PACIFIC CREST

M&A Banking for the Best Deal . . . Any Deal . . . In the Current Market

Erik J. Krieger

November 2001

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Just When Things Looked So Good You’ve carefully thought out all the angles

Everything has falling in place so far

You know what you’re doing, its what you’ve been trained to do, you’re an expert

Its instinctual and comes naturally to you

Nothing could possibly go wrong . . . right?

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Think Again!

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Agenda

Brief Market Overview - Perspective

M&A Advisor/Investment Banker Why hire an advisor Who to hire What an advisor should do What the advisor wants

M&A - The Transaction Valuation Process Timing

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Erik J. Krieger

Co-Founder/Chairman/Sr. Managing Director Pacific Crest Securities

Led efforts in Capital Markets, Research and Banking

15 years Investment Banking experience

New York & Chicago

Native Oregonian

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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 Companies85 million shares traded in October 2001

Banking: Underwriting participation in over40 public transactions valued at $6.4 billion in 2000

Completed over 200 M&A transactionswith aggregate value in excess of$100 billion

Offices: Boston, Seattle, Portland, San Francisco

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Market Overview

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M & A Drivers

General economic trends Outlook/confidence Company health

Investor views toward consolidation

Credit availability

Supply of quality companies

Public equity markets Volatility Valuations Availability to raise capital

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What a Difference a Year Makes!

1999-2000 Seller’s market Set initial pricing/terms Record activity Silly valuations Mega deals in vogue Strategic buyers dominate Speed to market rage Stock deals dominate Positive market responses to

announcements Easy access to capital Any deal had value

2001 Buyer’s market . . . Terms &

Pace # deals off 50%, lowest level

since 1996 Valuations pushed to low end Tech/Comm deals biggest

drop of all industries Lack of capital (debt &

equity) End of pooling Negative responses to

announcements Equity “orphans” everywhere Many can not be sold

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Perspective . . .

-

2,000

4,000

6,000

8,000

10,000

12,000

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

($ in m

illions)

# of Transactions Aggregate Value

Total M&A Market Past 30 Years

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Stock Prices Influence M&A Market

- 200%

0%

200%

400%

600%

800%

1000%

1200%

Jan-9

4

Apr-9

4

Jul-9

4

Oct-9

4

Jan-9

5

Apr-9

5

Jul-9

5

Oct-9

5

Jan-9

6

Apr-9

6

Jul-9

6

Oct-9

6

Jan-9

7

Apr-9

7

Jul-9

7

Oct-9

7

Jan-9

8

Apr-9

8

Jul-9

8

Oct-9

8

Jan-9

9

Apr-9

9

Jul-9

9

Oct-9

9

Jan-0

0

Apr-0

0

Jul-0

0

Oct-0

0

Jan-0

1

Apr-0

1

Jul-0

1

Oct-0

1

GSTI Semi Index AMEX Computer Tech Index S&P High- Tech Composite Nasdaq

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Tech Deals 1993 - 2001Technology

$-

$50

$100

$150

$200

$250

$300

$350

1993 1994 1995 1996 1997 1998 1999 2000 2001

($ in

mill

ions)

0

100

200

300

400

500

600

700

800

900

Avg. Deal Size # of Deals

Note: 2001 figures through November 5 only

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Communications Deals 1993 - 2001Communications

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

1993 1994 1995 1996 1997 1998 1999 2000 2001

($ in m

illions)

0

50

100

150

200

250

300

Avg. Deal Size # of Deals

Note: 2001 figures through November 5 only

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Tech/Comm Deals by Size

Note: 2001 figures through November 5 only

$250M - $1,000M

020406080

100120

1993 1995 1997 1999 2001$-

$20,000

$40,000

$60,000

$80,000($

in m

illio

ns)

# of Deals Aggregate enterprise value

$1,000M +

0

20

40

60

80

100

1993 1995 1997 1999 2001$-

$100,000

$200,000$300,000

$400,000

$500,000

$600,000

($ in

mill

ions)

# of Deals Aggregate enterprise value

cc

$25M - $100M

050

100150200250300

1993 1995 1997 1999 2001

$-

$5,000

$10,000

$15,000

($ in

mill

ions)

# of Deals Aggregate enterprise value

ccc

$100M - $250M

0

50

100

150

1993 1995 1997 1999 2001$-

$5,000

$10,000

$15,000

$20,000

$25,000

($ in

mill

ions)

# of Deals Aggregate enterprise value

c

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Tech/Comm Deals YTD by Size

$25M - $100M

0

5

10

15

20

Jan Feb Mar Apr May June July Aug Sept Oct

$-

$200

$400

$600

$800

$1,000

($ in

mill

ions)

# of deals Aggregate enterprise value

c

$100M - $250M

0

2

4

6

8

10

12

Jan Feb Mar Apr May June July Aug Sept Oct

$-

$500

$1,000

$1,500

$2,000

($ in

mill

ions)

# of deals Aggregate enterprise value

$250M - $1,000M

0

2

4

6

8

10

Jan Feb Mar Apr May June July Aug Sept Oct

$-

$1,000

$2,000

$3,000

$4,000

($ in

mill

ions)

# of deals Aggregate enterprise value

$1,000M +

0

1

2

3

4

5

Jan

Feb

Mar

Apr

May

June

July

Aug

Sept

Oct

$-

$10,000

$20,000

$30,000

$40,000

$50,000

($ in

mill

ions)

# of deals Aggregate enterprise value

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Tech/Comm Pricing Trends

0.9

10.1

1.1

11.3

1.2

17

2.1

18.6

1.6

18.6

1.5

17.9

2

18.1

3.2

22

1.7

13.7

0

5

10

15

20

25

1993 1994 1995 1996 1997 1998 1999 2000 2001

Ent/ sales

Ent/ EBIT

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Payment Trends

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1993 1994 1995 1996 1997 1998 1999 2000 2001

Both

Stock

Cash

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Reaction to Public M&A Announcements

- 6.0%

- 4.0%

- 2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%Ja

n-9

9

Mar-

99

May-9

9

Jul-9

9

Sep

-99

Nov-

99

Jan

-00

Mar-

00

May-0

0

Jul-0

0

Sep

-00

Nov-

00

Jan

-01

Mar-

01

May-0

1

Jul-0

1

Sep

-01

Average

Median

% Change One Day Prior to One Day After Deal

Announcement

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Premiums Paid For Public Deals

0%

10%

20%

30%

40%

50%

60%

70%

1993 1994 1995 1996 1997 1998 1999 2000 2001

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Technology by SpaceHousehold Appliances

Semiconductors Capital Equip.

Components

Graphics

Networks

Mainframes

Memory Devices

PC's

Peripherals

Services

Software

Semiconductors

Measuring Devices

Miscellaneous

1999

7%2%

40%30%

1%3%

2%4%1%0% 6%

1%0%

3%

Household Appliances

Semiconductors Capital Equip.

Components

Graphics

Networks

Mainframes

Memory Devices

PC's

Peripherals

Services

Software

Semiconductors

Measuring Devices

M iscellaneous 44%

33%

4%2%5%1%0%

0%

1%0%5%

0%

3%

2%

2000

2001

37%35%

4%

2%7%

0%1%

6%

1%4%0%1%1%

1%

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Communications by Space

2001

9% 6%

2%

21%

28%

23%

11%

2000

12%10%

3%

22%29%

16%8%

1999

18%

4%13%

32%

10%9%

14%

Radio/TV Broadcasting

Cable TV

Cellular

Equipment

Services

Wireless

Telephone

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Bottom Line!

Feels worse than it is

People still have memories of 1998, 1999 & 2000

Wall Street geared up as if it would last forever

Need time to flush out system

Deals are still happening . . . And will continue to happen

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Why are Transactions Happening?

Bigger is better . . . Scale provides for traction and stability . . . Customers are demanding it!

Buyers filling gaps

Lack of capital . . . survival

No hope of really growing on own . . . Feature versus Benefit (Business)

Orphan syndrome . . . Deal fatigue

Liquidity

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What’s a Company to do?

Concentrate on internal operations

Take advantage of low prices and become a “buyer”

Wait for better environment . . . If you can

Hire quality advisor to help evaluate alternatives and execute well thought out strategy

“ Tough times require extra care. Cover all the bases”

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Today’s Better M&A Spaces

Services New media eLearning

Technology Enterprise software - applications Security

Communications Wireless applications Convergent technologies

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M&A Advisory

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Why Hire an M&A Advisor?

Selling or buying a business is a full time job

Reduce buyer/seller friction

Increase number of alternatives

Maximize shareholder value

Drive the process and resolve trouble spots

“ None of it really matters unless deal closes . . . Advisor ensures closure”

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Tangible Things an Advisor Does Evaluate marketplace

Strategic analysis of alternatives

Valuation analysis

Create marketing plan & materials

Execute marketing plan

If necessary, arrange financing

Help with due diligence

Execution, Negotiation, Close

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Banker’s Role After the Deal

Sell side “Spin” control - internal and external Wealth management New sell/buy side engagements Help old management find new jobs

Buy side “Spin” control - internal and external Financing New buy side engagements

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What to Look for in an Advisor Transaction experience

Commitment Banker commitment Firm commitment Resources

Knowledge of space Understanding of dynamics/drivers of value Connection with buyers

Good listener of client’s needs

“Hire an advisor that can adapt to & succeed in any situation”

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Changing Banker Landscape Date Investment Bank Acquiror09/02/97 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

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Advisor Type

Global Full Service Goldman Sachs, Morgan Stanley, Merrill Lynch

National Full Service Piper Jaffray, Robertson Stephens, First Union

Boutique Full Service Pacific Crest, Soundview, Friedman Billings

M&A Boutique Alliant, Lincoln Partners, Houlihan Lokey

Local/Regional Generalist DA Davidson, Van Kasper, Veber

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Large versus Mid Sized /Smaller Deals

Larger Deal Commitment Board considerations Global reach Financing

Mid Sized/Smaller Deal Commitment Sr. Banker Attention Resources Location

“Match deal size and M&A advisor size”

“M&A advisory is not dependent on capital base”

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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

CommitmentLevel

High

Low

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What Motivates an Investment Banker?

Size of Transaction

Time it takes to close deal

Additional business

Good client . . .

“Show me the Money”

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What Makes a Good Client Good?

Realistic expectations

Honesty . . . Complete disclosure

Advisor versus Servant role

Clarity in decision making (fewer leaders)

Few owners . . . Or Public

“ Nobody likes surprises . . . Especially your advisor! Advisor

needs to know everything”

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What Makes for an Attractive Deal?

Strong financial performance . . . “plenty of runway”

Excellent internal controls

Scale . . . Client base

Brand/market leadership/technology

Real commercial partnerships

Strong external space influences (many buyers)

Definable business . . . Simpler the better

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Things that are Unattractive

Little/no revenue

Lack of “real” customers . . . More than one

“Real” validation of technology

Cash burn

Few buyers

Unrealistic expectations

“Just” employee bases/management teams

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What Does it Cost to Hire an Advisor?

Fees are negotiated . . . To a point Supply & demand You get what you pay for Insignificant cost if successful

Success Fee % of transaction . . . Lehman formula Incentives & minimums Buy side capped

Retainer Flush out “real” clients Credited toward Success Fee

Expenses Disincentive if not paid Proximity/Experience reduce cost

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Fee Case StudyCompany: Profitable enterprise software firm with

$30 million in revenue and no debt

Valuation: $95 to $105 million

Fee StructureRetainer: $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

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Deal Process

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Two Sides to Every Deal

“ Buyer and Seller”

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Core Issues in Any Deal Technology/business fit

Fill the gap Make versus buy Time to market

Philosophical similarity Direction Culture/Style/Intangibles Relevance

Good value . . . Buyer and seller Structure dictates motivations High, low or fair will influence outcome

Ease of integration (size, location, systems, etc.)

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M&A Realities

Emotions will create high anxiety throughout process

Integration is 99% of success

Expect significant disruption Time consuming Don’t lose control of business

After the deal . . . Nothing will be the same

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Buyer & Seller “Valuation” Perspectives Buyer

Back to fundamentals . . . Bubble has popped

“Justification” matrices long gone

Many companies can not be sold

Comparable public companies Discount private

companies Must look at & compare

fundamentals

Comparable M&A transactions

Discounted cash flow

Asset/technology valuations

Liquidation analysis

Seller Be prepared with

knowledge of buyer

Understand impact of make versus buy decision

Evaluate impact on Buyer’s business

Impact on growth rates

Earnings accretion/ dilution . . . synergies

Operations/ unique technology

Resultant share price impact

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Sale versus Buying ProcessSale

Business evaluation analysis Full due diligence Valuation analysis Financial strategic

alternatives

Marketing strategy Proper positioning . . .

Value creation Marketing materials Identify & screen buyers

Execution Market, coordinate,

negotiate, close Create sense of

urgency/scarcity

Buy M&A strategy

Develop objectives, criteria, parameters

Create Deal Flow Identify & screen targets Value Evaluate impact (external

and internal)

Execution Due diligence, negotiate,

close Financing Manage expectations and

process to best position buyer

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M&A Timeline (Sale)

Expect 4 to 6 months from start to close Banker pre-marketing prep 3 weeks Marketing 8 weeks Negotiation 4 weeks Due diligence 2-4 weeks Documentation 4-8 weeks Regulatory/shareholder 4-8 weeks Public company deals adds certain time

elements

“Be prepared for a long process”

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How to Prepare for Sale?

Get controls in place

Prepare detailed forecasts

Control costs

Develop strategic/commercial partnerships

Identify buyers & strategic fit

Mentally prepare for process

Run business as if not selling . . . Focus on operations

“ Clean up Shop - Like selling a house”

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Summary

Evaluate alternatives . . . Don’t do it in a vacuum and be honest

Hire Advisor to maximize options . . . Maximize value

Be prepared & knowledgeable

Deals are still being done . . .