The Current Technology M&A and Capital Market Environment
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The Current Technology M&A and Capital Market
Environment
CONFIDENTIAL DRAFT
NEW YORK
SILICON VALLEY
BOSTON
LONDON
BROADVIEW INTERNATIONAL
A DIVISION OF JEFFERIES & COMPANY, INC
Prepared for TeleSoft Partners Annual Venture Capital EcoSystem Meeting
Robert Abbe, Managing Director Broadview International
October 29, 2004
2
CONFIDENTIAL DRAFT
The Changing Landscape For Emerging Growth Technology Companies
IT Companies Must Adapt Their Exit Strategies To The New Environment
2004 forecast IT spending up 3.9%…but a $2.1 trillion
market1
NASDAQ up slightly over last twelve months
IPO market thawed but “bar” remains very high
M&A continues to rebound…sector specific
Regulatory / structural changes driving rationalization of
US public companies
1 Source: Gartner Dataquest Global Market Sizing – January 2004
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Despite a stable equity market and lots of liquidity, relatively few companies have been able to go public
Disconnect between what Wall Street says it can do and what it can do (resulting in a growing backlog)
Technology IPO Market Trends($ Billions)
As of September 24, 2004. Source: Jefferies Broadview capital markets. Technology defined per SDC Platinum high technology industry classification
Technology IPO Backlog Has Grown Dramatically
Amount Filed
Amount Offered
0
5
10
15
20
25
Jan '03 Apr '03 Jul '03 Oct '03 Jan '04 Apr '04 Jul '04
LTM IPO Issuances by Subsector1
Software23%
IT & Network Services15%
Semiconductors21%
Network Infrastructure10%
Computing Equipment4%
Other27%
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QUARTERLY IPO ISSUANCES IPO PRICING VS. FILING RANGE
QUARTERLY FOLLOW-ON ISSUANCES FOLLOW-ON PRICING VS. FILING RANGE
US IPO v. Follow-On Technology Market Stats
As of October 18, 2004 Source: Jefferies Broadview capital market. Technology defined per SDC Platinum high technology industry classification
Below Filing Range Within Filing Range Above Filing Range
0%
20%
40%
60%
80%
100%
Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Aug-04
Below Filing Range Above Filing Range
0%
20%
40%
60%
80%
100%
Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Aug-04
- -
2
7
10
4
21
3
9
12
-
5
10
15
20
25
Q3 '02 Q4 '02 Q1 '03 Q2 '03 Q3 '03 Q4 '03 Q1 '04 Q2 '04 Q3 '04 Q4 '04
Num
ber
of D
eals
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
Am
ount Raised (m
illions)
7
16
29 30
43
21
14
244
-
5
10
15
20
25
30
35
40
45
50
Q3 '02 Q4 '02 Q1 '03 Q2 '03 Q3 '03 Q4 '03 Q1 '04 Q2 '04 Q3 '04 Q4 '04
Nu
mbe
r o
f Dea
ls
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
Am
ount R
aise
d ($m
illions)
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The “Bar” for Tech IPOs Remains High in 2004, But The Quality And Performance Is Suspect
2003 2004
% of Companies with Revenue < $25MM 11% 14%
% of Companies Unprofitable 11% 11%
% of Companies Trading Below IPO 53% 68%
Q3-Q4 2003 vs. 2004 YTD1 IPO Performance
Q3-Q4 2003 Median Performance $85,000 $72,493 36.3% 6 4.5% 0.4%
2004 YTD Median Performance $86,000 $87,357 55.7% 5 7.5% 2.2%
OfferingAmount
TTMRevenue
TTMRevenueGrowth
Quarters ofProfitability
EBITMargin
% ChangeFrom IPO1
TTM
1 As of 09/17/04. Source: Broadview’s IPO Database / Hoover’s IPO Central / Capital IQ
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The Current IT M&A EnvironmentHas Returned To 1996 Levels
M&A Activity 1992 – Q3 2004 Number Of TransactionsNorth America - IT, Media, Communications
Source: Broadview's Global Mergers & Acquisitions database
741.7
33.1 36.8 48.175.9
126.9139.6
369.0
544.3
195.7
95.774.3
116.3
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Q3 2004
$0
$100
$200
$300
$400
$500
$600
$700
$800Number of Deals
Total Consideration ($B)
583
831920
1,593
2,079
2,8442,994
3,763 3,801
2,343 2,327
1,901
1621
2,156
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The Number Of Transactions Above $50 Million Remains Stable
Source: Broadview’s Global Mergers and Acquisitions Database. Data includes announced North American transactions with transaction value greater than $50MM.
1 Data compiled based on deals where the value was known.
19
3025 24 19
32
2014 16
14 19
32
26 2320
33
2223
10
14
15
19
1415
2021
20
2316 21
10
11 8
17
8
5 7
76
3
6
9
11
105
1611 12
169
9 77 7 6 9
5
1113 14
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
>$500MM
$250MM - $500MM
$100MM - $250MM
$50MM - $100MM
North American M&A Transactions >$50MM
78 74 68 57 40 51 53 42 44 43 55 66 71 62
2001 2002 2003 2004
60
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CONFIDENTIAL DRAFT
39 of These Companies Were
Venture Capital-Backed
10 of These Companies Were
Venture Capital-Backed
15 of These Companies Were
Venture Capital-Backed
50 of These Companies Were
Venture Capital-Backed
The Venture Capital Industry Has Seen A Reduction In Higher Value Private Company Exits but some recovery in 2004
Source: Broadview's Global Mergers & Acquisitions database. North American private seller transactions.
Middle Market Transactions Will
Drive Venture Capital Returns In The
Current Environment
2000 2002 H1 2004
>$20MM 563 172 138 97
>$50MM 397 84 80 51
>$150MM 193 30 23 14
2003
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Public Company Rationalization Continues to Be a Major Driver of Technology M&A
1 Source: NASDAQ2 Source: CapitalIQ3 Source: Thomson Financial First Call
Number Of NASDAQ Listed Public Companies1
Mar 2000 – Sep 2004
(35%)(1,838)
5,000
DEC 2000
3,800
DEC 2001
3,500
DEC 2002
CHANGE’00-’04
3,300
DEC 2003
Trading Values
<Cash
<$100m
<$250m
# Companies 2
41
1,136
1,882
1%
34%
56%
% of Total
5,181
MAR 2000
3,343
SEP 2004
56% of NASDAQ Listed Public Companies Have No Research
Coverage3
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Late Stage Private Equity and Buyout Market is an Increasingly Important Factor
Secular Changes
Large private equity capital pools focused on technology
Hedge funds entering the private market
Acceptance of sponsors selling companies to other sponsors
Historically low borrowing costs
Sarbanes-Oxley and lack of research and trading support hollowing out low end of public market
Reduced required rate of return / IRR driving pricing higher
Sponsors more comfortable about ultimate exit as other sponsors provide safety net
Companies valued between $100 and $300m have an attractive alternative to an IPO
Implications
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CONFIDENTIAL DRAFT
The Quest For Growth In EARNINGS Is Driving Even “Strategic” M&A
Higher gross margins
Leveraging sales/channel costs
Responding to customers rationalizing vendors
Access to new/larger markets
Make vs. Buy (avoiding P&L hit)
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CONFIDENTIAL DRAFT
STAGE VALUE/ PROOF
Most Buyers Are Seeking Acquisitions At A Later Stage Of Company Development
Technical Feasibility
Product Functionality
Customer Acceptance
Business Model Works
Economic Model Works
Scalability Proven
5
6
Product is possible to do
Product does what it is supposed to do
Customers care
Customers are willing to pay a rational economic price
Company can be profitable
Increasingly profitable growthis possible
Size O
f Ad
dressab
le Market D
rives Valu
ation
BusinessAcquisition
3
4
ProductAcquisition
1
2
TechnologyAcquisition
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The M&A Environment: The Challenges
Proven business model (not just technology) a requirement for most buyers
Few Buyers can stomach dilution, pursue early stages companies (Cisco, Symantec, etc.)
Bias towards partnership versus M&A
Mid-cap buyers only beginning to consider M&A again
Valuation disconnect and preference structures
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CONFIDENTIAL DRAFT
The M&A Environment: The Good News
Convergence, open standards are driving renewed focus on growth verses consolidation (in some segments)
Positive Wall Street reaction to recent M&A– Computer Associates / Netegrity
– Verisign / Jamba
– Juniper / Netscreen
Many large and mid caps substantially reduced R&D as they right sized their businesses
Customers seek complete solutions from fewer vendors
Lines between software and hardware are blurring – Many software companies open to selling standards based appliances
– Systems companies increasingly look like software and services companies
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CONFIDENTIAL DRAFT
The Resulting “New Rules of the Road”
Restructure liquidation preferences NOW
Target IRR on the first $75MM of enterprise value … the best deals will use <$20MM total investment
VCs
Drive to profitability first
Develop visibility and partnerships with marketplace gorillas
Don’t fight industry rationalization … like fighting the rising/falling tide
Young Company
CEOs
1616
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August 2004$160,000,000
has been acquired byhas divested its XGS enterprise
technology platform and the associated software licenses to
June 2004
$28,000,000
Hewlett-Packard Company
July 2004$242,000,000
has been acquired by
April 2004$20,000,000
OMR Systems Corporation andOMR Systems International, Ltd.
to
has divested
September 2003
has sold substantially all ofits operating assets to
ConfidentialJanuary 2004
has been acquired by
April 2004
has been acquired by
€475,000,000June 2004
has been acquired by
$497,000,000
ConfidentialFebruary 2003
has sold its virtualmachine assets to
$120,000,000March 2003
has been acquired byhas been acquired by
$150,000,000April 2003
$122,000,000May 2003
has been acquired by
ConfidentialAugust 2003
has been acquired by
Recent M&A Activity Reflects Access To Today’s Dominant Technology Firms
September 2004$123,000,000
has been acquired by
Pending$445,000,000
has agreed to be acquired by
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