23 April, 2004 – Solvay Business School

Discovering Investment Banking

Morgan Stanley Team

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Antoine de Spoelberch

• Executive Director

• Belgian Banking Group

• Coverage and Execution

• 10 years of Banking experience

• Relevant notable transactions include

– Sale of Fafer to Usinor

– Sale of UGB to Hoogovens

– Sale of Meneba to CVC

– Sale of Motorola Telco

– Creation of Diageo (Guinness/GrandMet)

– Creation of Dexia (CCB/CLF partnership)

– Acquisition of Polygram by Seagram

– Belgacom strategic partnership

• Solvay Business School (1993)

Thibault Biebuyck

• Analyst

• Financial Institutions Group

• Coverage and Execution

• 2 years of Banking experience

• Relevant notable transactions include

– Sale of Inmarsat to Apax/Permira

– Sale of Egg (in process)

• Solvay Business School (2002)

• Darden Graduate School of Business Administration

Selected Belgian/Luxembourg Clients

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Kingdom of Belgium

Introduction

3

• Organisational Structure

• Investment Banking Activity

– What is investment banking?

– Overview of main roles

• Transaction Overview

– Types of M&A transactions

– Typical phase of auction process

• Case Study: Inmarsat

Organisational StructureSection 1

Divisional StructureOrganisational Structure

4

Banking Group

Mergers &Acquisitions

CorporateFinance

Foreign Exchange

Commodities InvestmentBanking

FixedIncome (inc. Research)

Equity (inc. Research)

InvestmentManagement

PrivateEquity

PrivateWealthManagement

Securities AssetManagement

Infrastructure

Morgan Stanley

Global CapitalMarkets

Real EstateGroup

SecuritisedProductsGroup

InstitutionalFinance &Operations

InformationTechnology

Overview of Business Divisions (cont’d)Organisational Structure

5

Research (Equity, Fixed Income and Asset Management)

• Industry specialists

• Product specialists

• Designed to support sales and trading

Investment Management & Individual Investor Group

• Manage and administer assets for

– Institutions (IM)

– Wealthy individuals (PWM)

Sales and Trading • Distributes underwritten and agented securities

• Market making for institutional clients

• Proprietary trading

• Instruments include equities, bonds, derivatives, bank loans, FX, etc.

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Chinese Wall Between IBD & Sales and Trading

Organisational Structure

Investment Banking Division (IBD)

Banking

Mergers & Acquisitions

Real Estate

Institutional Equity Division (IED) & Fixed Income Division (FID)

Sales

Trading

Equity & FixedIncome Research

Note: (1) Chinese Wall: Organisational and physical barrier between the investment banking division, the research divisions and the sales and trading divisions to prevent misuse of confidential and sensitive information and to guarantee the independence of the various services provided

Global Capital Markets(GCM)

Joint VenturesIED – GCMFID – GCM

Chinese Wall(1)

Investment Banking ActivitySection 2

What is Investment Banking?Investment Banking Activity

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Suppliers of Capital

•Institutions

–Pension Funds

–Insurance Companies

–Investment Trusts

–Unit Trusts

•Individuals

Morgan Stanley Investment Banking Division

Users of Capital & Advisory Services

•Corporations

•Governments

–Sovereign

–Local

•Financial InstitutionsMoney

Securities

Advisory Services

Investment Banking Division – Europe Investment Banking Activity

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European Banking

Nordic FranceUK/Ireland Russia Middle East

TurkeySouthAfrica

BNS EMGItaly Israel

FinancialSponsors

RetailHealth Care

ConsumerProducts

RealEstate

Technology Financial Institutions

Energy / Utilities Commun-ications

Media GIG Natural Resources

ChemicalsTransport

Spain/Portugal

Germany

Mergers and Acquisitions

Securitised Products

Group

Global Capital Markets

Corporate Finance

Execution

A Global Bank with a Local PresenceInvestment Banking Activity

9Note: (1) Excluding retail offices

• 700 offices in 28 countries• Over 65,850 employees world-wide• Over 5,720 employees in 12 European office(1)

• Individuals from 120 nationalities, speaking 97 languages

Melbourne

SydneyJohannesburg

Mumba

Singapore

TaipeiHong Kong

Tokyo

Osaka

Seoul

Shanghai

Beijing

Mexico

City

Chicago

TorontoMontreal

New YorkBostonSan Francisco

Los AngelesMenlo Park

Denver

Houston

Sao Paulo

Bangkok

Buenos Aires

Moscow

Milan

Luxembourg

London

Madrid

Paris

Geneva

ZurichFrankfurt

Rome

Amsterdam

Stockholm

Overview of Business DivisionsInvestment Banking Activity

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Banking Group (Corporate Finance, M&A)

• Maintain and develop client relationships

• Market full range of investment banking services to clients

• Ongoing strategic discussions and development of new transaction opportunities

• Execute acquisitions, divestitures, mergers, JVs and corporate restructurings

• Capital structure and financing advice and execution (IPO, privatisation, acquisition financing)

• Provide strategic and tactical advice

• Valuation, fairness opinions

Global Capital Markets • Monitor capital market conditions and develop new financing products and raise capital for corporates/institutions

• Intermediate between clients and sales/trading in new issuesand trading

• Market coverage of users of capital

TransactionsSection 3

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The Buyside/Sellside TransactionTransactions

What?

• Acquisition of controlling shareholding

– Private/Public

• Acquisition of assets or of a division

• Minority investments

• Joint ventures

How?

• Full auction process

• Limited auction

• Bilateral discussion

• Hostile

Buyer?

• Strategic buyer

• Financial buyer

Seller?

• Large company

• Family shareholders

• Public shareholders

Illustrative M&A Advisory AssignmentTransactions

ExploringStrategicAlternatives

ValuationandPricing

StructuringAssistance inDue DiligenceReview

Negotiation

CapitalMarketsReactionAssessment

FairnessOpinion

Signing andAnnouncement

• Understand the client company’s objectives

• Identify and screen possible strategic alternatives

• Apply knowledge of mergers/ acquisitions market

• Analyze strategic and financial implications

• Review of market valuations of comparable companies

• Insight into precedent transactions

• Discounted cash flow analyses, including sensitivity studies

• Pro forma analyses

• Judgement, experience and market knowledge

• Conventional structures

• Creative structures

• Financing• Tax issues

• Assisting team in investigation, as appropriate

• Coordination and coaching of various teams (financial, technical, legal, etc.)

• Price, structure, contract

• Coordinate details and tactics

• Balance price with other terms

• Equity markets• Rating agencies

• Communications strategy

• Ongoing advice on closing conditions, regulatory review and potential interlopers

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Typical Phases of an Auction ProcessTransactions

Invitation

• Seller sends out invitations

• Buyers sign Confidentiality Agreement

Phase I

• Seller sends out information memorandum and process letter

• Buyers submit non-binding preliminary bids by deadline

Phase II

• Seller selects [usually 3-6] Phase II bidders

• Due diligence

• Buyers submit final bid and marked-up Sale and Purchase Agreement

Completion

• [Confirmatory due diligence]

• Negotiation of final Sale and Purchase Agreement

• Signing

• Closing

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Typical Buyside TimetableTransactions

Invi

tatio

nP

hase

IP

hase

IIC

ompl

etio

n

Receive Teaser

Receive Offering MemorandumEvaluate Offering MemorandumSubmit Non-binding BidAnnouncement of Phase II BiddersAttend Management Presentation/Data RoomContinue Due Diligence/Revise Offer

Valuation

Structuring

Financing

Legal/Accounting

Submit Final BidAnnouncement of “Winners”

Negotiation of Sales and Purchase Agreement

Confirmatory Due Diligence

Signing

Negotiate Confidentiality Agreement

1 8 15 22 29 5 12 19 26 5 12 19 26 2 9 16 23 30 7 14Week Starting

FebruaryJanuary March April May

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TeaserTransactions

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Confidentiality AgreementsTransactions

Key or Sensitive Clauses in Seller/Potential Buyer Confidentiality Agreements:

• Definition of confidential information

– Includes analyses, compilations, forecasts, studies, etc.

• Buyer will return (or destroy) all information at seller’s request

• Buyer not entitled to rely on accuracy and completeness of information, but solely on the representations and warranties of Sale and Purchase Agreement

• Buyer will not hire (or solicit) any employees from the company or seller for [3] years

• Buyer agrees in advance to grant injunctive relief to seller without proof of damages

• Governing law of agreement

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Confidential Information MemorandumTransactions

Industry Overview

• History • Competitive landscape• Market characteristics and structure• Government regulation (if applicable)• Key trends and statistics

Financial Overview

• Historical financials– 3-5 years– Commentary

• [Management projections]– 3-5 years– Commentary

• Current year budget vs. year-to-date performance

Executive Summary

• Overview of the opportunity• Business description• Key investment considerations• Summary financials• Indemnity and key contacts

Business Description

• Products and brands• Customers• Sales, marketing and distribution• Manufacturing process• Raw materials and suppliers• Research & development• Product pricing policy

• Product brochures• Advertisements• List of shareholders • Management biographies• (Audited) financial statements• Borrowing arrangements (if applicable)• Property and facilities• Country/industry economic outlook• Any other relevant information

Appendices

• Organisation charts• Senior management team

– Responsibilities– Experience

• Employees– By division, location and rank

• Employee benefits• Board of directors (if applicable)

Management & Employees

Typical Information Memorandum Structure

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The Work….Transactions

• Review IM

• Valuation

– Develop assumptions

– Build financial model

• Pro forma analysis

• Bid structure

– Legal/tax issues

• Strategic and operational issues

• Insight on competitive landscape

• Bid letter

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Preliminary Bid LetterTransactions

• Not binding: Subject to…

• Seller’s requirements

• Typical content:

– Price (amount or range, consideration)

– Assumptions

– Financing

– Conditions

– Required approvals and consents

– Scope and extent of due diligence

– Strategic Rationale/Plans for the Business

– Overview of Acquiring Entity

– Advisers and Contact Name

• Approach:

– Tactical pricing

– Fair pricing

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DataroomTransactions

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Site VisitsTransactions

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Management Presentation Transactions

• Executive Summary

• Industry Overview

• Business Description

• Management & Employees

• Financial Overview

• Questions & Answers

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Valuation Transactions

Company ProjectedEarnings and Cash Flow(including Synergies)

Other valuation methodologies (Comps, Prepaids, LBO, Synergies,etc.)

Discounted Cash Flow

Due Diligence input

Value Range

Agreed ValuePro Forma Analysis

Strategic and other qualitative issues

Legal/Tax Aspects

CompetitiveDynamics

Tactical Considerations

Price

Corporate Governance

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Sale and Purchase Agreement Transactions

• Price and price adjustments

– Completion audit

– Price adjustment mechanism

– Deferral/escrow of purchase price

• Warranty provisions

– Seller’s representations and warranties

– Limits on seller’s liability

• Conditions

– What they are

– Responsibility

• Conduct of business pending completion/closing

• Completion/closing obligations

– Transfer of title to shares

– Change of directors/officers

– Repayment of inter-company debts

– Clearance from relevant competition authorities

• Post-completion obligations, e.g.

– Transfer of pension schemes

– Unwinding of other arrangements with related parties

• Confidentiality and public announcements

• Restriction on competition by seller

• Cost and expenses

• Governing law and disputes forum

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Final Bid LetterTransactions

• Key content:

– Price

– Financing:

– source(s) and proposed timing of financing

– attach letters from financial institutions proposing to provide external financing detailing the Buyer’s financial ability, if applicable

– Strategic rationale/plans for business

– Social undertakings

– Indication of timetable and next steps

– List of all proposed amendments to the Sale & Purchase Agreement

– Conditions

– To signing

– additional due diligence

– To closing

– regulatory approval

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The DealTransactions

Case Study: InmarsatSection 4

Activity SectorsCase Study: Inmarsat

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Maritime

• Service launched: 1982

• Commissioned terminals(1): 134,800

• Revenues (2001): US$269 MM

• Established enterprise users including 52% of deep water merchant shipping

• Only provider of GMDSS

Land Aeronautical Leasing & Navigation

• Service launched: 1982

• Commissioned terminals(1 ): 96,500

• Revenues (2001): US$97 MM

• Only provider of mobile broadband service with global footprint

• Service launched: 1990

• Commissioned terminals(1): 7,200

• Revenues (2001): US$12 MM

• Established enterprise users including 50% of long-haul commercial aircraft

• Leasing satellite capacity• Revenues (2001):

US$37 MM• Attractive revenue

opportunity for unused network capacity in second and third generation satellites

• Growing, predictable revenue stream

Note: (1) As of June 2002

Sale of Inmarsat to Apax and PermiraCase Study: Inmarsat

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• Inmarsat Ventures plc changed its IGO status and was privatised on April 15, 1999

• 86 shareholders representing most PTOs worldwide

• Shareholders subject to a 15% shareholding and voting cap

• Some shareholders (e.g. Telenor, FT, Xantic), are its largest customers or LESOs (“Land Earth Station Operators”)

• The commercial relationship between the shareholders is regulated in the “LESO Agreement”

• The company is a provider of global wireless voice and data communications services through its satellite constellation (Inmarsat-2 and Inmarsat-3)

• Strong market position; does not sell directly to end users but to LESOs, and Service Providers

• High operational leverage as demonstrated by the positive impact over the last couple of years of Global Security Revenues (GSR)

• I-4 Satellite launches expected for 2004 and 2005

Illustrative Satellite Cash Flow Life CycleCase Study: Inmarsat

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Illustrative Satellite Cash Flow Life CycleCumulative Cash Flow (€ MM)

(400)

(200)

0

200

400

600

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

ProcurementPeriod Revenue Generating Period

10 Year Contract

Satellite Life(Years)

Launch

Morgan Stanley RoleCase Study: Inmarsat

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• Morgan Stanley acted as exclusive financial advisor to Inmarsat from early 2000

• Originally engaged to do an IPO to comply with US ORBIT Act(1), also aimed at offering liquidity to shareholders

• Assisted in preparations for IPO during 2000-02

• In July 2002, the prevailing state of equity markets and valuation levels led the Board to explore a private equity process alternative

• Morgan Stanley organised a process in which process integrity and competitive tension were paramount considerations

• Established a Steering Group (“SG”) with some of the largest shareholders (representing 52%) to provide forum for shareholder input and convey credibility to buyers

• Protected process integrity by obtaining confidentiality commitments from SG shareholders and standstill and confidentiality commitments from bidders

• Prevented bidder collusion by not allowing teaming up by private equity bidders in their first round bids

• Bidder consortia were only allowed into the second round after testing

• Valuation levels

• Convincing buyers of business caseNote: (1) ORBIT Act was passed in March 2000 and stands for Open-market Reorganisation for the Betterment of International Telecommunications Act, requiring Inmarsat and other satellite companies to conduct and IPO before October 1, 2000 amongst other requirements

Summer InternshipsSection 5

Summer InternshipsSummer Internships

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• Morgan Stanley is offering each year summer internship positions for students in its Investment Banking Division in London. Please apply online from November 2004 onwards on www.morganstanley.com/careers/recruiting

• For any questions regarding this presentation, the internship programme or Morgan Stanley in general, please contact:

– Thibault Biebuyck: +44 20 7425 3775

thibault.biebuyck@morganstanley.com

– Augustin Bataille : +44 20 7425 3202

augustin.bataille@morganstanley.com

– Edouard Janssen: +44 20 7677 9736

edouard.janssen@morganstanley.com

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