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Plop, Plop, Fizz, Fizz, Oh What A Relief It Is! Bill Brady Head of Global Technology Corporate Finance Credit Suisse First Boston Technology Group November 9, 2001 TeleSoft Annual Meeting Agenda Changing Leaders in the Technology Market Taming the Volatile Equity Markets

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slide1

Plop, Plop, Fizz, Fizz, Oh What A Relief It Is!

Bill BradyHead of Global Technology Corporate FinanceCredit Suisse First Boston Technology GroupNovember 9, 2001

TeleSoft Annual Meeting

agenda
Agenda
  • Changing Leaders in the Technology Market
  • Taming the Volatile Equity Markets
  • The New M&A Environment

4. What to Expect in the Future

5. Implications for Liquidity Options

6. CSFB Technology Group - The Clear Leader

slide3
Dramatic Growth in New Companies and Market CapTechnology Companies and Market Cap by Size Now vs. 1990

# Companies

Market Cap ($Bn)

Category

> $1 Bn

$100MM - 1Bn

< $100MM

322

$2,807

# Companies

Market Cap ($Bn)

582

$210

33

$194

118

$38

759

$23

134

$5

2001

1990

$237

1663

All

285

$3,040

16.5% CAGR

24.7% CAGR

Source: Factset based on data from 4/9/90 and 10/31/2001.

the mighty have fallen top 40 us traded technology companies 1 year ago

Technology Group

The Mighty Have Fallen…Top 40 US-Traded Technology Companies 1 year ago

Market Value ($BN)

Market Value ($BN)

10/31/2000

10/31/2001

%Change

10/31/2000

10/31/2001

%Change

%

%

Motorola

* Broadcom

Compaq

TSMC

Phillips

Qualcomm

STMicroelectronics

* Siebel

Applied Materials

Automatic Data Processing

* Network Appliance

* Marconi PLC

* I2 Technologies

NEC

* Yahoo

* Ariba

* Palm

* Ciena

SAP

* Gemstar

TOTAL

Cisco Systems

Microsoft

Intel

Nokia

EMC

Oracle

Sun Microsystems

IBM

Nortel Networks

AOL Time Warner

Ericsson

Hewlett-Packard

Texas Instruments

Lucent Technologies

JDS Uniphase

Dell

Siemens

* Juniper Networks

Veritas

Alcatel

$387.4

366.1

302.9

186.3

216.9

220.4

178.5

174.8

136.6

117.0

110.9

90.6

84.9

78.9

78.3

76.4

75.5

61.9

57.6

57.5

$123.9

313.2

164.3

96.2

27.2

75.4

33.0

187.7

18.6

209.0

34.4

32.6

48.5

22.9

10.5

62.6

43.1

7.1

11.3

16.1

(68.0)

(14.4)

(45.7)

(48.4)

(87.5)

(65.8)

(81.5)

7.4

(86.4)

78.6

(69.0)

(64.0)

(42.9)

(71.0)

(86.6)

(18.1)

(42.9)

(88.5)

(80.4)

(72.0)

$54.5

52.3

51.8

51.3

51.3

48.7

46.0

44.2

43.2

41.2

38.2

35.7

34.0

33.2

32.7

31.3

30.3

30.1

29.9

28.1

$3867.4

$36.2

8.6

14.8

42.3

29.6

37.4

25.0

7.5

27.8

32.2

4.4

1.2

2.0

15.2

6.2

0.8

1.4

5.3

18.2

8.4

$1862.2

(33.6)

(83.6)

(71.4)

(17.5)

(42.3)

(23.2)

(45.7)

(83.0)

(36.6)

(21.8)

(88.5)

(96.6)

(94.1)

(54.2)

(81.0)

(97.4)

(95.4)

(82.4)

(39.1)

(70.1)

(51.8)

* Companies not included in 2001 top 40 list.

this year s leader board top 40 us traded technology companies now
This Year’s Leader BoardTop 40 US-Traded Technology Companies Now

10/31/2001

Market Value

($BN)

10/31/2001

Market Value

($BN)

EMC

* First Data Corp

STMicroelectronics

Lucent Technologies

* UMC

Nortel Networks

SAP

* Computer Associates

Alcatel

NEC

* Maxim Integrated Products

Compaq

* Ebay

* Accenture

* Concord EFS

* Analog Devices

* Micron Technology

* Linear Technology

Veritas

JDS Uniphase

$27.2

25.8

25.0

22.9

18.7

18.6

18.2

17.8

16.1

15.2

15.1

14.8

14.3

14.1

13.7

13.7

13.6

12.4

11.3

10.5

Microsoft

IBM

Intel

AOL Time Warner

Cisco Systems

Nokia

Oracle

Dell

Texas Instruments

Siemens

TSMC

Qualcomm

Motorola

Ericsson

Sun Microsystems

Hewlett-Packard

Automatic Data Processing

Electronic Data Systems

Philips

Applied Materials

$313.2

187.7

164.3

137.8

123.9

96.2

75.4

62.6

48.5

43.1

42.3

37.4

36.2

34.4

33.0

32.6

32.2

30.2

29.6

27.8

*

* Companies not included in 2000 top 40 list.

moore s law of nasdaq ran out of gas in y2k
Moore’s Law of Nasdaq Ran Out of Gas in Y2K

January 1983 - Present

Doubles in 1 year

Doubles in 2 years

Doubles in 4 years

Doubles in 8 years

equity new issue market technology equity equity related offerings 1993 2001

66

240

44

168

57

60

61

100

35

51

366

111

124

410

145

40

30

49

206

221

78

295

96

226

27

145

147

Equity New Issue MarketTechnology Equity & Equity-Related Offerings, 1993-2001

$ Billions

US and Int’l Technology transactions completed.

Source: Securities Data Company as of 10/31/01.

performance of top ipos of 1999 and 2000
Performance of Top IPOs of 1999 and 2000

Top 50 IPOs of 1999

Top 50 IPOs of 2000

continued volatility results in short market windows
Continued Volatility Results in Short Market Windows

# of Negative Pre-Announcements (1)

(1)3 weeks into each quarter

m a market technology mergers acquisitions 1993 2001
M&A MarketTechnology Mergers & Acquisitions, 1993-2001

$ Billions

YTD

# of

Deals

35

65

95

120

164

228

487

833

289

Source: Securities Data Company as of 10/31/2001.

Incl. Domestic and Int’l transactions, pending or completed,

with transaction value >$50MM, excl. share repurchases.

perceptions towards strategic transactions have changed in this difficult market environment

Acquirors willing to accept significant earnings dilution for promise of significant growth opportunity

  • Acquirors typically accept zero to small amount of earnings dilution in exchange for growth prospects
  • Little tolerance for cash burn

Accretion/Dilution

  • Many bidders drove up valuation
  • Public market offered liquidity events for startups, driving up valuation
  • Few acquirors in this market
  • Public market more stringent; therefore, fewer startups obtaining liquidity

Valuation

  • Revenue could be more than one year away
  • Clear path to revenue and profitability
  • Must be at least in customer trial phase of development

Time to revenue

  • Potential for customers
  • Small base, many in trial stage
  • Highly concentrated revenue
  • Quality, well-financed and diversified customer base with recurring revenue stream

Customer base

Perceptions Towards Strategic Transactions Have Changed in This Difficult Market Environment…

THEN: MAY 1999

NOW: OCTOBER 2001

resulting in a challenging near term environment
…Resulting in a Challenging Near-Term Environment

Current Status

  • Consolidation activity has slowed significantly from the torrid pace of early 2000
  • Operating issues have forced many traditional acquirers to focus internally
  • Market volatility has created uncertainty as to “true values” and hesitancy to make commitments
  • Uncertainty over proper valuation levels remains
  • Many sellers focused on last year’s valuations
  • Valuation analysis has returned to traditional earnings and cash flow based methodologies
  • Consolidators no longer playing with “funny-money”

Valuation

  • Public equity markets have become less forgiving of ill conceived or poorly executed transactions
  • Heightened scrutiny of both long term strategic and near term financial implications of any transaction
  • Integration plans must be well thought out and expertly communicated to the market at time of announcement
  • Earnings dilution is a major concern

Public MarketScrutiny

many potential buyers have seen their share prices plummet over the last year
Many Potential Buyers Have Seen Their Share Prices Plummet Over the Last Year

PERCENTAGE CHANGE IN STOCK PRICE SINCE MARCH 1, 2000

Comm. Equipment

eBusiness

Internet Infrastructure

Nortel

Lucent

Alcatel

Cisco

i2

Ariba

C1

Siebel

Inktomi

Akamai

VeriSign

InfoSpace

Semiconductors

Optical

Internet

JDSUniphase

New Focus

Intel

Broadcom

PMC-Sierra

Conexant

Sycamore

Corvis

Amazon

Yahoo!

AOL

eBay

Note: Corvis and New Focus data is from IPO Pricing of $36.00 and $20.00, respectively.

Let’s not forget the companies that have gone bankrupt:

as a result companies have begun to use cash to fund their acquisitions
As a Result, Companies Have Begun to Use Cash ToFund Their Acquisitions
  • With stock prices at record lows, the notion that cash is king is being reinforced
  • In particular, large cap companies with depressed P/Es are using cash as their preferred acquisition currency
  • Sellers prefer liquidity in these uncertain times
  • Interest rates are at unprecedented lows
  • Many companies are taking advantage of the convertible market’s tremendous appetite for technology issues to build “war chests”

SELECTED ACQUIRORS USING CASH AS ACQUISITION CURRENCY

vc returns under pressure cumulative vintage year performance of u s venture capital funds

Pooled IRR average % (09/30/00)

Pooled IRR average % (03/31/01)

Pooled IRR average % (12/31/00)

VC Returns Under PressureCumulative Vintage Year Performance of U.S. Venture Capital Funds

Source: Venture Economics Information Services

market rallies and subsequent downturns
Market Rallies and Subsequent Downturns

8/1/82 -

12/13/84 -

10/28/87 -

10/11/90 -

12/9/94 -

10/8/98 -

MARKET RALLIES

6/22/83

8/21/87

10/9/89

3/18/94

7/20/98

3/10/00

Length

11

33

24

42

44

17

Trough to Peak:

NASDAQ

96%

91%

66%

147%

180%

256%

S&P 500

60%

108%

54%

59%

165%

45%

Range of S&P

11x – 13x

10x – 22x

11x – 15x

14x – 26x

15x – 29x

28x - 34x

(1)

500P/E Multiples

AND SUBSEQUENT

6/22/83 -

8/21/87 -

10/9/89 -

3/18/94 -

7/20/98 -

3/10/00 -

DOWNTURNS

12/13/84

10/28/87

10/11/90

12/9/94

10/8/98

10/31/01

Length

18

2

12

9

3

20

Peak to Trough:

NASDAQ

-27%

-36%

-33%

-11%

-30%

-67%

S&P 500

-5%

-31%

-18%

-5%

-19%

-24%

Range of S&P 500

9x – 13x

15x – 20x

14x – 16x

15x – 20x

24x – 28x

23x – 29x

(1)

P/E Multiples

Net Market Move

Net Market Move

%

CAGR %

%

CAGR %

NASDAQ

95%

8.5%

419%

16.1%

S&P 500

176%

13.2%

259%

12.3%

(1) Trailing P/E multiples.

recessions are followed by market rallies
Recessions Are Followed by Market Rallies
  • There have been 5 recessions in the U.S. since 1969
  • The average recession lasted for 12 months and resulted in a 2% contraction in GDP
  • During recessionary times, the S&P 500 has not demonstrated significant drops, except in ‘73 - ’75 (-23%)
  • Markets begin to recover one quarter before the trough and gain an average of 23% in the following 6 months
  • CSFB Technology Research anticipates that tech sectors should experience a recovery in the next 6 quarters, with a concentration during Q2 - Q3 of 2001

Overviews of Previous Recessions

Expected Timing of

Recovery by Sector

implications
Implications

Don’t Count On:

  • Return to “irrational exuberance” any time soon
  • Indefinite losses will be bankable
  • Me-too, undifferentiated companies will be bankable
  • Valuations on private financings will hold up

Plan To:

  • Focus on business model, sponsorship, uniqueness, barriers
  • Develop alternative financing plans, merger partners
  • Shift business models to accelerate profitability and cash flow
  • Finance ahead of needs when windows present themselves
the bar is set higher for ipos

Revenue Base (in quarter going public)

$2 - 5MM $10MM

Time to Profitability 6 - 8 Quarters 2 - 3 Quarters

Valuation Metrics Revenue Multiples P/E Multiples

The Bar is Set Higher for IPOs

20002001

equity private placement market overview
Equity Private Placement Market Overview
  • Flat to down rounds
  • Months, not weeks to complete
  • Fully-funded business plans only
  • Fewer buyers
  • 3-5x returns to IPO within 1-2 years
current m a environment
Current M&A Environment
  • Strategic rationale for M&A stronger than ever
  • Few deals near-term due to “reality distortion field”
  • Strategic buyers’ currency and confidence reduced
  • Sellers’ value expectations need to adjust
  • Financial buyers’ interest growing
  • Expect strong rebound in M&A as reality sets in
the clear leader in technology investment banking
The Clear Leader in Technology Investment Banking

2000- 2001 Total Technology

Financing and M&A

(Number of Deals)

2000- 2001 Total Technology

Financing and M&A

(Dollars in Billions)

Notes:

Transactions announced 1/1/00 through10/31/01. Includes private placement deals.

(1) JP Morgan deals include deals completed by H&Q.

csfb clear winners do not need recounts
CSFB: Clear Winners Do Not Need Recounts

Reuters’ Survey of Fund Managers*

Ranking

Category

1st Place

2nd Place

Morgan Stanley

DLJ

Goldman Sachs

Morgan Stanley

Morgan Stanley

Morgan Stanley

Quality of new equity issues

Pricing of new equity issues

Quality of research product and service in the aftermarket

Aftermarket performance of equity issues

Equitable allocation of new issue product

Due diligence on new issues

* In a survey dated July 19, 2000, Reuter’s surveyed 75 of the largest institutional managers of active US equity funds. Responses have been weighted by fund size.