Private Alternatives to the Public Markets How to Survive and Grow in a Capital Constrained Environment A Private Conference on May 16, 2001 J. Richard.

Private Alternatives to the Public MarketsHow to Survive and Grow in a Capital Constrained Environment

A Private Conference on

May 16, 2001

J. Richard Knop

Windsor Group LLC

Agenda

Windsor Group Overview

Middle Market M&A Trends

Recent M&A Trends

Approach on Doing a Deal on the Best Price and Terms Today

3

Windsor Group Overview

Windsor Group Overview 25-year old investment bank with 30 employees

Mergers and acquisitions (buy- and sell-side) Private placements (debt & equity) Leveraged buyouts & management buyouts

Industry Representation Government Contracting Commercial IT Telecommunications General Middle Market Corporate Finance

Locations Headquartered in Middleburg, VA (Satellite office to open in Reston, VA, in 2001) Windsor Group Securities in Southport, CT

Transactions 50% of engagements $20M to $100M, with remainder $100M to $1B Over 40 M&A transactions (aggregate value > $6 Billion) closed in past 5 years

Windsor Group Reputation

Reputation for closing almost every engagement on terms favorable to client

Capable of managing both middle and large market transactions

Strong reputation and network Strong deal flow generated through banks and investment banks, law firms, “word

of mouth”, marketing, industry participation, and previous clients

Seasoned client staff with blend of strong operational experience, industry knowledge, and financial expertise

Intense “hands-on” involvement of senior management

6

Middle Market M&A Trends

Middle Market M&A Trends

M&A transaction volume in the $50-500MM value range grew consistently through the 1990’s, driven by:

Strong economic environment Increasing stock market valuations Globalization of business Low cost of credit Active private equity industry

380443

546680

815

1,007

1,337

1,490

1,306 1,318

-

200

400

600

800

1,000

1,200

1,400

1,600

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Tran

sact

ion

s

8

Recent M&A Trends

Deterioration of Public and Private Capital Markets

Closing of IPO market leaves sale/merger as only liquidity path for many companies

Stock market decline reduces value of stock as currency High yield market not available to fund acquisitions Bank financing terms tightened - less leverage

2.5-3.0 x EBITDA v. 4-4.5 x one year ago 40% Equity required from LBO funds v. 20% one year ago

Private equity groups more conservative in underwriting acquisitions due to dot.com fallout

Impact on M&A Transactions

Realignment of expectations (primarily seller)

Creative capital structures required

Good opportunities for buyers with capital

Consolidation trend continues in government and IT industries

Industry Factors Acquisition reform Outsourcing trend Commodization of products and services Competition stronger and larger

Internal Factors “Build or buy” “Glass ceiling” syndrome “Bifurcated” shareholder issue Personal issues

Current Environment: “Kiss a lot of frogs until you find your Prince”

Buyers filling voids in technologies & customers v. bulking up

Buyers seeking growth & margin improvement

“Back to basics” investor/buyer psychology

More focus on intangible issues Management Cultural fit Integration issues

Trend toward consolidations (merger of multiple companies)

Efficiencies and synergies

More critical mass

Better access to capital markets

More complicated (corporate valuations and HR/management issues)

Impact of Recent Legal & Accounting Changes

Pooling accounting method eliminated effective July 2001 Potential positive development for private & financial buyers v. public

buyers

HSR threshold increased from $15 to $50 Million.

Use of installment note as part of consideration

Valuations

Commercial market valuations have softened more than government market valuations (“flight to safety”)

Highest valuations paid for:

Companies with high end skill sets and intellectual property Companies with customers hard to break into Good operating margins Focused growth strategy Strong senior and mid level management team that will transition Past performance

16

Approach to Doing a Deal on Best Price and Terms Today

Overall theme: exploring and developing all options will produce better results than discussion with a few competitors and colleagues Emphasize EBITDA for current year Books and records in good order Resolve litigation Hire experienced team of professionals Don’t “reinvent the wheel.” Do only once in your lifetime Allows you to manage company Typically return is several times the cost

Sellers: Use systematic approach

Investment banker services Evaluates alternatives Provides valuation range Packages the company Identifies, qualifies, initiates & contacts most qualified

prospective purchasers Creates competition among potential purchasers Provides critical assistance in structuring and negotiating deal

terms & guiding company through due diligence Brings deal to closure

The Windsor Philosophy

“Complete the transaction as soon as possible on the best

financial terms and the best strategic and cultural fit for our client.”

Be patient

Be prepared to walk away

Continue to manage and move company forward during sales process

Buyers Engage knowledgeable investment bank and other

professional advisors who: Know your industry Have relationships and a track record

Identify financial resources to make acquisitions Enables you to take advantage of opportunities that arise Capital is key today

Develop a well thought out acquisition plan and criteria “Kiss a lot of frogs until you find your Prince”

Buyers Cont’d

Be sensitive to cultural, management, and employee benefit issues

Develop before closing an integration program with the owners/managers of the acquired company

Follow the general “code of honor” in the M&A business Don’t put a company under letter of intent expecting to renegotiate the

terms irrespective of the results of due diligence Deal openly and directly as opposed to “playing games” Develop a reputation of being trustworthy and fair in your dealings

Backdrop to Current Environment Slowing economy and Internet “bubble” are reducing the

opportunities for IPO’s and secondary stock sales Number of United States IPO’s are down to 429 in 2000 from 538 in 1999 (down 20%) Only $8.1 billion of proceeds in fourth quarter 2000 versus $27.4 billion in fourth

quarter 1999 Performance very poor in 2000:

Rule “FD could make things worse, due to increasing uncertainty in minds of analysts and portfolio managers

2000 1999Return Return

S&P 500 -10.1% 19.5%

Nasdaq -39.3% 85.6%

Backdrop to Current Environment Leveraged loan market has contracted to levels of the

early 1990s Proceeds of debt syndications of $1,175 MM in 200 versus $1,298 MM in

1999 (down 9.5%) Bank debt multiples at a 10-year low Bank examiners caused 60% of syndication buyers to exit the market

since mid-2000 Predicting a recession - and may be getting what they predicted!

Leverage Multiples of $100MM to $249MM LBOs

2.5 x 2.3 x 2.4 x

2.6 x1.9 x 1.9 x

2.8 x 2.1 x

3.3 x

1.0 x

0.0 x

1.0 x

2.0 x

3.0 x

4.0 x

5.0 x

6.0 x

7.0 x

1989 1992 1995 1998 2001

Bank Debt/EBITDA Total Debt/EBITDA

Backdrop to Current Environment High-yield bond market is no longer an option for most issuers

Assets more concentrated than in stock market, leading to larger minimum size thresholds (now $250MM+)

Returns under 5% annually since 1998 Yields and spreads have increased, but liquidity has not returned 2000 new issuance down to levels of 1994-95

Leverage Multiples of $100MM to $249MM LBOs

2.5 x 2.3 x 2.4 x

2.6 x1.9 x 1.9 x

2.8 x 2.1 x

3.3 x

1.0 x

0.0 x

1.0 x

2.0 x

3.0 x

4.0 x

5.0 x

6.0 x

7.0 x

1989 1992 1995 1998 2001

Bank Debt/EBITDA Total Debt/EBITDA

Backdrop to Current Environment cont’d

Source: Venture Economics/NVCA

Significant amount of LBO capital has been raised but not invested yet

LBO Funds Raised

-

10

20

30

40

50

60

70

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

($B

)

Backdrop to Current Environment LBO funds are investing more equity in deals, despite high

acquisition multiples implying a reduction in expected returns

Average Equity Contribution to LBOs

13%

22% 24%

32%

38%

0%

10%

20%

30%

40%

1989 1992 1995 1998 2000

% of Total Sources

Acquisition Multiples of $100MM - $249MM LBOs

6.3 x

7.2 x

6.5 x

5.5 x

6.0 x

6.5 x

7.0 x

7.5 x

1995 1998 2000

Price/EBITDA