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 Technology M&A in 2002Ben HoweGlobal Head of Mergers & Acquisitions,SG Cowen(617) 946-3700bhowe@sgcowen.comJanuary 25, 2002: 

Technology M&A in 2002 Ben Howe Global Head of Mergers & Acquisitions, SG Cowen (617) 946-3700 bhowe@sgcowen.com January 25, 2002 Massachusetts Software & Internet Council

M&A Advice from a Wall Street Veteran... : 

M&A Advice from a Wall Street Veteran... “Life all comes down to a few moments. This is one of them.”

Is It a Good Time to Sell My Company?: 

From a macro perspective the M&A market is the best it has been in a year Is It a Good Time to Sell My Company? Recession is almost over Buyers are back CEO and Board confidence has improved Currencies are stronger Sellers expectations are more humble The M&A climate will improve as the year progresses

What Drives Value?: 

Company must present a compelling opportunity What Drives Value? Large and credible market opportunity Leading edge and proven technology/products Attractive financial results (not necessarily profitable) High caliber team that wants to sign up Raw technology without meaningful revenues and momentum is much tougher to sell

Should We Wait Another Six Months?: 

Maybe . . . Should We Wait Another Six Months? Certain milestones will enhance value and impact potential buyers Significant improvements in profitability Major technology achievement Endorsement from customer or partner Settling a major liability

Have Valuations Improved?: 

Have Valuations Improved? Yes, we bottomed out in Q3 of 2001 97 up 23% 98 up 39% 99 up 84% 00 down 40% 01 down 15%* 02 YTD Down 3% * Based on market close 01/23/02.

In Retrospect, Valuations Got Out of Hand : 

In Retrospect, Valuations Got Out of Hand Old Economy New Economy Company Current Revenue Multiple Peak Revenue Multiple Current Revenue Multiple Company Retail Wal-Mart 1.3 x Business Services ADP 4.7 Content/Media Cox Communications 7.9 Communications/ISP SBC 2.7 Services EDS 1.6 Software Microsoft 11.3 Hardware Dell 2.1 Infrastructure Services Verizon 2.9 30 x 1.9 x 276 0.7 217 13.3 12 0.6 22 0.1 252 3.8 11 1.5 28 3.6 Sector

How Long Will It Take & What are the Steps in the Process?: 

How Long Will It Take & What are the Steps in the Process? 3 weeks Preparation Transaction Closed Executed Agreement Contact Buyers Preparation Indications of Interest Final Bids Closing 4–8 weeks

What are the Process Alternatives for a Sell-Side Transaction?: 

What are the Process Alternatives for a Sell-Side Transaction? Contact most logical potential buyer Mechanism Price Competition Confidentiality Process Flexibility Minimize Business Disruption Considerations Risk of unsuccessful sale and suboptimal valuation Privately contact a limited number of potential buyers (10–25 buyers) Likely to elicit optimal valuation Make public announcement and contact broad universe of potential buyers (30+ buyers) Reluctance of potential buyers to participate in auctions Exclusive Negotiation Private Auction Public Auction + + + +

What Are The Critical Terms of a Transaction?: 

What Are The Critical Terms of a Transaction? 1. Price 2. Consideration — cash or stock or cash & stock 3. Transaction structure 4. Registration rights 5. Timetable/speed 6. Management roles/employment contracts/retention agreements 7. Board composition 8. Exclusivity/no shop 9. Break-up fee/fiduciary out 10. Escrow amounts/earn-outs 11. Conditions to closing 12. Representations and warranties

How Much Time Is Required of Management?: 

How Much Time Is Required of Management? Management is key to success — selling the story Critical periods — marketing, due diligence & negotiation CFO drives the process and the work product

What Are The Typical Acquisition Challenges?: 

What Are The Typical Acquisition Challenges? Overpaying Acquiring/Selling lower growth rate & lower margins Integration Sales force Product offering Customer communication Ability to focus on achieving near-term projections Competitive bidders Institutional reaction upon announcement Management/employee issues

What Happens to Employee Options?: 

What Happens to Employee Options? Most commonly converted into acquirors options Exercise terms may be extended/accelerated Problems with accelerated vesting

What Do You Look For in an M&A Advisor?: 

What Do You Look For in an M&A Advisor? Strong knowledge & passion for your business Preferably, a history of supporting the Company In depth knowledge and experience in the sector Solid contacts with the key potential buyers Senior level commitment to the project Senior members who have solid sales skills World-class execution skills True commitment to relentless service Strong references that are recent

What Should I Expect To Pay?: 

What Should I Expect To Pay? Retainer fee — $50,000 to $250,000 Minimum transaction fee — much more common Incentive fee based on achieving a “hurdle” transaction value Out-of-pocket expenses

Lastly . . . : 

Lastly . . . “All we want you to do, Ross, is make us as rich as possible.” — Member of LBO group to F. Ross Johnson, Barbarians at the Gates Some of you entrepreneurs have heard this before

SG Cowen M&A Effort: 

SG Cowen M&A Effort Exclusive focus on Technology and Healthcare 40 completed transactions per year Typical deal size from $50 to $500 million 7 billion+ dollar deals in last 18 months U.S., European and Asian M&A coverage