A White Paper Presentation for The University of Texas at Austin MBA Program - Marv Dumon, Alumni

1. “To win one hundred victories in one hundred battles is not the peak of skill. To subdue the enemy without fighting is.” The Art of War, Sun Tzu A White Paper Presentation for The University of Texas at Austin MBA Program - Marv Dumon, Alumni Privileged & Proprietary Work Product of Marv Dumon and Robert W. Cooper – INDUSTRIAL III, INC.

2. - Table of Contents - • The Auction Environment …………………… ………………. 4 – 6 • Company Interest and Markets………………………………... 7 – 8 • Competitive Landscape……………………………………........ 9 – 13 • Deal Flow………………………………………………… …... 14 – 15 • Sourcing……………………………………………………....... 16 – 17 • Mercenary Model in Antiquity………………………………… 18 – 19 • Mercenary Model……………………………………………… 20 – 22 • Private Equity: Contemplated Changes in Methods…………. 23 – 24 • Strategic Companies: Contemplated Changes in Methods… . 25 – 26 • M & A in 2008: Questions to Consider……………………….. 27 – 28 “Competitive Sourcing: Observations of the Auction Arena and M & A Mercenaries” as a White Paper may or may not reflect the views of this or any related organization. It is instead directed to the academic recipients, the operational model builders, and strategic market theorists who focus on external and internal organizational structures that enhance financial and operational performance. The concepts of virtual and agile are paramount to directing corporate assets for maximizing return to shareholders. Multiple structural marketplace flaws are observed and cited. Although criticisms are referenced, this paper is intended to be a useful critique model utilized by M & A marketplace and financial deal sources. Multiple markets may drive different regional, national and global observations and findings. Companies within this regional space are skewed towards sustainable through extreme operational organic growth. We invite review of the contents of this White Paper and welcome commentary. INDUSTRIAL III, INC. @ www.iii-inc.com

3. - Discussion - INDUSTRIAL III, INC. @ www.iii-inc.com

4. Crowded Landscape – Acquisition Environment • Growth of Private Equity & Capital Funds • Private Equity landscape approaching 2,000 firms • Over $260 billion of Private Capital raised in U.S. in 2007 • Previously small equity firms have raised larger funds • Strategic Companies Becoming More Assertive • Prospect of $100 barrel oil pushing demand for Energy Companies • Strong Energy Space growth resulted in large cash reserves • Big 3 Oil Companies, 2006 12 month profits exceeded $70 billion • Competing Acquirers Pooling Capital and Demand • SPACs: Special Purpose Acquisition Companies ( approaching 1,000 ) • High Net Worth Managers / Operators / Former Executives “The first, the supreme, the most far-reaching act of judgment that the statesman and commander have to make is to establish . . . the kind of war on which they are embarking.” Karl von Clausewitz INDUSTRIAL III, INC. @ www.iii-inc.com

5. - U.S. Energy Consumption by Fuel ( 1980 – 2030 ) - Source: United States. Energy Information Administration. U.S. Energy Consumption by Fuel. 26 Nov. 2007, http:// www.eia.doe.gov/oiaf/forecasting.html. INDUSTRIAL III, INC. @ www.iii-inc.com

6. - Energy Prices = Interest in Energy Services Companies - Source: WTRG Economics. Crude Oil Spot Prices: WTI Cushing. Energy Economics Newsletter. 26 Nov. 2007, http://www.wtrg.com/daily/oilandgasspot.html. INDUSTRIAL III, INC. @ www.iii-inc.com

7. - ( Recurring ) Cash is King - • Characteristics Attracting Interest: • (1) Strong, sustainable segment growth along investment runway • (2) Business model not particularly tied to commodity prices • (3) Niche and / or engineered products and / or services • (4) Understandable historic business model • (5) Economic organic growth and significant valuation appreciation by acquisitions • (6) Capable management team and integration • (8) Diversity in customers vertically, horizontally, and geographically • (9) Current shareholder(s) willing to retain equity for a “second bite at the apple” • (10) Exit strategies for upstream divestitures to include Publicly-Traded Strategics • (11) Global / Multi-national market environment for upstream divestitures INDUSTRIAL III, INC. @ www.iii-inc.com

8. - Industrials Attracting Most Interest - • Top 10 Energy / Industrial Markets in Demand: • Pipeline Services ( Integrity and Compliance ) • Energy Services: Enhancement, Transportation, Technical • Energy Capital Equipment ( OEM ) • Production Manufacturing ( OEM and Patented Products ) • Specialty Chemicals and Bulk Derivatives • Polymers & Elastomers ( Industrial Expendables / Consumables ) • Environmental Services • Infrastructure and Water Development & Delivery • Technology ( Aerospace / Defense / Homeland Security Solutions ) • Integrated Manufacturing ( Foreign Sources ) INDUSTRIAL III, INC. @ www.iii-inc.com

9. Potential Seller $1+ Million EBITDA “Know that there are some battles that should not be fought.” The Art of War, Sun Tzu INDUSTRIAL III, INC. @ www.iii-inc.com

10. 1 2 • Opportunistic / semi-generalist searches • Bargain hunters • Capital acquirers, typically require operational Champion • Targeted searches • Aggressive hunters • Urgent timelines “Given the same amount of intelligence, timidity will do a thousand times more damage than audacity.” Karl von Clausewitz INDUSTRIAL III, INC. @ www.iii-inc.com

11. 4 3 5 • Industry specific searches • Can pay highest premiums • Experts in market space • Opportunistic • Bargain hunters • Limited geographic scope • Company search post acquisition for add-ons • Identified opportunity • Rarely conveys sufficient capitalization INDUSTRIAL III, INC. @ www.iii-inc.com

12. Plenty of companies available with $1 - $3 million EBITDA • Acquisition Environment in Flux • Multiple acquirers and intermediaries approaching a business owner • Potential sellers receiving multiple LOIs: Price war • Owners attracted to groups that (1) build good rapport / trustworthy / attuned to rural sensibilities (2) solid track record / industry & operational familiarity (3) help engineer low personal or capital gains tax treatment / other functional support • Acquirers flushed with cash turning to lower quality Companies: operational improvements, bankruptcy, weak management • Using LOIs to lock in parties • Equity Firms creating referral alliances with equity, financing, and professional groups “If my body dies, let my body die, but do not let my country die.” Genghis Khan INDUSTRIAL III, INC. @ www.iii-inc.com

13. Mid-Market Firms Fighting for Deal Flow • Approximately 10-15% have high quantity / majority of active Deal Flow. • Focusing on quality, not quantity. Enjoys Proprietary and Deals • Tend to be largest, recognizable, most capitalized equity firms • Predominantly Industry-focused ( e.g. Energy fund ) • Marginal benefits from expansion of Intermediary / Referral network • Approximately 35-40% of P.E., acquisition objectives are unrealized this year • Moderate risk of not being able to purchase targets due to competition • Goals may be achievable with elevated risk and / or pricing • About half of Mid-Market Private Equity Firms are not meeting platform acquisition objectives set out for 2007 • Between 1/3 and 1/4 of total groups are falling “significantly short” of objectives ( e.g., successfully acquired half or less desired platform companies ) “You must not fight too often with one enemy, or you will teach him all your art of war.” Napoleon Bonaparte INDUSTRIAL III, INC. @ www.iii-inc.com

14. - Sufficiency of Deal Flow - • Entrenchment, Positioning • For Mid-Market Private Equity: Assuming $500+ million fund • Firm with 600+ business opportunities / year yields “too much” traffic • More emphasis on sell-side deals; focus on quality ( not quantity ) • Focus on deal filtering, intermediary filtering, and company analysis • Exceptional name recognition and executive / intermediary network • Lukewarm / arrogant interaction with intermediaries, investment banks, etc. • Likely to have limited size of fund to ½ or 2/3 of size potential • Firm with 300-600 business opportunities / year – acceptable, moderate risk • Will do both buy-side and sell-side deals; focus on quality ( not quantity ) • Emphasis on deal filtering and company analysis • 20-30 presentations may result in 3-5 new platform acquisitions • May provide incentives for proprietary deal flow • Usually has several imbedded executives in-house sourcing deal flow • Typically established firms in existence for 5 or more years • Cordial to lukewarm relationships with intermediaries, investment banks, etc. INDUSTRIAL III, INC. @ www.iii-inc.com

15. - Sufficiency of Deal Flow - • Firm with 200-300 business opportunities / year – outcompeted, significantly short of achieving acquisition objectives • Enthusiastic with buy-side deals, shies away from sell-side representation • Tend to be newer firms; have not yet perfected formulas and processes for acquiring proprietary deal flow • Emphasis on quantity of deal flow, less stringent on quality of companies • Tend to be generalists, have become flexible in their investment criteria • Partners tend to be exclusively finance professionals, few, if any, in-house executive affiliates with extended network and operational background • Have chosen brokers, intermediaries who have unproven M&A experience ( former real estate advisors, professionals ) to carry out Search Assignments • Not favored with intermediaries, investment banks, etc. ( rarely invited to bid on selected preferred deals and are relegated to sell-side limited auction reviews ) • Aggressive / desperate interaction with intermediaries, investment banks, etc. • Forcing relationships, providing additional incentives above Lehman Fees • Conclusion: “Large firms get deals, smaller firms fight harder for them.” “We are not retreating. We are advancing in another direction.” Gen. Douglas MacArthur INDUSTRIAL III, INC. @ www.iii-inc.com

16. - Sourcing Responsibilities - • Ideal Scenarios • Deal Filtering, Review, and Generation • Sufficient deal flow has placed emphasis on quality of companies • In-house affiliates can provide their own deal flow • Analysts focus on filtering companies, freeing up principals for transaction • Intermediary Filtering • Senior Firms develop long-term relationships, choose equity relationships. • P.E. can target intermediaries with industry or geographic expertise. • Existing relationships already in place for outsourcing of deal generation should “deal creep” occupy principals and dry up deal flow • Referral network • Relationships with accounting, legal, estate, finance professionals • Formal or informal ties, built-in trust • Time as a competitive advantage in today’s market • Focus on filtering at analyst level frees up associates and principals to quickly analyze and execute a transaction – before additional interest is introduced “With audacity one can undertake anything, but not do everything.” Napoleon Bonaparte INDUSTRIAL III, INC. @ www.iii-inc.com

17. - Relevance - “Never bring all . . . forces into play haphazardly and at one time, thereby losing all means of directing the battle . . . conserve a decisive mass for the critical moment . . . .[ and ] it must be used with the greatest audacity.” Karl von Clausewitz INDUSTRIAL III, INC. @ www.iii-inc.com

18. - Mercenary Model in Antiquity - • Lessons from Ancient Roman Empire • Diminished legions led to strain on borders, constant attacks • Emperors increased use of non-Roman mercenaries • Generals skeptical of outsourced troops, second-class treatment • Lack of troop cohesion, untrained fighting skills resulted in uncoordinated battles • Characteristics of a Mercenary Army • No loyalty or duty to leaders or empire, will fight for highest bidder • Not as effective in battles, will not fight to the death, fickle • Little or no respect from the Legions • Degraded Esprit de Corps “Let them hate as long as they fear.” Augustus Caesar INDUSTRIAL III, INC. @ www.iii-inc.com

19. - Mercenary Model in Antiquity - • Defense hinged on discipline and focus • Legion formation could not afford weak links • Weakness on one front could lead to a campaign disaster • Infiltrated by spies amongst alien troops, overrun on several sides • Took away offensive initiative, became reactive to multiple crises • Emperor forced to concede land • Negotiable stance emboldened more enemies • Invaders gradually demanded territory and other tributes • Emperors forced to increase already high taxation, diluted coinage valuation • Lower morale, insurrection by Generals fragmented Empire • Shift in populist momentum and political objectives “To place any dependence upon [ a temporary ] militia is assuredly resting upon a broken staff. Men just dragged from the tender scenes of domestic life; unaccustomed to the din of arms; totally unacquainted with every kind of military skill , which being followed by a want of confidence in themselves, when opposed to Troops regularly train’d, disciplined, and appointed, superior in knowledge, and superior in Arms, makes them timid, and ready to fly from their own shadows.” George Washington INDUSTRIAL III, INC. @ www.iii-inc.com

20. - Mercenary Model - Deal Shopping - Multiple Introductions to Multiple Parties “Mercenary” Motivations Broker #1 “Few men have virtue to withstand the highest bidder.” George Washington INDUSTRIAL III, INC. @ www.iii-inc.com

21. - Acquirer Access to Deal Flow Network - • Senior Tier Groups • Massive referral network • Recurring deal sources • Group name recognized • Established rapport with • external professionals • Ability to compete and • win in M & A auctions • _____________________ • Secondary Tier Groups • Minimal referral network • One-off deal reviews • Volatile sources • Less-established name • Minimal rapport with • external professionals • Inefficient in auctions • Minimal support from • referral sources • Fewer introductions of • initial deals for review • Probability of Acquisition “When your weapons are dulled and ardor damped, your strength is exhausted and treasure spent, neighboring rulers will take advantage of your distress to act.  And even though you have wise counselors, none will be able to lay good plans for the future.” The Art of War, Sun Tzu

22. - Proprietary Model - ADVISOR: Multiple Introductions to Single Acquirer Criteria Fiduciary Duty Client “Guard against the impostures of pretended patriotism.” George Washington INDUSTRIAL III, INC. @ www.iii-inc.com

23. - Doctrine & Methods - • Private Equity • Ruling from the throne VS. leading and inspiring on the fields . . . • The need to be “on the field,” not at the Ivory Tower • Pre-empting cash-filled Strategics with speed • Recruiting of battle-tested Analysts and Associates ( including operational experience ) – most are exceptional thinkers but can be ineffective in soft, “art of the deal” situations • Reaching out to more external professionals – your allies • Consideration of more flexible investment criteria ( EBITDA below $3 million, diversity in geographic and / or market sectors ) • Prioritization of referral sources that identify relevant, quality deals • Insisting on “deal warts” and “killers” upfront • Proper interface with intermediaries, who filter out potential acquirers when attempting to find fit for sell-side clients “If wise, a commander is able to recognize changing circumstances and to act expediently . . . . If humane, he loves mankind, sympathizes with others, and appreciates their industry and toil.” The Art of War, Sun Tzu INDUSTRIAL III, INC. @ www.iii-inc.com

24. - Doctrine & Methods - • Private Equity • Deal Management • Attitude check. Increase rural / seller sensitivities. Likeability goes a long way. • Current Case Study: Frequent seller rejection of offers from arrogant parties • Roman Case Study: Citizen / army revolts against unpopular Emperors • Being humble at relationship-development phase with owners • Budgeting of time / role evolution: assessing ROI per activity • Company and referral deal generation • Company deal and intermediary filtering • Assessing relevant targets • Relationship building with sellers and professional networks • Ideal scenario is most of time should be spent analyzing relevant companies and courting sellers – emphasis on building bridges of trust “We are masters of the unsaid words, but slaves of those we let slip out.” Winston Churchill INDUSTRIAL III, INC. @ www.iii-inc.com

25. - Doctrine & Methods - • Strategic Companies • Internal Processes • Shorten cycle time in interaction with sellers • Case Study: 7 weeks to convey interest to owner is simply unacceptable • Long lead times between Legal Department ( Confidentiality Agreements ), Business Development Officer, M & A Decision Maker, Finance Executive, External Parties, etc. • Lessen red tape: have main M&A champion who coordinates with, and is respected by, corporate team • Coordinated effort, timeline expectations per functionary role • M&A flowcharts may help clarify process and expectations • Business Development Officer should have direct, unfiltered access to decision maker(s) “If you entrench yourself behind strong fortifications, you compel the enemy to seek a solution elsewhere.” Karl von Clausewitz INDUSTRIAL III, INC. @ www.iii-inc.com

26. - Doctrine & Methods - • Strategic Companies • External Relationships • Practice fundamentals • Constant and thorough education of intermediaries and internal operators who refer acquisition opportunities • Be less threatening; convey respect and personal consideration • Adhere to rural / seller sensitivities • Initially request transparency of company flaws / deal killers / compliance issues • Pricing Drivers may not be the highest consideration; instead importance of relationship between future and current operators, and the succession of an engineered transaction • Seller wants his lifelong effort to be meaningful; okay to take off the corporate hat in soft interactions ( i.e., Chairman Emeritus or Senior Company Consultant ) • Prepare and coordinate executive and support group to define the direction, and convey corporate unity to extend an expedient and supportable proposal and Transaction “I am not afraid of an army of lions led by a sheep; I am afraid of an army of sheep led by a lion.” Alexander the Great INDUSTRIAL III, INC. @ www.iii-inc.com

27. - M & A in 2008 - Questions to Consider “Remember upon the conduct of each depends the fate of all.” Alexander the Great INDUSTRIAL III, INC. @ www.iii-inc.com

28. - M & A in 2008 - • What adjustments are necessary to succeed in 2008? • How aggressive will Strategic Companies be? • What impact will the strong Euro, credit crunch, high crude prices have? • Will deal flow increase due to market conditions? • How will Energy prices change in 2008? • Will owners focus on building a better company, or will they liquidate their equity? • How will the U.S. presidential election impact capital gains tax treatment? • What percent of owners have the skill set to sustain high growth without needing operational and financial partners? • How many new Private Equity Firms and Funds join the Acquisition Marketplace? Soldiers! From the tops of these pyramids forty centuries look down on you! Battle of the Pyramids, Napoleon Bonaparte INDUSTRIAL III, INC. @ www.iii-inc.com