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Investment Banking University of Colorado Rob Kaufman November 3, 2004

Investment Banking University of Colorado Rob Kaufman November 3, 2004. Investment Banking Agenda. Overview of IB industry Perspectives on market risk Valuation perspective Case study: .com valuation Case study: Sell-side M&A Q&A. Investment Banking Agenda. Overview of IB industry

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Investment Banking University of Colorado Rob Kaufman November 3, 2004

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  1. Investment Banking University of Colorado Rob Kaufman November 3, 2004

  2. Investment Banking Agenda • Overview of IB industry • Perspectives on market risk • Valuation perspective • Case study: .com valuation • Case study: Sell-side M&A • Q&A

  3. Investment Banking Agenda • Overview of IB industry • Perspectives on market risk • Valuation perspective • Case study: .com valuation • Case study: Sell-side M&A • Q&A

  4. RWK Bio • Rob Kaufman • BA in Economics, Yale University (1981-85) • International Capital Markets, Goldman Sachs (85-89) • MBA in finance, Harvard Business School (1989-91) • Partner, Sierra International Partners (1991-1995) • Partner, The Wallach Company (1995-1999) • CFO and CEO, netLibrary, Inc. (1999-2002) • Partner, Q Advisors LLC (2002-present)

  5. Overview of the I-Banking Industry • Investment Banking • Private placements • Mergers and acquisitions • LBOs, MBOs • Sales/Trading • Public company research • Stock brokers • Retail/institutional sales coverage • Corp. Finance • Corporate and municipal issuance of equity/debt • Capital markets Hybrid Securities

  6. Investment Banking Agenda • Overview of IB industry • Perspectives on market risk • Valuation perspective • Case study: .com valuation • Case study: Sell-side M&A • Q&A

  7. Perspectives on market risk An attempt to define the expected return which corresponds to investments at various levels of risk.

  8. Risk/Reward Relationship • The Risk/Reward Frontier • Required Rates of Return • Developing an appropriate discount rate for an investment decision

  9. Risk/Reward Frontier An attempt to define the expected return which to corresponds investments at various levels of risk U.S. T-Bills Low RISK

  10. Risk/Reward Frontier An attempt to define the expected return which to corresponds investments at various levels of risk U.S. T-Bills Seed-Stage VC Low RISK High

  11. Risk/Reward Frontier Seed Stage Venture Capital Start-up Venture Capital Early Stage Venture Capital Private Equity Mezzanine Debt “Junk” Bonds Senior Debt Small Capitalization Equities Large Capitalization Equities U.S. T-Bills High RISK Low

  12. Expected Annual Returns Seed Stage Venture Capital Start-up Venture Capital Early Stage Venture Capital Private Equity Mezzanine Debt “Junk” Bonds Senior Debt Small Capitalization Equities Large Capitalization Equities U.S. T-Bills 50%+ 40-50% 35-45% 25-35% 18-25% 14-20% 8-12% 14-18% 10-14% 4-5 % High RISK Low

  13. Required Rates of Return • Venture Capital • Private Equity • Mezzanine Debt • Senior Debt Risk • Small Cap Equities • Large Cap Equities • U.S. T-Bills Return

  14. Investment Banking Agenda • Overview of IB industry • Perspectives on market risk • Valuation perspective • Case study: .com valuation • Case study: Sell-side M&A • Q&A

  15. Valuation perspective • Why is valuation important? • Fundamental to all boutique investment banking work • Private placements require premoney valuation • M&A work requires relative value of acquirer/acquiree • Financing of transactions requires fundamental understanding of value

  16. Valuation perspective • Methodologies • Public Comparable Analysis • Control Transactions • Discounted Cash Flow Analysis

  17. Public Comparable Analysis • Select publicly-traded comparable companies • Analyze financial and operating performance • Derive valuation multiples for minority positionbased on performance of comparables • Adjust for size/liquidity discount and control premium

  18. Control Transactions • Collect historical transactions in SIC Codes • Compute financial performance of targets • Derive valuation multiples from disclosed information (multiple of sales, EBIT, EBITDA, NI) • Adjust for size discount • Apply multiples to target

  19. Discounted Cash Flow Analysis • Develop financial model with aid of management • Projected after-tax, free cash flows, discounted to present • Terminal value calculated as a multiple of final year Operating Profit, discounted to present • Appropriate discount rates applied to cash flows and terminal values • Appropriate terminal value multiples applied to final year profit

  20. Investment Banking Agenda • Overview of IB industry • Perspectives on market risk • Valuation perspective • Case study: .com valuation • Case study: Sell-side M&A • Q&A

  21. Case study: .com valuation Valuations gone haywire: 1998-2000 Case Study: netLibrary, Inc.

  22. Case study: netLibrary, Inc. • The netLibrary Story • Founded 1998, three founders • Raised $120+ million • Grew to 520+ employees in March 2000

  23. Case study: netLibrary, Inc. • The netLibrary Story • Founded 1998, three founders • Raised $120+ million • Grew to 520+ employees in March 2000 • Reduced headcount to 122 in September 2001 • Sold in Chapter 11 for $10 million • Zero capital returned to investors, shareholders

  24. Case study: netLibrary, Inc. • Founding • Founded 1998, three founders • Create an ASP model for reference content • Compete in $5+ billion market for published content from leading publishers into institutional libraries in academic, public and corporate libraries • Early support from University of Colorado libraries and University Press • Raised $5 million 8/98 Anschutz and Sequel

  25. Case study: netLibrary, Inc. • Growth • Bring on CFO in February 1999 • Raising venture funds • Requirements: • Executive Summary • PowerPoint • Challenges • Too many interested parties • Valuation ramping too high/too quickly

  26. Case study: netLibrary, Inc. • Funding • Venture funding • Series A, $5 million at $5 million premoney • Series B, $25 million at $40 million premoney • Series C, $72 million at $225 million premoney • Series D, $15 million at $450 million premoney • Public offering • CSFB/Merrill Lynch/JP Morgan • Timing  April 2000

  27. Case study: netLibrary, Inc. • Restructuring • Headcount reduction • Focus on customers/publishers and not investors • Aggressive move toward EBITDA positive • Move toward sale of Company as endgame, not IPO or organic growth

  28. Case study: netLibrary, Inc. • Lessons Learned • Running the business • Meet customer needs, not investor/buyer needs (“Built to Flip”) • “Traditional” business requirements apply • Financial • Cost of capital  higher valuation needs to be earned • Beware competing stage investors

  29. Case study: netLibrary, Inc. • netLibrary Epilogue • Investor conflict • Series A/B aligned against Series C/D • Buyers identified (three @ $40-50 million) • Conflict over the “cram down” • Sale in Chapter 11 bankruptcy despite cash in bank • Currently 60+ employees, $20+ million revenue and still EBITDA positive

  30. Investment Banking Agenda • Overview of IB industry • Perspectives on market risk • Valuation perspective • Case study: .com valuation • Case study: Sell-side M&A • Q&A

  31. Case study: Sell-side M&A Sale/Merger Characteristics • Must possess strategic/financial value to buyer • Established product/service and installed customer base • Management team optional • Proprietary process or technology preferred • Opportunity for moderate growth or enhanced market share • Sufficient company size

  32. Advantages Value could be the highest of alternatives Greatest liquidity of Alternatives Possibly tax-deferred exchange No Publicity if private transaction Complete exit from business Moderately expensive transaction costs Case study: Sell-side M&A Disadvantages • Loss of Control • Management could be dramatically affected • No “upside” for future performance for 100% sale • You could be unemployed • Your company could lose its identity

  33. Case study: Gates Rubber Company • Facts • World’s leading manufacturer of rubber hoses and belts with revenues of over $1.5 billion • Family owned business • Desire for a tax deferred transaction • IBer had completed seven other assignments for Gates

  34. Case study: Gates Rubber Company • Facts • World’s leading manufacturer of rubber hoses and belts with revenues of over $1.5 billion • Family owned business • Desire for a tax deferred transaction • IBer had completed seven other assignments for Gates • Assignment • Conduct a worldwide sale process to a limited number of strategic buyers

  35. Case study: Gates Rubber Company • Facts • World’s leading manufacturer of rubber hoses and belts with revenues of over $1.5 billion • Family owned business • Desire for a tax deferred transaction • IBer had completed seven other assignments for Gates • Assignment • Conduct a worldwide sale process to a limited number of strategic buyers • Result • Nine entities approached; three final offers • Sold to Tomkins PLC for a package of securities valued at $1.2 billion

  36. Investment Banking Agenda • Overview of IB industry • Perspectives on market risk • Valuation perspective • Case study: .com valuation • Case study: Sell-side M&A • Q&A

  37. Investment Banking University of Colorado Rob Kaufman November 3, 2004

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