distinguishes the firm. Important Disclosures This communication is being provided strictly for informational purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security referenced herein. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified, therefore, we do not guarantee its accuracy. 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