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  1. 1. Robin A. Graham Needham & Company, Inc.
  2. 2. The Emerging Growth Investment Bank for Technology Leaders
  3. 3. Today’s M&A discussion <ul><li>Understand the M&A environment that you are in </li></ul><ul><li>How to find and engage the right investment bank for M&A advice </li></ul><ul><li>Working with an investment banker to prepare for a negotiation/sale </li></ul><ul><li>The range of services provided by bankers in the M&A process </li></ul><ul><li>Issues in selecting the best merger or acquisition partner </li></ul><ul><li>Where M&A bankers are focused today and why </li></ul>
  4. 4. The Mergers and Acquisitions Environment
  5. 5. Market Capitalization Over Time <ul><li>More than half of large-cap companies ($1bn+) reassigned to the middle market ($500M - $1bn) </li></ul><ul><li>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 </li></ul>Valuation corrections in 2001 altered the Market Cap landscape dramatically
  6. 6. Macro Trends in M&A <ul><li>Overall M&A volume has retreated dramatically from the past few years all-time highs </li></ul><ul><li>M&A activity is still driven by corporate buyers fulfilling strategic imperatives </li></ul><ul><li>An extended period of high valuations followed by tight credit markets have caused financial buyers to be an insignificant factor in the overall M&A market as compared to earlier periods. </li></ul>
  7. 7. The Impact on Technology M&A <ul><li>2001 tech M&A volume was down more than 60% from 2000 levels after an unprecedented run that began in 1994. </li></ul><ul><li>Broken deals were prevalent as business fundamentals and expectations eroded. </li></ul><ul><li>2002 YTD M&A volume is even more depressed </li></ul>Technology M&A volume was most significantly impacted
  8. 8. Mergers & Acquisitions Environment <ul><li>Cash is King - reversing the accelerating use of high p/e stock seen 1995-2000 </li></ul><ul><li>New FASB rules no longer penalize creative structures using stock and cash </li></ul><ul><li>Cash is an increasingly attractive currency to sellers and low P/E buyers. </li></ul>M&A Currency - what is different now?
  9. 9. The Public/Public M&A Story <ul><li>Most of Q1’s dollar volume were CY 2000 transactions that closed in early 2001 </li></ul><ul><li>Public companies froze merger discussions due to valuation uncertainty and eroding business performance at both buyers and sellers. </li></ul><ul><li>The number of transactions consummated declined >6x Q1/Q1 </li></ul>M&A dollar volume between public companies fell dramatically after Q1 2001
  10. 10. The Private Company Liquidity Path <ul><li>Of the 93 IPOs in 2001, just 19 were technology companies </li></ul><ul><ul><li>This compared to 308 tech IPOs in 1999 and 221 tech IPOs in 2000 </li></ul></ul><ul><ul><li>The period 1980 – 1998 averaged just 61 IPOs per year </li></ul></ul><ul><li>M&A continually reinforced as the most likely liquidity path for private companies </li></ul>Private companies found liquidity paths scarce in 2001
  11. 11. The Good Old Days… The BOOM Economy Explosion of young VC-backed tech and Internet companies Investors seeking abnormal returns increasingly turned to private equity Unprecedented wealth creation and high consumer confidence Proliferation of venture funds “ Public” Venture Capital Phenomenon Low cost and easy access to capital M&A outpaces IPO’s 11-1 M&A EXIT: High p/e stock currency used in “strategic” MA& boom IPO EXITs: underdeveloped companies go public early
  12. 12. Mergers & Acquisitions Environment <ul><li>Significantly reduced M&A activity seen in 2001 will continue </li></ul><ul><li>Classic “Buyers Market”, yet the universe of buyers contracted dramatically </li></ul><ul><li>The number of sellers remain high as the valuation-sensitive sellers are more than outnumbered by the illiquid desperate sellers </li></ul><ul><ul><li>Distressed public companies and stranded / capital-starved private companies </li></ul></ul><ul><li>Industry leaders that had built their businesses through aggressive acquisition were on the M&A sidelines -- until very recently </li></ul><ul><ul><li>In 2001, corporate buyers were waiting for valuations and their businesses to stabilize. Examples: Cisco, Lucent, Nortel, Broadcom </li></ul></ul><ul><ul><li>However, “Gorilla” acquisition appetites are renewed in 2002 </li></ul></ul><ul><ul><ul><li>Cisco just announced two “spin-in” acquisitions and 2002 M&A intentions </li></ul></ul></ul><ul><ul><ul><li>Broadcom just re-entered with acquisition of Mobilink ($258M) </li></ul></ul></ul>
  13. 13. Mergers & Acquisitions Environment <ul><li>The results are: </li></ul><ul><li>Fewer M&A transactions and lower valuations for M&A transactions </li></ul><ul><li>Longer cycle times for transactions </li></ul><ul><ul><li>Much greater emphasis on detailed financial/business due diligence </li></ul></ul><ul><ul><li>Management cautious throughout process </li></ul></ul><ul><ul><li>Greater degree of Board involvement in acquisitions </li></ul></ul><ul><ul><li>Slow, difficult negotiations – every point counts </li></ul></ul><ul><li>More carefully structured M&A transactions </li></ul><ul><ul><li>the return & proliferation of earn-outs for acquired companies </li></ul></ul><ul><ul><li>Passing EPS accretion/dilution acid test is critical </li></ul></ul>
  14. 14. Mergers & Acquisitions Environment <ul><li>M&A Market Outlook for 2002 </li></ul><ul><li>Significant transition made in 2001 from Sellers market to Buyers market </li></ul><ul><li>Companies with strong balance sheets, experienced management teams and profitable business models are now the drivers of the M&A market. </li></ul><ul><li>M&A transactions will continue to suffer h igher attrition rates and lower net valuations </li></ul><ul><li>An increasing percentage of transactions will be“distressed sales” or bankruptcies </li></ul><ul><li>Leveraged companies and undercapitalized companies will be at a tremendous negotiating disadvantage </li></ul><ul><li>Choosing and using the right M&A advisor and experienced legal counsel will be all the more critical to a successful outcome </li></ul>
  15. 15. The M&A transaction
  16. 16. Assembling the Transaction Team <ul><li>The Core Working Group: </li></ul><ul><ul><li>Senior management team, legal counsel, Investment Banker & their M&A team </li></ul></ul><ul><li>Getting to know investment bankers </li></ul><ul><ul><li>Who can make the right introductions </li></ul></ul><ul><ul><ul><li>Directors </li></ul></ul></ul><ul><ul><ul><li>Venture Capitalists </li></ul></ul></ul><ul><ul><ul><li>Legal counsel </li></ul></ul></ul><ul><ul><li>If your company is an attractive acquisition candidate, bankers have probably been beating down your door </li></ul></ul><ul><ul><li>Take the time to get to know bankers well before a transaction is imminent – a long-standing relationship benefits everyone involved </li></ul></ul>
  17. 17. Selecting the Right Banker <ul><li>Bankers who know your industry sector and its competitive dynamics </li></ul><ul><li>Active M&A team with current & recent experience on transactions </li></ul><ul><li>An investment bank with a tradition of representing companies that are your size and profile </li></ul><ul><li>Research analysts who cover your industry sector and follow its public companies </li></ul><ul><li>Leverage the relationship with your banker </li></ul><ul><ul><li>Hire a full service investment who can advise you on a multitude of possible alternatives to M&A (alternatives = negotiating leverage) </li></ul></ul>
  18. 18. Current Structure of the Investment Banking Industry 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) Independent National Emerging Growth Firms Needham & Company Thomas Weisel Partners Wit Soundview Emerging Growth Firms Now Owned by Major Commercial Banks ABN Amro / ING Barings / Furman Selz Bank of America Securities / Montgomery JP. Morgan / Chase / H&Q 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
  19. 19. The Role of an Advisor <ul><li>… extracts from a standard engagement letter: </li></ul><ul><li>Reviewing with the Board of Directors and management the Company's financial plans, strategic plans and business alternatives </li></ul><ul><li>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 </li></ul><ul><li>Assisting the Company's Board of Directors and management in the valuation of the business(es) involved in the Transaction </li></ul><ul><li>Assisting the financial due diligence efforts of the Company with respect to the Other Party </li></ul><ul><li>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 </li></ul>
  20. 20. Preparation is Key <ul><li>Discuss your business’ history and prospects with M&A advisors in detail </li></ul><ul><li>Realistic assessment of financing/M&A options with advisors </li></ul><ul><ul><li>Avoids “death-march” or “firesale” scenarios </li></ul></ul><ul><li>Prepare realizable , bottoms-up, detailed financial forecasts </li></ul><ul><li>Outline non-financial concerns to your advisors </li></ul><ul><ul><li>Employee treatment, cultural and strategic fit with each potential buyer </li></ul></ul><ul><li>Establish reasonable valuation expectations up front </li></ul><ul><li>Determine initial preference for cash, stock or combination thereof </li></ul><ul><li>Help your advisors build a Negotiating Plan </li></ul>
  21. 21. Assessing Negotiating Leverage <ul><li>Competition </li></ul><ul><li>Strategic Alternatives </li></ul><ul><li>Necessity/Desire </li></ul><ul><li>Resources </li></ul><ul><li>Time </li></ul>Negotiating Leverage (5 key elements) Multiple Elements Drive Negotiating Leverage
  22. 22. Building the Negotiating Plan Negotiating Plan Collecting Information Achieving Resolution Determining Response Establishing Expectations Assessing Leverage Planning is an Important Component of Successful Negotiations
  23. 23. Critical Transaction Parameters Valuation Structure Liquidity Financial Terms Strategic Fit Culture Timing Non - Financial Terms Buyer’s Minimum Terms Seller’s Minimum Terms Successful Negotiation Can Usually Result in a Broad Range of Outcomes
  24. 24. Structure of M&A Advisor Fees <ul><li>Sellers pay advisory fees as a % of Total Transaction Value </li></ul><ul><ul><li>Sometimes staggered for additional incentive: 1% plus 2% over $100M </li></ul></ul><ul><li>Advisors “minimum fee” common in this business environment </li></ul><ul><ul><li>Example: Fee is the greater of 1.5% or $750,000 </li></ul></ul><ul><li>Interim fees sometimes charged and credited against total fees due on closing: </li></ul><ul><ul><li>Retainer fee on signing engagement letter </li></ul></ul><ul><ul><li>Milestone Fees on signing of Letter of Intent/Agreement or Announcement </li></ul></ul><ul><li>Fairness Opinion fees (Only necessary for public companies) </li></ul><ul><ul><li>Set $ amount charged is independent of transaction completion </li></ul></ul>
  25. 25. Where Advisors are Focused Today <ul><li>The Investment Banking industry is itself retrenching </li></ul><ul><ul><li>Many firms are pre-occupied with their own M&A and restructuring </li></ul></ul><ul><li>M&A professionals spending more time advising Acquirers in a buyers market </li></ul><ul><ul><li>In 2000, Needham represented Buyers in just 27% of transactions </li></ul></ul><ul><ul><li>In 2001 & 2002, Needham represented Buyers in 47% of transactions </li></ul></ul><ul><li>Public companies who are building market leadership through M&A </li></ul><ul><li>Still very active in representing sellers, but Very cautious in assessing valuation and probability of transaction completion prior to committing resources </li></ul><ul><ul><li>Seller’s business stability and negotiating leverage, strategic drivers of transaction are critical </li></ul></ul><ul><ul><li>Acquisitions of stand-alone private companies by public companies are difficult in today’s M&A market </li></ul></ul>
  26. 26. Where Advisors are Focused Today <ul><li>Needham & Company remains committed to Emerging Growth companies </li></ul><ul><li>Supporting client-base through the downturn </li></ul><ul><ul><li>Follow-on equity offerings </li></ul></ul><ul><ul><li>Private Placements </li></ul></ul><ul><ul><li>PIPEs </li></ul></ul><ul><li>Grew headcount in 2001 and YTD 2002 while maintaining profitability every quarter </li></ul><ul><li>Strong Q1 2002 -- our second best Q1 in 15 years </li></ul><ul><li>Taking market share in Emerging Growth M&A </li></ul><ul><ul><li>Ten M&A transactions announced YTD </li></ul></ul><ul><ul><li>Including four public/public M&A transactions </li></ul></ul>
  27. 27. Appendices
  28. 28. The M&A Transaction Preparation Weeks 1 - 4 Canvas Buyers Weeks 5 - 8/10* Due Diligence Weeks 8/10 - 12/14 Final Negotiation Weeks 12/14 - 16/18 <ul><ul><li>Closing </li></ul></ul><ul><ul><li>(TBA) </li></ul></ul><ul><li>Engagement of Needham </li></ul><ul><li>Review Co. Financial and </li></ul><ul><li>Operational Information </li></ul><ul><li>Needham Values Co. </li></ul><ul><li>Prepare Memorandum, </li></ul><ul><li>Executive Summary and </li></ul><ul><li>NDA with co. counsel </li></ul><ul><li>Prepare List of Likely Buyers </li></ul><ul><li>Contact Buyers </li></ul><ul><li>Send Executive summary </li></ul><ul><li>Sign NDAs </li></ul><ul><li>Distribute informational </li></ul><ul><li>memorandum / materials </li></ul><ul><li>Prepare management team </li></ul><ul><li>for diligence presentations </li></ul><ul><li>Request and receive initial </li></ul><ul><li>non-binding bids in writing. </li></ul><ul><li>Setup Data Room </li></ul><ul><li>Select Qualified Bidders </li></ul><ul><li>for D.D. </li></ul><ul><li>Schedule and Conduct </li></ul><ul><li>Visits </li></ul><ul><li>Provide Draft Definitive </li></ul><ul><li>Agreement </li></ul><ul><li>Receive Final Bids </li></ul>Phase/Action Items Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 * The length depends on such factors as the size of canvas, the overall market and the geographic location of contacts. A Typical Sale / Divestiture Process <ul><li>Select Winning Bidder </li></ul><ul><li>Negotiate & Execute </li></ul><ul><li>Definitive Agreement </li></ul><ul><li>Press Release </li></ul><ul><li>Submit HSR Filing </li></ul><ul><li>($50 million threshold) </li></ul><ul><li>Shareholder Approval </li></ul><ul><li>Process </li></ul>
  29. 29. The M&A Transaction Valuation Steps to successful transactions Structuring Negotiations Due Diligence <ul><li>Analyze financial statements </li></ul><ul><li>Discuss business history and </li></ul><ul><li>prospects with management </li></ul><ul><li>Analyze comparable public companies’ trading multiples </li></ul><ul><li>Analyze comparable transactions </li></ul><ul><li>Determine ability to use either </li></ul><ul><li>cash or stock </li></ul><ul><li>Analyze respective proforma </li></ul><ul><li>effects of a stock or cash </li></ul><ul><li>acquisition </li></ul><ul><ul><li>Balance sheet </li></ul></ul><ul><ul><li>P&L </li></ul></ul><ul><ul><li>Goodwill (write-off upon impairment) </li></ul></ul><ul><li>Financial advisor or principal </li></ul><ul><li>Cash or stock preferable </li></ul><ul><li>Understand potential synergies </li></ul><ul><li>Employee issues such as: </li></ul><ul><ul><li>Acceleration of options </li></ul></ul><ul><ul><li>Employment agreements </li></ul></ul><ul><ul><li>Non-compete agreements </li></ul></ul><ul><li>Key issues to be negotiated: </li></ul><ul><ul><li>Condition of closing </li></ul></ul><ul><ul><li>Financing outs </li></ul></ul><ul><ul><li>Reps & warranties </li></ul></ul><ul><ul><li>Break-up fees </li></ul></ul><ul><ul><li>Shopping restrictions </li></ul></ul><ul><ul><li>Topping offers </li></ul></ul><ul><ul><li>Material adverse change </li></ul></ul><ul><ul><li>Shareholders’ vote </li></ul></ul><ul><ul><li>required (either company) </li></ul></ul><ul><li>Interview key management </li></ul><ul><li>Financial due diligence </li></ul><ul><li>including analysis of historical </li></ul><ul><li>and projected financial statements; interview independent auditors </li></ul><ul><li>Third-party interviews and </li></ul><ul><li>reference checks </li></ul><ul><li>Facility visits </li></ul><ul><li>Legal due diligence </li></ul>Financial Positioning <ul><li>Press release announcing transaction </li></ul><ul><li>Backgrounder on the acquisition </li></ul><ul><li>Guidance for analysts’ forecasts </li></ul><ul><li>Prepare and conduct conference call </li></ul><ul><li>Plan and execute roadshow to sell the deal, if necessary </li></ul>Acquisitions & Transactional Issues
  30. 30. Representative Financial Advisory Assignments $160,000,000 Acquiring Innoveda Inc. Pending $77,000,000 Sale to Viasystems Group, Inc. 2000 $36,000,000 Sale to Computer Network Technologies 2001 $115,000,000 Sale to NVIDIA Corporation 2001 $900,000,000 Merger of Excalibur Technologies Corp. with Intel’s Interactive Media Service Division 2000 $26,000,000 Sale to Lawson Software 2001 $100,000,000 has Acquired MMC Technology, Inc. 2001 $140,000,000 Spin-off to Existing Shareholders 2001 $37,000,000 has Acquired CMD Technology 2001 $12,300,000 Sale to FEI Company 2001 $50,100,000 has Acquired ADC Telecommunications, Inc. (RF Equipment Business) 2001 $68,000,000 Sale to Therma-Wave, Inc. 2002 $29,000,000 Acquiring GHz Technology, Inc. 2002 $77,000,000 Sale to Integrated Circuit Systems Corp. 2002 $120,000,000 Sale to Level 3 Communications 2002 $128,000,000 Acquiring Mechanical Dynamics, Inc. 2002 $103,000,000 Sale to Mentor Graphics Corporation 2002 Undisclosed Sale to Asyst Technologies, Inc. 2002
  31. 31. Representative Public Equity Offerings $29,700,000 Follow-On Offering Lead-Manager August 2001 $150,000,000 Convertible Debt Co-Manager August 2001 $62,100,000 Follow-On Offering Co-Manager July 2001 $26,000,000 Follow-On Offering Co-Manager September 2001 $103,020,000 Follow-On Offering Co-Manager October 2001 $100,000,000 Follow-On Offering Co-Manager October 2001 $76,467,060 Follow-On Offering Co-Manager November 2001 $68,000,000 Follow-On Offering Co-Manager November 2001 $23,490,000 Follow-On Offering Lead Manager December 2001 $66,000,000 Follow-On Offering Co-Manager December 2001 $93,020,000 Follow-On Offering Lead Manager January 2002 $100,350,000 Follow-On Offering Co-Manager January 2002 Follow-On Offering Co-Manager February 2002 $53,550,000 $60,750,000 Follow-On Offering Co-Manager March 2002 Convertible Preferred Co-Manager March 2002 $50,000,000 $52,200,000 Follow-On Offering Lead Manager March 2002 $109,500,000 Follow-On Offering Co-Manager March 2002 $125,000,000 Convertible Debt Co-Manager April 2002
  32. 32. Representative Public Equity Offerings $120,000,000 Follow-On Offering Co-Manager July 2000 $39,000,000 Initial Public Offering Co-Manager July 2000 $53,000,000 Initial Public Offering Co-Manager August 2000 $20,000,000 Follow-On Offering Lead Manager August 2000 $26,000,000 Follow-On Offering Co-Manager August 2000 $75,000,000 Initial Public Offering Co-Manager August 2000 $36,000,000 Initial Public Offering Co-Manager August 2000 $41,000,000 Follow-On Offering Lead Manager August 2000 $126,000,000 Follow-On Offering Co-Manager September 2000 $98,000,000 Follow-On Offering Co-Manager October 2000 $42,000,000 Initial Public Offering Co-Manager November 2000 $141,000,000 Follow-On Offering Co-Manager February 2001 $244,000,000 Follow-On Offering Co-Manager May 2001 $200,000,000 Convertible Debt Co-Manager May 2001 Convertible Debt Co-Manager June 2001 $250,000,000 Follow-On Offering Co-Manager June 2001 $36,000,000 $50,000,000 Initial Public Offering Co-Manager June 2001 $64,000,000 Follow-On Offering Co-Manager July 2001
  33. 33. Representative Private Placements Current Status: Current Status: Current Status: Public $12,700,000 2000 Series I Preferred Private $6,000,000 1999 Common Stock Private $8,300,000 2000 Series B Preferred Public $10,000,000 2000 Common Stock Public $8,200,000 2000 Common Stock Private $21,500,000 2000 Series B Preferred Private $37,500,000 2000 Series G Preferred $11,850,000 2000 Series D Preferred Private Public $19,500,000 2001 Common Stock Public $10,000,000 2001 Convertible Preferred Public $18,600,000 2001 Common Stock Public $28,600,000 2001 Common Stock Public $8,220,000 2001 Common Stock Private $12,000,000 2001 Series C Preferred Private $20,000,000 2002 Series C Preferred Virtual Silicon Public $17,000,000 2002 Common Stocks Convertible Preferred Public $10,250,000 2001 Common Stocks Public $29,450,000 2002 Common Stock
  34. 34. Representative Corporate Investment Transactions $10,000,000 Westinghouse Electric Corporation investment in GAMMA-METRICS Corporation $24,000,000 investment in RF Micro Devices $10,000,000 Telemetrix PLC investment in GTI Corporation Undisclosed investment in Elo Touch System, Inc. $20,000,000 Sears, Roebuck & Company, Inc. investment in MaxServ, Inc. $10,000,000 investment in Epoch System $60,000,000 Philips N.V. investment in Navigation Technologies Corporation $35,000,000 Hitachi Metals Limited investment in Applied Magnetic Corporation $10,000,000 Conner Peripherals, Inc. investment in Applied Magnetic Corporation Undisclosed strategic partnership with Northrop Grumman and Vitesse Semiconductor

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