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  1. 1. M&A Banking for the Best Deal . . . Any Deal . . . In the Current Market Erik J. Krieger November 2001
  2. 2. Just When Things Looked So Good <ul><li>You’ve carefully thought out all the angles </li></ul><ul><li>Everything has falling in place so far </li></ul><ul><li>You know what you’re doing, its what you’ve been trained to do, you’re an expert </li></ul><ul><li>Its instinctual and comes naturally to you </li></ul><ul><li>Nothing could possibly go wrong . . . right ? </li></ul>
  3. 3. Think Again!
  4. 4. Agenda <ul><li>Brief Market Overview - Perspective </li></ul><ul><li>M&A Advisor/Investment Banker </li></ul><ul><ul><li>Why hire an advisor </li></ul></ul><ul><ul><li>Who to hire </li></ul></ul><ul><ul><li>What an advisor should do </li></ul></ul><ul><ul><li>What the advisor wants </li></ul></ul><ul><li>M&A - The Transaction </li></ul><ul><ul><li>Valuation </li></ul></ul><ul><ul><li>Process </li></ul></ul><ul><ul><li>Timing </li></ul></ul>
  5. 5. Erik J. Krieger <ul><li>Co-Founder/Chairman/Sr. Managing Director Pacific Crest Securities </li></ul><ul><li>Led efforts in Capital Markets, Research and Banking </li></ul><ul><li>15 years Investment Banking experience </li></ul><ul><li>New York & Chicago </li></ul><ul><li>Native Oregonian </li></ul>
  6. 6. Pacific Crest Securities Services: Full-Service Investment Bank Focus: Institutional, Next Generation Communications & Technology Employees: 90+ Professionals Research Coverage: Over 125 Public Companies Institutional Reach: 250 active technology buyers Trading: #1 market maker in US under 150 Companies 85 million shares traded in October 2001 Banking: Offices: Boston, Seattle, Portland, San Francisco Underwriting participation in over 40 public transactions valued at $6.4 billion in 2000 Completed over 200 M&A transactions with aggregate value in excess of $100 billion
  7. 7. Market Overview
  8. 8. M & A Drivers <ul><li>General economic trends </li></ul><ul><ul><li>Outlook/confidence </li></ul></ul><ul><ul><li>Company health </li></ul></ul><ul><li>Investor views toward consolidation </li></ul><ul><li>Credit availability </li></ul><ul><li>Supply of quality companies </li></ul><ul><li>Public equity markets </li></ul><ul><ul><li>Volatility </li></ul></ul><ul><ul><li>Valuations </li></ul></ul><ul><ul><li>Availability to raise capital </li></ul></ul>
  9. 9. What a Difference a Year Makes! <ul><li>1999-2000 </li></ul><ul><li>Seller’s market </li></ul><ul><li>Set initial pricing/terms </li></ul><ul><li>Record activity </li></ul><ul><li>Silly valuations </li></ul><ul><li>Mega deals in vogue </li></ul><ul><li>Strategic buyers dominate </li></ul><ul><li>Speed to market rage </li></ul><ul><li>Stock deals dominate </li></ul><ul><li>Positive market responses to announcements </li></ul><ul><li>Easy access to capital </li></ul><ul><li>Any deal had value </li></ul><ul><li>2001 </li></ul><ul><li>Buyer’s market . . . Terms & Pace </li></ul><ul><li># deals off 50%, lowest level since 1996 </li></ul><ul><li>Valuations pushed to low end </li></ul><ul><li>Tech/Comm deals biggest drop of all industries </li></ul><ul><li>Lack of capital (debt & equity) </li></ul><ul><li>End of pooling </li></ul><ul><li>Negative responses to announcements </li></ul><ul><li>Equity “orphans” everywhere </li></ul><ul><li>Many can not be sold </li></ul>
  10. 10. Perspective . . . Total M&A Market Past 30 Years
  11. 11. Stock Prices Influence M&A Market
  12. 12. Tech Deals 1993 - 2001 Note: 2001 figures through November 5 only
  13. 13. Communications Deals 1993 - 2001 Note: 2001 figures through November 5 only
  14. 14. Tech/Comm Deals by Size Note: 2001 figures through November 5 only
  15. 15. Tech/Comm Deals YTD by Size
  16. 16. Tech/Comm Pricing Trends
  17. 17. Payment Trends
  18. 18. Reaction to Public M&A Announcements % Change One Day Prior to One Day After Deal Announcement
  19. 19. Premiums Paid For Public Deals
  20. 20. Technology by Space Household Appliances Semiconductors Capital Equip. Components Graphics Networks Mainframes Memory Devices PC's Peripherals Services Software Semiconductors Measuring Devices Miscellaneous 1999 2000 2001
  21. 21. Communications by Space 1999 18% 4% 13% 32% 10% 9% 14% Radio/TV Broadcasting Cable TV Cellular Equipment Services Wireless Telephone
  22. 22. Bottom Line! <ul><li>Feels worse than it is </li></ul><ul><li>People still have memories of 1998, 1999 & 2000 </li></ul><ul><li>Wall Street geared up as if it would last forever </li></ul><ul><li>Need time to flush out system </li></ul><ul><li>Deals are still happening . . . And will continue to happen </li></ul>
  23. 23. Why are Transactions Happening? <ul><li>Bigger is better . . . Scale provides for traction and stability . . . Customers are demanding it! </li></ul><ul><li>Buyers filling gaps </li></ul><ul><li>Lack of capital . . . survival </li></ul><ul><li>No hope of really growing on own . . . Feature versus Benefit (Business) </li></ul><ul><li>Orphan syndrome . . . Deal fatigue </li></ul><ul><li>Liquidity </li></ul>
  24. 24. What’s a Company to do? <ul><li>Concentrate on internal operations </li></ul><ul><li>Take advantage of low prices and become a “buyer” </li></ul><ul><li>Wait for better environment . . . If you can </li></ul><ul><li>Hire quality advisor to help evaluate alternatives and execute well thought out strategy </li></ul>“ Tough times require extra care. Cover all the bases”
  25. 25. Today’s Better M&A Spaces <ul><li>Services </li></ul><ul><ul><li>New media </li></ul></ul><ul><ul><li>eLearning </li></ul></ul><ul><li>Technology </li></ul><ul><ul><li>Enterprise software - applications </li></ul></ul><ul><ul><li>Security </li></ul></ul><ul><li>Communications </li></ul><ul><ul><li>Wireless applications </li></ul></ul><ul><ul><li>Convergent technologies </li></ul></ul>
  26. 26. M&A Advisory
  27. 27. Why Hire an M&A Advisor? <ul><li>Selling or buying a business is a full time job </li></ul><ul><li>Reduce buyer/seller friction </li></ul><ul><li>Increase number of alternatives </li></ul><ul><li>Maximize shareholder value </li></ul><ul><li>Drive the process and resolve trouble spots </li></ul>“ None of it really matters unless deal closes . . . Advisor ensures closure”
  28. 28. Tangible Things an Advisor Does <ul><li>Evaluate marketplace </li></ul><ul><li>Strategic analysis of alternatives </li></ul><ul><li>Valuation analysis </li></ul><ul><li>Create marketing plan & materials </li></ul><ul><li>Execute marketing plan </li></ul><ul><li>If necessary, arrange financing </li></ul><ul><li>Help with due diligence </li></ul><ul><li>Execution, Negotiation, Close </li></ul>
  29. 29. Banker’s Role After the Deal <ul><li>Sell side </li></ul><ul><ul><li>“ Spin” control - internal and external </li></ul></ul><ul><ul><li>Wealth management </li></ul></ul><ul><ul><li>New sell/buy side engagements </li></ul></ul><ul><ul><li>Help old management find new jobs </li></ul></ul><ul><li>Buy side </li></ul><ul><ul><li>“ Spin” control - internal and external </li></ul></ul><ul><ul><li>Financing </li></ul></ul><ul><ul><li>New buy side engagements </li></ul></ul>
  30. 30. What to Look for in an Advisor <ul><li>Transaction experience </li></ul><ul><li>Commitment </li></ul><ul><ul><li>Banker commitment </li></ul></ul><ul><ul><li>Firm commitment </li></ul></ul><ul><ul><li>Resources </li></ul></ul><ul><li>Knowledge of space </li></ul><ul><ul><li>Understanding of dynamics/drivers of value </li></ul></ul><ul><ul><li>Connection with buyers </li></ul></ul><ul><li>Good listener of client’s needs </li></ul>“ Hire an advisor that can adapt to & succeed in any situation”
  31. 31. Changing Banker Landscape Date Investment Bank Acquiror 09/02/97 Alex. Brown Inc Bankers Trust New York Corp 09/02/97 Dillon Read & Co SBC Warburg 10/01/97 Montgomery Securities NationsBank Corp 10/08/97 Furman Selz LLC ING Barings 11/03/97 Oppenheimer CIBC Wood Gundy Securities Inc 11/28/97 Salomon Inc Travelers Group Inc (Smith Barney) 02/02/98 Wheat First Butcher Singer First Union Corp 04/06/98 Wessels Arnold & Henderson LLC Dain Rauscher Corp 04/15/98 Cleary Gull Reiland & McDevitt Freedom Securities Corp 05/01/98 Bowles Hollowell Conner & Co First Union Corp 05/01/98 Piper Jaffray Cos US Bancorp 06/30/98 Cowen and Co Societe Generale Securities 10/08/98 Salomon Smith Barney Citicorp 06/04/99 BT Alex. Brown Deutsche Bank 07/01/99 BankBoston Robertson Stephens Fleet Financial 11/01/99 Hambrecht & Quist Chase Manhattan Corp. 12/15/99 06/12/00 07/12/00 08/29/00 09/13/00 09/28/00 12/18/00 01/04/01 06/14/01 09/28/01 Volpe Brown Whelan & Co J.C. Bradford PaineWebber Donaldson, Lufkin, Jenrette J.P. Morgan Dain Rauscher Wessels Prudential Securities Wasserstein Perella Epoch Partners, Inc. Alliant Prudential Securities PaineWebber UBS AG Credit Suisse First Boston Chase H&Q Royal Bank of Canada N/A Dresdner Bank The Goldman Sachs Group, Inc Silicon Valley Bank NationsBanc Montgomery Securities BT Alex. Brown SBC Warburg Dillon Read ING Barings Furman Selz CIBC Wood Gundy Oppenheimer Salomon Smith Barney Wheat First Union Dain Rauscher Wessels Cleary Gully Freedom US Bancorp Piper Jaffray SG Cowen Salomon Smith Barney Deutsche Banc Alex. Brown Fleet Boston Robertson Stephens Prudential Volpe Technology PaineWebber UBS WArberg Credit Suisse First Boston JP Morgan Chase & Co. RBC Dain Rauscher Wessels Prudential Exits Investment Banking Dresdner Kleinwort Wasserstein The Goldman Sachs Group, Inc. Silicon Valley Bank Survivor Bowles Hollowel Conner Chase H&Q
  32. 32. Advisor Type <ul><li>Global Full Service </li></ul><ul><ul><li>Goldman Sachs, Morgan Stanley, Merrill Lynch </li></ul></ul><ul><li>National Full Service </li></ul><ul><ul><li>Piper Jaffray, Robertson Stephens, First Union </li></ul></ul><ul><li>Boutique Full Service </li></ul><ul><ul><li>Pacific Crest, Soundview, Friedman Billings </li></ul></ul><ul><li>M&A Boutique </li></ul><ul><ul><li>Alliant, Lincoln Partners, Houlihan Lokey </li></ul></ul><ul><li>Local/Regional Generalist </li></ul><ul><ul><li>DA Davidson, Van Kasper, Veber </li></ul></ul>
  33. 33. Large versus Mid Sized /Smaller Deals <ul><li>Larger Deal </li></ul><ul><li>Commitment </li></ul><ul><li>Board considerations </li></ul><ul><li>Global reach </li></ul><ul><li>Financing </li></ul><ul><li>Mid Sized/Smaller Deal </li></ul><ul><li>Commitment </li></ul><ul><li>Sr. Banker Attention </li></ul><ul><li>Resources </li></ul><ul><li>Location </li></ul>“ Match deal size and M&A advisor size” “ M&A advisory is not dependent on capital base”
  34. 34. Middle Market Advisor Profile Resources/ Capabilities Industry Knowledge Global - Full Service Many High National - Full Service Boutique- Full Service Local/Regional Generalist Business Broker M&A Boutique Commitment Level High Low
  35. 35. What Motivates an Investment Banker? <ul><li>Size of Transaction </li></ul><ul><li>Time it takes to close deal </li></ul><ul><li>Additional business </li></ul><ul><li>Good client . . . </li></ul>“ Show me the Money”
  36. 36. What Makes a Good Client Good? <ul><li>Realistic expectations </li></ul><ul><li>Honesty . . . Complete disclosure </li></ul><ul><li>Advisor versus Servant role </li></ul><ul><li>Clarity in decision making (fewer leaders) </li></ul><ul><li>Few owners . . . Or Public </li></ul>“ Nobody likes surprises . . . Especially your advisor! Advisor needs to know everything”
  37. 37. What Makes for an Attractive Deal? <ul><li>Strong financial performance . . . “plenty of runway” </li></ul><ul><li>Excellent internal controls </li></ul><ul><li>Scale . . . Client base </li></ul><ul><li>Brand/market leadership/technology </li></ul><ul><li>Real commercial partnerships </li></ul><ul><li>Strong external space influences (many buyers) </li></ul><ul><li>Definable business . . . Simpler the better </li></ul>
  38. 38. Things that are Unattractive <ul><li>Little/no revenue </li></ul><ul><li>Lack of “real” customers . . . More than one </li></ul><ul><li>“ Real” validation of technology </li></ul><ul><li>Cash burn </li></ul><ul><li>Few buyers </li></ul><ul><li>Unrealistic expectations </li></ul><ul><li>“ Just” employee bases/management teams </li></ul>
  39. 39. What Does it Cost to Hire an Advisor? <ul><li>Fees are negotiated . . . To a point </li></ul><ul><ul><li>Supply & demand </li></ul></ul><ul><ul><li>You get what you pay for </li></ul></ul><ul><ul><li>Insignificant cost if successful </li></ul></ul><ul><li>Success Fee </li></ul><ul><ul><li>% of transaction . . . Lehman formula </li></ul></ul><ul><ul><li>Incentives & minimums </li></ul></ul><ul><ul><li>Buy side capped </li></ul></ul><ul><li>Retainer </li></ul><ul><ul><li>Flush out “real” clients </li></ul></ul><ul><ul><li>Credited toward Success Fee </li></ul></ul><ul><li>Expenses </li></ul><ul><ul><li>Disincentive if not paid </li></ul></ul><ul><ul><li>Proximity/Experience reduce cost </li></ul></ul>
  40. 40. Fee Case Study Company: Profitable enterprise software firm with $30 million in revenue and no debt Valuation: $95 to $105 million Fee Structure Retainer: $75,000 paid 50% at signing of engagement letter and 50% within 30 days. Credited to Success Fee. Expenses: All out of pocket. Client approval over $25,000. Success: 1.25% up to $95 million plus, 3% of amount over $95 million $750,000 minimum
  41. 41. Deal Process
  42. 42. Two Sides to Every Deal “ Buyer and Seller”
  43. 43. Core Issues in Any Deal <ul><li>Technology/business fit </li></ul><ul><ul><li>Fill the gap </li></ul></ul><ul><ul><li>Make versus buy </li></ul></ul><ul><ul><li>Time to market </li></ul></ul><ul><li>Philosophical similarity </li></ul><ul><ul><li>Direction </li></ul></ul><ul><ul><li>Culture/Style/Intangibles </li></ul></ul><ul><ul><li>Relevance </li></ul></ul><ul><li>Good value . . . Buyer and seller </li></ul><ul><ul><li>Structure dictates motivations </li></ul></ul><ul><ul><li>High, low or fair will influence outcome </li></ul></ul><ul><li>Ease of integration (size, location, systems, etc.) </li></ul>
  44. 44. M&A Realities <ul><li>Emotions will create high anxiety throughout process </li></ul><ul><li>Integration is 99% of success </li></ul><ul><li>Expect significant disruption </li></ul><ul><ul><li>Time consuming </li></ul></ul><ul><ul><li>Don’t lose control of business </li></ul></ul><ul><li>After the deal . . . Nothing will be the same </li></ul>
  45. 45. Buyer & Seller “Valuation” Perspectives <ul><li>Buyer </li></ul><ul><li>Back to fundamentals . . . Bubble has popped </li></ul><ul><ul><li>“ Justification” matrices long gone </li></ul></ul><ul><ul><li>Many companies can not be sold </li></ul></ul><ul><li>Comparable public companies </li></ul><ul><ul><li>Discount private companies </li></ul></ul><ul><ul><li>Must look at & compare fundamentals </li></ul></ul><ul><li>Comparable M&A transactions </li></ul><ul><li>Discounted cash flow </li></ul><ul><li>Asset/technology valuations </li></ul><ul><li>Liquidation analysis </li></ul><ul><li>Seller </li></ul><ul><li>Be prepared with knowledge of buyer </li></ul><ul><li>Understand impact of make versus buy decision </li></ul><ul><li>Evaluate impact on Buyer’s business </li></ul><ul><ul><li>Impact on growth rates </li></ul></ul><ul><ul><li>Earnings accretion/ dilution . . . synergies </li></ul></ul><ul><ul><li>Operations/ unique technology </li></ul></ul><ul><ul><li>Resultant share price impact </li></ul></ul>
  46. 46. Sale versus Buying Process <ul><li>Sale </li></ul><ul><li>Business evaluation analysis </li></ul><ul><ul><li>Full due diligence </li></ul></ul><ul><ul><li>Valuation analysis </li></ul></ul><ul><ul><li>Financial strategic alternatives </li></ul></ul><ul><li>Marketing strategy </li></ul><ul><ul><li>Proper positioning . . . Value creation </li></ul></ul><ul><ul><li>Marketing materials </li></ul></ul><ul><ul><li>Identify & screen buyers </li></ul></ul><ul><li>Execution </li></ul><ul><ul><li>Market, coordinate, negotiate, close </li></ul></ul><ul><ul><li>Create sense of urgency/scarcity </li></ul></ul><ul><li>Buy </li></ul><ul><li>M&A strategy </li></ul><ul><ul><li>Develop objectives, criteria, parameters </li></ul></ul><ul><li>Create Deal Flow </li></ul><ul><ul><li>Identify & screen targets </li></ul></ul><ul><ul><li>Value </li></ul></ul><ul><ul><li>Evaluate impact (external and internal) </li></ul></ul><ul><li>Execution </li></ul><ul><ul><li>Due diligence, negotiate, close </li></ul></ul><ul><ul><li>Financing </li></ul></ul><ul><ul><li>Manage expectations and process to best position buyer </li></ul></ul>
  47. 47. M&A Timeline (Sale) <ul><li>Expect 4 to 6 months from start to close </li></ul><ul><ul><li>Banker pre-marketing prep 3 weeks </li></ul></ul><ul><ul><li>Marketing 8 weeks </li></ul></ul><ul><ul><li>Negotiation 4 weeks </li></ul></ul><ul><ul><li>Due diligence 2-4 weeks </li></ul></ul><ul><ul><li>Documentation 4-8 weeks </li></ul></ul><ul><ul><li>Regulatory/shareholder 4-8 weeks </li></ul></ul><ul><ul><li>Public company deals adds certain time elements </li></ul></ul>“ Be prepared for a long process”
  48. 48. How to Prepare for Sale? <ul><ul><li>Get controls in place </li></ul></ul><ul><ul><li>Prepare detailed forecasts </li></ul></ul><ul><ul><li>Control costs </li></ul></ul><ul><ul><li>Develop strategic/commercial partnerships </li></ul></ul><ul><ul><li>Identify buyers & strategic fit </li></ul></ul><ul><ul><li>Mentally prepare for process </li></ul></ul><ul><ul><li>Run business as if not selling . . . Focus on operations </li></ul></ul>“ Clean up Shop - Like selling a house”
  49. 49. Summary <ul><ul><li>Evaluate alternatives . . . Don’t do it in a vacuum and be honest </li></ul></ul><ul><ul><li>Hire Advisor to maximize options . . . Maximize value </li></ul></ul><ul><ul><li>Be prepared & knowledgeable </li></ul></ul><ul><ul><li>Deals are still being done . . . </li></ul></ul>

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