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Robin A. GrahamRobin A. GrahamNeedham & Company, Inc.Needham & Company, Inc.

The Emerging Growth Investment Bank for Technology LeadersThe Emerging Growth Investment Bank for Technology LeadersThe Emerging Growth Investment Bank for Technology LeadersThe Emerging Growth Investment Bank for Technology Leaders

Today’s M&A discussionToday’s M&A discussionToday’s M&A discussionToday’s M&A discussion

• Understand the M&A environment that you are in

• How to find and engage the right investment bank for M&A advice

• Working with an investment banker to prepare for a negotiation/sale

• The range of services provided by bankers in the M&A process

• Issues in selecting the best merger or acquisition partner

• Where M&A bankers are focused today and why

The Mergers and Acquisitions EnvironmentThe Mergers and Acquisitions Environment

Market Capitalization Over TimeMarket Capitalization Over TimeMarket Capitalization Over TimeMarket Capitalization Over Time

• More than half of large-cap companies ($1bn+) reassigned to the middle market ($500M - $1bn)

• 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

Valuation corrections in 2001 altered the Market Cap landscape dramatically

0

500

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6,000

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of

Co

mp

an

ies

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Market Capitalization AnalysisU.S. Targets

January 1, 1990 to December 31, 2001

0 - $500MM > $500MM - $1B > $1B

Source: FactSet

Macro Trends in M&AMacro Trends in M&AMacro Trends in M&AMacro Trends in M&A

• Overall M&A volume has retreated dramatically from the past few years all-time highs

• M&A activity is still driven by corporate buyers fulfilling strategic imperatives

• 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.

$210.2$292.3 $311.0

$198.2$137.0 $121.1

$180.5

$287.2

$402.7

$613.5

$740.7

$1,352.2 $1,317.5

$1,740.1

$1,091.7

$110.8

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ytd

Value of Completed M&A TransactionsU.S. Targets

January 1, 1987 to April 30, 2002($ in billions)

Source: Securities Data Company.

16.2%

20.2%

23.8%

10.0%

4.6%5.9%

4.9%3.9% 3.6%

1.2%1.9%

0.8% 0.5% 0.5% 0.5% 0.2%

0%

5%

10%

15%

20%

25%

30%

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ytd

Acquisitions Completed by Financial BuyersU.S. Targets

January 1, 1987 to April 30, 2002(% of Total Volume)


The Impact on Technology M&AThe Impact on Technology M&AThe Impact on Technology M&AThe Impact on Technology M&A

• 2001 tech M&A volume was down more than 60% from 2000 levels after an unprecedented run that began in 1994.

• Broken deals were prevalent as business fundamentals and expectations eroded.

• 2002 YTD M&A volume is even more depressed

Technology M&A volume was most significantly impacted

$13.4 $10.2 $10.2 $13.5 $14.4 $8.7 $9.7$45.5

$67.9

$162.3$125.5

$222.8

$513.2

$722.8

$271.5

$27.5

$0

$100

$200

$300

$400

$500

$600

$700

$800

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ytd

Value of Completed Technology M&A TransactionsU.S. Targets

January 1, 1987 to April 30, 2002($ in billions)


Mergers & Acquisitions EnvironmentMergers & Acquisitions EnvironmentMergers & Acquisitions EnvironmentMergers & Acquisitions Environment

• Cash is King - reversing the accelerating use of high p/e stock seen 1995-2000

• New FASB rules no longer penalize creative structures using stock and cash

• Cash is an increasingly attractive currency to sellers and low P/E buyers.

M&A Currency - what is different now?

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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ytd

M&A Currency AnalysisU.S. Technology Transactions greater than $25MM

January 1, 1990 to April 30, 2002

Cash Stock Combination


The Public/Public M&A StoryThe Public/Public M&A StoryThe Public/Public M&A StoryThe Public/Public M&A Story

• Most of Q1’s dollar volume were CY 2000 transactions that closed in early 2001

• Public companies froze merger discussions due to valuation uncertainty and eroding business performance at both buyers and sellers.

• The number of transactions consummated declined >6x Q1/Q1

M&A dollar volume between public companies fell dramatically after Q1 2001

M&A Activity Between Public CompaniesU.S. Targets

January 1, 2000 to April 30, 2002

$0

$50

$100

$150

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$250

$300

$350

$400

2000 - Q1 2000 - Q2 2000 - Q3 2000 - Q4 2001 - Q1 2001 - Q2 2001 - Q3 2001 - Q4 2002 - Q1

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ompl

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ransactio

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$ Volume # of Transactions


The Private Company Liquidity PathThe Private Company Liquidity PathThe Private Company Liquidity PathThe Private Company Liquidity Path

• Of the 93 IPOs in 2001, just 19 were technology companies

This compared to 308 tech IPOs in 1999 and 221 tech IPOs in 2000

The period 1980 – 1998 averaged just 61 IPOs per year

• M&A continually reinforced as the most likely liquidity path for private companies

Private companies found liquidity paths scarce in 2001

214

2,082

403

1,986

604

2,337

818

2,732

645

3,466

578

3,873

874

4,463

629

4,949

389

5,036

536

4,243

386

4,097

93

2,549

24258

0

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2,000

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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 ytd

U.S. Private Company Liquidity EventsJanuary 1, 1990 to April 30, 2002

IPO M&A


The Good Old Days…The Good Old Days…The Good Old Days…The Good Old Days…

The BOOMEconomy

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

M&A EXIT:High p/e

stock currency used in “strategic” MA& boom

IPO EXITs: underdeveloped companies go public early

Low cost and easy access to capital

M&A outpaces IPO’s 11-1


Significantly reduced M&A activity seen in 2001 will continue

• Classic “Buyers Market”, yet the universe of buyers contracted dramatically

• The number of sellers remain high as the valuation-sensitive sellers are more than outnumbered by the illiquid desperate sellers

Distressed public companies and stranded / capital-starved private companies

• Industry leaders that had built their businesses through aggressive acquisition were on the M&A sidelines -- until very recently

In 2001, corporate buyers were waiting for valuations and their businesses to stabilize. Examples: Cisco, Lucent, Nortel, Broadcom

However, “Gorilla” acquisition appetites are renewed in 2002

— Cisco just announced two “spin-in” acquisitions and 2002 M&A intentions

— Broadcom just re-entered with acquisition of Mobilink ($258M)


The results are:

• Fewer M&A transactions and lower valuations for M&A transactions

• Longer cycle times for transactions

Much greater emphasis on detailed financial/business due diligence

Management cautious throughout process

Greater degree of Board involvement in acquisitions

Slow, difficult negotiations – every point counts

• More carefully structured M&A transactions

the return & proliferation of earn-outs for acquired companies

Passing EPS accretion/dilution acid test is critical


M&A Market Outlook for 2002

• Significant transition made in 2001 from Sellers market to Buyers market

• Companies with strong balance sheets, experienced management teams and profitable business models are now the drivers of the M&A market.

• M&A transactions will continue to suffer higher attrition rates and lower net valuations

• An increasing percentage of transactions will be“distressed sales” or bankruptcies

• Leveraged companies and undercapitalized companies will be at a tremendous negotiating disadvantage

Choosing and using the right M&A advisor and experienced legal counsel will be all the more critical to a successful outcome

The M&A transactionThe M&A transaction

Assembling the Transaction TeamAssembling the Transaction TeamAssembling the Transaction TeamAssembling the Transaction Team

• The Core Working Group:

Senior management team, legal counsel, Investment Banker & their M&A team

• Getting to know investment bankers

Who can make the right introductions

— Directors

— Venture Capitalists

— Legal counsel

If your company is an attractive acquisition candidate, bankers have probably been beating down your door

Take the time to get to know bankers well before a transaction is imminent – a long-standing relationship benefits everyone involved

Selecting the Right BankerSelecting the Right BankerSelecting the Right BankerSelecting the Right Banker

• Bankers who know your industry sector and its competitive dynamics

• Active M&A team with current & recent experience on transactions

• An investment bank with a tradition of representing companies that are your size and profile

• Research analysts who cover your industry sector and follow its public companies

• Leverage the relationship with your banker

Hire a full service investment who can advise you on a multitude of possible alternatives to M&A (alternatives = negotiating leverage)

Current Structure of the Investment Banking IndustryCurrent Structure of the Investment Banking IndustryCurrent Structure of the Investment Banking IndustryCurrent Structure of the Investment Banking Industry

Special Bracket Firms

Citigroup / Salomon Smith BarneyCS First Boston / DLJGoldman SachsLehman BrothersMerrill LynchMorgan 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 & CompanyThomas Weisel Partners Wit Soundview

Emerging Growth Firms NowOwned by Major Commercial Banks

ABN Amro / ING Barings / Furman SelzBank of America Securities / MontgomeryJP. Morgan / Chase / H&Q CIBC World Markets / OppenheimerDeutsche Bank / Bankers Trust / Alex. BrownFirstar / US Bancorp / Piper JaffrayFleet / BancBoston / Robertson StephensRoyal Bank of Canada / Dain Rauscher / WesselsSG / Cowen

Major Bracket Institutional Firms

Bear StearnsUBS Warburg / Paine Webber

The Role of an AdvisorThe Role of an AdvisorThe Role of an AdvisorThe Role of an Advisor

…extracts from a standard engagement letter:

• Reviewing with the Board of Directors and management the Company's financial plans, strategic plans and business alternatives

• 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

• Assisting the Company's Board of Directors and management in the valuation of the business(es) involved in the Transaction

• Assisting the financial due diligence efforts of the Company with respect to the Other Party

• 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

Preparation is KeyPreparation is KeyPreparation is KeyPreparation is Key

• Discuss your business’ history and prospects with M&A advisors in detail

• Realistic assessment of financing/M&A options with advisors

Avoids “death-march” or “firesale” scenarios

• Prepare realizable, bottoms-up, detailed financial forecasts

• Outline non-financial concerns to your advisors

Employee treatment, cultural and strategic fit with each potential buyer

• Establish reasonable valuation expectations up front

• Determine initial preference for cash, stock or combination thereof

• Help your advisors build a Negotiating Plan

Assessing Negotiating LeverageAssessing Negotiating LeverageAssessing Negotiating LeverageAssessing Negotiating Leverage

• Competition

• Strategic Alternatives

• Necessity/Desire

• Resources

• Time

NegotiatingLeverage

(5 key elements)

Multiple Elements Drive Negotiating Leverage

Building the Negotiating PlanBuilding the Negotiating PlanBuilding the Negotiating PlanBuilding the Negotiating Plan

NegotiatingPlan

CollectingInformation

AchievingResolution

DeterminingResponse

EstablishingExpectations

AssessingLeverage

Planning is an Important Component of Successful Negotiations

Critical Transaction ParametersCritical Transaction ParametersCritical Transaction ParametersCritical Transaction Parameters

ValuationStructureLiquidity

Fin

anci

al T

erm

s

Strategic Fit CultureTimingNon - Financial Terms

Buyer’s Minimum Terms

Seller’s Minimum Terms

Successful Negotiation Can Usually Result in aBroad Range of Outcomes

Structure of M&A Advisor FeesStructure of M&A Advisor FeesStructure of M&A Advisor FeesStructure of M&A Advisor Fees

Sellers pay advisory fees as a % of Total Transaction Value

Sometimes staggered for additional incentive: 1% plus 2% over $100M

• Advisors “minimum fee” common in this business environment

Example: Fee is the greater of 1.5% or $750,000

• Interim fees sometimes charged and credited against total fees due on closing:

Retainer fee on signing engagement letter

Milestone Fees on signing of Letter of Intent/Agreement or Announcement

• Fairness Opinion fees (Only necessary for public companies)

Set $ amount charged is independent of transaction completion

Where Advisors are Focused TodayWhere Advisors are Focused TodayWhere Advisors are Focused TodayWhere Advisors are Focused Today

• The Investment Banking industry is itself retrenching

Many firms are pre-occupied with their own M&A and restructuring

• M&A professionals spending more time advising Acquirers in a buyers market

In 2000, Needham represented Buyers in just 27% of transactions

In 2001 & 2002, Needham represented Buyers in 47% of transactions

• Public companies who are building market leadership through M&A

• Still very active in representing sellers, but Very cautious in assessing valuation and probability of transaction completion prior to committing resources

Seller’s business stability and negotiating leverage, strategic drivers of transaction are critical

Acquisitions of stand-alone private companies by public companies are difficult in today’s M&A market

Where Advisors are Focused TodayWhere Advisors are Focused TodayWhere Advisors are Focused TodayWhere Advisors are Focused Today

Needham & Company remains committed to Emerging Growth companies

• Supporting client-base through the downturn

Follow-on equity offerings

Private Placements

PIPEs

• Grew headcount in 2001 and YTD 2002 while maintaining profitability every quarter

• Strong Q1 2002 -- our second best Q1 in 15 years

• Taking market share in Emerging Growth M&A

Ten M&A transactions announced YTD

Including four public/public M&A transactions

AppendicesAppendices

The M&A TransactionThe M&A TransactionThe M&A TransactionThe M&A Transaction

PreparationWeeks 1 - 4

Canvas BuyersWeeks 5 - 8/10*

Due DiligenceWeeks 8/10 - 12/14

Final NegotiationWeeks 12/14 - 16/18

Closing(TBA)

•Engagement of Needham

•Review Co. Financial and Operational Information

•Needham Values Co.

•Prepare Memorandum,

Executive Summary and

NDA with co. counsel

•Prepare List of Likely Buyers

•Contact Buyers

•Send Executive summary

•Sign NDAs

•Distribute informational memorandum / materials

•Prepare management team for diligence presentations•Request and receive initial non-binding bids in writing.

•Setup Data Room

•Select Qualified Bidders for D.D.

•Schedule and Conduct Visits•Provide Draft Definitive Agreement

•Receive Final Bids

Ph

ase/

Act

ion

Ite

ms

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

•Select Winning Bidder•Negotiate & Execute Definitive Agreement

•Press Release

•Submit HSR Filing

($50 million threshold)

•Shareholder Approval Process

The M&A TransactionThe M&A TransactionThe M&A TransactionThe M&A Transaction

Valuation

Steps to successful transactions

Structuring

Negotiations

Due Diligence

•Analyze financial statements

•Discuss business history and

prospects with management

•Analyze comparable public companies’ trading multiples

•Analyze comparable transactions

•Determine ability to use either

cash or stock

•Analyze respective proforma

effects of a stock or cash

acquisition

•Balance sheet

•P&L

•Goodwill (write-off upon impairment)

•Financial advisor or principal

•Cash or stock preferable

•Understand potential synergies

•Employee issues such as:

•Acceleration of options

•Employment agreements

•Non-compete agreements

•Key issues to be negotiated:

•Condition of closing

•Financing outs

•Reps & warranties

•Break-up fees

•Shopping restrictions

•Topping offers

•Material adverse change

•Shareholders’ vote

required (either company)

•Interview key management

•Financial due diligence

including analysis of historical

and projected financial statements; interview independent auditors

•Third-party interviews and

reference checks

•Facility visits

•Legal due diligence

Financial Positioning

•Press release announcing transaction

•Backgrounder on the acquisition

•Guidance for analysts’ forecasts

•Prepare and conduct conference call

•Plan and execute roadshow to sell the deal, if necessary

Acquisitions & Transactional Issues

$77,000,000

Sale to

ViasystemsGroup, Inc.

2000

$36,000,000

Sale to

Computer NetworkTechnologies

2001

$115,000,000

Sale to

NVIDIA Corporation

2001

$900,000,000

Merger of

Excalibur Technologies Corp.

withIntel’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 GraphicsCorporation

2002

Undisclosed

Sale to

Asyst Technologies, Inc.

2002

$160,000,000

Acquiring

Innoveda Inc.

Pending

Representative Financial Advisory AssignmentsRepresentative Financial Advisory AssignmentsRepresentative Financial Advisory AssignmentsRepresentative Financial Advisory Assignments

Representative Public Equity OfferingsRepresentative Public Equity OfferingsRepresentative Public Equity OfferingsRepresentative Public Equity Offerings

$29,700,000

Follow-OnOffering

Lead-Manager

August 2001

$150,000,000

Convertible Debt

Co-Manager

August 2001

$62,100,000

Follow-OnOffering

Co-Manager

July 2001

$26,000,000

Follow-OnOffering

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-OnOffering

Co-Manager

November 2001

$23,490,000

Follow-OnOffering

Lead Manager

December 2001

$66,000,000

Follow-OnOffering

Co-Manager

December 2001

$93,020,000

Follow-On Offering

Lead Manager

January 2002

$100,350,000

Follow-OnOffering

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-OnOffering

Lead Manager

March 2002

$109,500,000

Follow-OnOffering

Co-Manager

March 2002

$125,000,000

ConvertibleDebt

Co-Manager

April 2002

Representative Public Equity OfferingsRepresentative Public Equity OfferingsRepresentative Public Equity OfferingsRepresentative Public Equity Offerings

$120,000,000

Follow-OnOffering

Co-Manager

July 2000

$39,000,000

Initial PublicOffering

Co-Manager

July 2000

$53,000,000


Co-Manager

August 2000

$20,000,000

Follow-OnOffering

Lead Manager

August 2000

$26,000,000

Follow-OnOffering

Co-Manager

August 2000

$75,000,000


Co-Manager

August 2000

$36,000,000


Co-Manager

August 2000

$41,000,000

Follow-OnOffering

Lead Manager

August 2000

$126,000,000

Follow-OnOffering

Co-Manager

September 2000

$98,000,000

Follow-OnOffering

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-OnOffering

Co-Manager

June 2001

$36,000,000$50,000,000


Co-Manager

June 2001

$64,000,000

Follow-OnOffering

Co-Manager

July 2001

Representative Private PlacementsRepresentative Private PlacementsRepresentative Private PlacementsRepresentative Private Placements

Public

$12,700,000

2000

Series I Preferred

Private

$6,000,000

1999

Common Stock

Bernàrd Technologies, Inc.

CurrentStatus:

CurrentStatus:

CurrentStatus:

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

PrivatePublic

$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 StocksConvertible Preferred

Public

$10,250,000

2001

Common Stocks

Public

$29,450,000

2002

Common Stock

Representative Corporate Investment TransactionsRepresentative Corporate Investment TransactionsRepresentative Corporate Investment TransactionsRepresentative Corporate Investment Transactions

$10,000,000

Westinghouse ElectricCorporation

investment in

GAMMA-METRICSCorporation

$24,000,000

investment in

RF Micro Devices

$10,000,000

Telemetrix PLC

investment in

GTI Corporation

Undisclosed

investment in

Elo TouchSystem, 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

NavigationTechnologiesCorporation

$35,000,000

Hitachi MetalsLimited

investment in

Applied MagneticCorporation

$10,000,000

Conner Peripherals, Inc.

investment in

Applied MagneticCorporation

Undisclosed

strategic partnership with

Northrop Grummanand

Vitesse Semiconductor

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