May 19, 2001 Joe Dews Jdews@needhamco.com

1. May 19, 2001 Joe Dews Jdews@needhamco.com

2. The M&A Market in Q1 2001

3. What a great time - Q1 2000 Only a year ago… • Large companies, with huge market caps and sky high stock multiples were bidding incredible prices for early stage companies • There was unlimited and practically free cash available in the public and private equity markets – so what did burn rates matter? • “You snooze, you lose” was the mantra

4. M&A in Q1 2001 Q1 2000 • M&A came to a virtual halt: • Buyers don’t know what to pay • Buyers have seen their own stocks punished • Buyers are focused on figuring out their own businesses • Burn rates and earnings dilution are again a focus • There will be no buyers for many venture backed companies without clear business models

5. Where have all the buyers gone? Source: SDC disclosed value global technology M&A deals over $20MM

6. Where are the big deals? Tech M&A over $1 billion in value. Source: SDC.

7. Acquisition currencies have been damaged

8. The great buyers have stopped buying in 2001 Number of M&A Deals Completed

9. Where we are today? What was in - 2000 What is in - 2001 • PowerPoint presentations • “Press Release” companies • Multiple of pro-forma forecast 2005 revenues • Investors who “got it” • Public venture capital • Momentum investing: Buy on chart moves and sell quickly • “0 to IPO” in under a year • Promoting the stock the primary focus • ‘Twenty-something” fund managers • “Twenty-something” IPO jockeys • Real Businesses and Managements • Demonstrated success • Multiple of historical earnings and balance sheets • Investors who didn't “get it” • Tested companies • Value investing: Buy on fundamental analysis and hold • Long-term company building • Operations the primary focus • Adult supervision • Experienced advisors

10. M&A Banking for the Best Deal in the Current Market

11. Points of Discussion • Leading firms working with software and Internet companies, and how to identify and engage a banker, • Typical fee arrangements, • The range of services provided by bankers in the M&A process, • How valuation is set from the target’s perspective – and how valuations have changed over the past few months, • Issues in selecting the best acquisition partner, • Assistance, if any, that acquisition bankers might provide following completion of the deal, • What type of companies Needham is now working with, and • What kind of deals we are turning away.

12. Just in case I run out of time, here are the short answers • I Leading firms working with software and Internet companies, and how to identify and engage a banker, • In general, more important than the firm is the people you will be working with • II Typical fee arrangements, • Be aware that in general you will get what you pay for. The fee structure should provide incentive for the desired outcome • III The range of services provided by bankers in the M&A process • Various, but an overlooked point is that the M&A process is a process, a complex multi-variable process • IV How valuation is set from the target’s perspective – • No acquirer will pay more than they have to, so it is ALL about leverage. • and how valuations have changed over the past few months, • LOL • V Issues in selecting the best acquisition partner • Depends on a lot of things – big difference between a cash and a stock deal • VI Assistance, if any, that acquisition bankers might provide following completion of the deal. • If you are counting on someone who gets paid when the deal closes to help you manage the integration process, you may want to think some more about that • VII What type of companies Needham is now working with (Broadly speaking) • Representing buyers – Public Companies buying private or public companies that are a strategic fit and are affordable with their current currency. • Representing sellers – Adequately-funded private or public companies that don’t need to be sold, but for strategic or liquidity reasons want to be sold, and which have strong market position, technology and customers • VIII What kind of deals they are turning away. • Fire sales; companies which we think are unlikely to be sold due to high losses or lack of significant market position, technology and customers; companies where the valuation or our ability to add value will not support our minimum fee.

13. Who are leading firms working with software and Internet companies, and how to identify and engage a banker • There are many investment banking firms that have both a strong effort in technology and focused M&A expertise • There are a group of firms that have historically had a purely or heavily technology focus • There has been a lot of change in the industry • There has been a lot of consolidation • Recently, there have been layoffs at most investment banks • I think you should look for a firm that has expertise in your industry, expertise in M&A, with people that you feel good about working with, were you feel you will be a valued client and get the effort you want and deserve on your behalf. At the end of the day, as in anything else, you are working with a group of people. • Sources of introductions/information: professional introductions (from your lawyers, your accountants); personal references (other entrepreneurs); seminars like this; advertising.

14. Structure of the Investment Banking Industry Independent National Emerging Growth Firms Needham & Company Thomas Weisel Partners Wit / Soundview Emerging Growth Firms NowOwned by Major Commercial Banks Fleet / BancBoston / Robertson Stephens Bank of America Securities / Montgomery Chase / H&Q / J.P. Morgan / Flemings Deutsche Bank / BT/ Alex. Brown SG / Cowen Securities Royal Bank of Canada / Dain Rauscher / Wessels Firstar / US Bancorp/ Piper Jaffray CIBC World Markets/ Oppenheimer ABN Amro / ING / Barings / Furman Selz Major Bracket Institutional Firms Bear Stearns UBS / Warburg / PaineWebber Special Bracket Firms Citigroup / Salomon / Smith Barney / Schroder CS / First Boston / DLJ Goldman Sachs Lehman Brothers Merrill Lynch Morgan Stanley / Dean Witter Regional Firms A.G. Edwards (St. Louis) Adams Harkness & Hill (Boston) First Union (Richmond) Janney Montgomery Scott (Philadelphia) McDonald & Company (Cleveland) Morgan Keegan (Memphis) Raymond James Financial (St. Petersburg) Robinson-Humphrey (Atlanta) Stephens Inc. (Little Rock) Sutro & Co. (San Francisco) Tucker Anthony Sutro (Boston) Wells Fargo/FSVK (San Francisco) William Blair (Chicago)

15. What are typical fee arrangements • Case by case basis • Typically a front end or retainer, and back end or success fee • Typically related to the size of the deal, as through a success fee based on a percentage or variable percentage of the transaction value • Typically subject to a minimum in the event of a completed transaction • Be aware that in general you get what you pay for. The fee structure should be designed to provide incentive for the desired outcome.

16. The range of services provided by bankers in the M&A process • “M&A” can cover a range of advisory services to clients on: Recapitalization Mergers 4 4 Restructuring Acquisitions 4 4 Share Repurchases Divestitures 4 4 Strategic Positioning Fairness Opinions 4 4 Takeover Defense Going Private 4 4

17. Sale Process and Transactional Issues Financial Positioning • Press release announcing transaction • Backgrounder on the acquisition • Guidance for analysts’ forecasts • Prepare and conduct conference call • Plan and execute roadshow to sell the deal, if necessary Due Diligence Steps to successful transactions • Interview key management • Financial due diligence • including analysis of historical • and projected financial statements; interview independent auditors • Third-party interviews and • reference checks • Facility visits • Legal due diligence Negotiations • Financial advisor or principal • Cash or stock preferable • Understand potential synergies • Employee issues such as: • Acceleration of options • Employment agreements • Non-compete agreements • Key issues to be negotiated: • Condition of closing • Financing outs • Reps & warranties • Break-up fees • Shopping restrictions • Topping offers • Material adverse change • Shareholders’ vote • required (either company) Structuring • Determine ability to use either • cash or stock • Analyze respective proforma • effects of a stock or cash • acquisition • Balance sheet • P&L • Goodwill • In-process R&D • Write-offs Valuation • Analyze financial statements • Discuss business history and • prospects with management • Analyze comparable public companies’ trading multiples • Analyze comparable transactions • Value shares offered for • consideration (public co. only)

18. What is some of the value a banker can provide • Smooth orchestration of a process, saving time and energy, and increasing the likelihood of a successful deal • Convert a serial process to a parallel process, to increase leverage and get a better price • Credibility – implicit or explicit “threat of an auction”, to increase leverage and get a better price • Ability to outsource the difficult negotiations, preserving the relationship of a CEO and the Buyer, to increase leverage and get a better price and have a harmonious relationship after the deal • Experience and insight • Relationships and introductions

19. Resources an Investment Bank can Provide • A highly knowledgeable research analyst can be a resource, circumstance permitting • - Industry bankers with a strong understanding of the industry • An M&A team experienced with the M&A process • Contacts with the “right” individuals at potential acquiring companies • Ability to leverage expertise and capabilities of various areas of the firm, including underwriting, research, mergers & acquisitions, and potentially private placements and venture capital, to produce maximum transaction value

20. How valuation is set from the target’s perspective and how valuations have changed over the past few months • Valuation is set by what the buyer believes they need to, and can afford to, pay to get the deal. • Metrics (price/sales, price/earnings, price/book, premium to stock price) can measure valuation, can guide expectations, can at some level be constraints, but do not determine valuation. • Valuation impacted by alternatives to the seller, such as the availability of, and cost of, private or public equity capital • Valuation impacted by how the acquirer is valued, by the public or private markets • No acquirer will pay more than they believe they have to, so it is ALL about leverage. Get the leverage on your side

21. Sale Process and Transactional Issues Multiple Elements Drive Negotiating Leverage • Competition • Desire • Necessity • Resources • Time Negotiating Leverage (5 key elements)

22. Sale Process and Transactional Issues Planning is an Important Component of Successful Negotiations Collecting Information Assessing Leverage Negotiating Plan Achieving Resolution Establishing Expectations Determining Response

23. Issues in selecting the best acquisition partner • Think about this before you start the process, because depending on the answer the process may change • Different stake holders may have different objectives and criteria, which needs to be managed • Big difference between a cash deal and a stock deal

24. Sale Process and Transactional Issues Successful Negotiation Can Usually Result in a Broad Range of Outcomes Valuation Structure Liquidity Buyer’s Minimum Terms Financial Terms Seller’s Minimum Terms Culture Corporate Strategy Non - Financial Terms

25. Sale Process and Transactional Issues Sale Process Continuum One-on-one negotiation Full auction Potential Tradeoffs • Probability of Successful Sale Low Medium High • Maximization of Sale Proceeds Low Medium High • Time • - required to canvas • prospective purchasers Low Medium High • - from canvas to conclusionHigh Medium Low • Confidentiality High Medium Low

26. Assistance, if any, that acquisition bankers might provide following completion of the deal • If you are counting on someone who gets paid when the deal closes to help you manage the integration process, you may want to think about that some more • Strategize on positioning • A lot of issues that appear after the deal is completed, depend on the due diligence, negotiation, pricing and structure of the deal, so make sure you get those right • Liquidity • Any surprises • Integration • Long term success

27. What type of companies Needham is now working with • Representing buyers – Public Companies buying private or public companies that are a strategic fit and affordable with their current currency. • Representing sellers – Adequately-funded private or public companies that don’t need to be sold, but for strategic or liquidity reasons want to be sold, with strong market position, technology and customers • Situations where we believe we can add a lot of value

28. What kind of deals we are turning away. • Fire sales – don’t wait until the last minute, leave yourself plenty of runway • While deals can happen quickly, a full sale process can take 4 to 6 months or longer to close, and being almost out of cash does not help your leverage • Companies without significant market position, technology and customers • Companies where valuation or our ability to add value will not support our minimum fee

29. Perspective on the current tech stock market

30. The current market for tech stocks Welcome to 2001! • The late 1990’s was an aberration in the public markets unlikely to reoccur in our generation Forget this ever happened!

31. Where have all the billions gone? ($ in billions) Highest Current (5/2) Market Cap MarketCap % Change Akamai $ 35.7 $ 1.0 -97 % Ariba 42.6 1.6 -96 % Crossroads 12.2 0.2 -98 % Inktomi 29.5 0.8 -97 % Internet Capital Group 56.0 0.6 -99 % Sycamore 51.9 2.4 -95 % VA Linux 13.0 0.1 -99 % Ventro 11.1 0.1 -99 % Versata 3.8 0.1 -97 % VerticalNet 13.5 0.2 -99 % Vignette 23.8 1.5 -94 %

32. Overview of the Equity Market • In the first half of 2000, the flow of cash into stock mutual funds reached an unprecedented pace. However, turbulence within equity markets during the second half of 2000, particularly the fourth quarter, has caused a sharp decline in mutual fund flows.

33. Overview of the Equity Markets Overview of the Equity Market • Large decreases in margin debt coincided with broad market sell-offs in the late summer/fall of 1998, in April 2000 and in the fall of 2000. Decreases in margin debt were of a higher magnitude in these periods than positive net cash flows into mutual funds.

34. Historical Bear Market Comparison

35. Will history repeat itself? • This crash was the “big one” for tech stocks • The market crash of 2000 - 2001 makes the earlier post WW II tech stock crashes looks like mere fender benders • A frightening thought - The recovery time from the two prior tech stock crashes was each 8 years

36. Will history repeat itself? And, which history?

37. Where is the market for tech stocks going? • Favorable monetary, and fiscal outlook • Continuing rapid obsolescence • Productivity gains continuing based on recent information technology investments • Strong world position of the US • Interest rates lower than in previous downturns. Inflation tame • Investors have not given up on equities • Mutual funds have not yet seen significant outflows. • Technology stocks have been trading at a slight discount to non-techs • Still no “surprise” shock from left field • Some renewed life in the stock and IPO markets in Q2 Positive factors Negative factors • Housing and automotive market sectors likely to weaken in 2001 • PE ratio’s are still not historically low. In 1973-74 stocks sold at less than book value (albeit, in a different inflation environment) • High levels of consumer debt • World economy weakening further • No real capitulation yet by investors • Tech stocks not truly cheap yet • The NASDAQ has still doubled over the past 5 years and quadrupled over the last 10 years • Still no “surprise” shock from left field

38. The IPO Market in Q1 2001

39. Year to year change in volume of IPOs The number of IPOs in Q1 2001 was 15% of the 2000 level * Nearly 50% ($3.6 Billion ) of the Q1 2001 IPO dollars were from one transaction, the IPO of Agere

40. The tech IPO market dried up in Q1 2001 Source: Securities Data Corporation

41. Tech IPO backlog dropped away Source: CommScan.

42. If this one didn’t work . . . Loud Cloud Inc.

43. If this one didn’t work . . .

44. The private equity market in Q1 2001

45. Impact of the markets on private equity investments • The “Crossover” hedge and mutual fund, foreign and corporate investors that gave the edge to valuations in 1999 - 2000 are largely on the sidelines • Many private equity investors are wondering what exactly is it that they bought in 1999 and 2000 • Private equity funds face massive needs to continue to support existing portfolio companies that were expected by now to be public or be sold • As a consequence, many established funds are focused on the needs of existing portfolio companies and not on adding new investments

46. Private equity returns are coming down • Expect time to liquidity now of 4 - 5 years • Expect dramatically lower returns than over the past five years • Many 1999 and 2000 funds will show negative returns

47. US venture investments The impact is being felt in funding Dollars invested by quarter (in billions) * Preliminary Estimate. Source: VentureOne

48. US venture investments The impact is particularly felt in new financings as funds focus on existing portfolio companies New first venture rounds by quarter * Preliminary estimate. Source: VentureOne

49. Valuations are coming down in many sectors • New rounds are difficult to raise at last round or, in many cases, at any valuation • Desperate efforts to avoid write-downs on new rounds (e.g. 3x or more preferences on new rounds, large warrant packages) serve to reduce the effective valuation while still keeping the last round nominal price • Pre-money valuations are dropping dramatically when new investors are needed

50. It is a good time to be a private equity investor • It is a much better time to invest in new investments than for the past three years (if you have any money and time left after caring for your investments of the past two years)