acquisition analysis

June 26, 2001

IntelliVen, L.L.C.1750 Tysons Blvd., Fourth Floor / McLean, VA 22102Tel: 703.744.1419 / Fax: 703.744.1001 / www.intelliven.com

Acquisition Analysis

ClientCo Strategic Planning Project

2June 26, 2001

IntelliVen, L.L.C.1750 Tysons Boulevard, Fourth Floor / McLean, VA 22102

Tel: 703.744.1419 / Fax: 703.744.1001 / www.intelliven.com

Today’s Objectives

Acquisition analysis has two parts Valuation Deal structure

We look at valuation today To determine if the acquisition is worth pursuing in financial, as opposed to

strategic, terms

We look at deal structure only to the extent of comparing a fixed payment to an earnout

3June 26, 2001



Executive Summary

The acquisition is expensive at the asking price -- 7.6X projected 12 months earnings

For ClientCo to break even on the deal, the acquisition would have to do better than the seller’s projection (the base case) but not as well as ClientCo expects

Therefore, ClientCo’s confidence that it can substantially beat the base case will determine whether the acquisition is a good buy

The parties’ preference for a fixed payment or an earnout depends on their expectations

4June 26, 2001



ClientCo is considering a potentially attractive acquisition...

$0

$5

$10

$15

$20

$25

$30

$35

$40

2001 2002 2003 2004 2005 2006

Revenues

EBT

Acquisition: Base Case ($MM)

Notes• EBT = earnings before taxes• Revenues and EBT in $K• EBT margin is 20% each year• 2001 data is for half-year starting 7/1/01, when deal would presumably closeSource: ClientCo

5June 26, 2001



…and the owner is willing to accept a multi-year payout of his $28.3 million asking price...

$0

$1

$2

$3

$4

$5

2001 2002 2003 2004 2005 2006

Annual Payout ($MM)

Note: this analysis does not consider the possibility that the seller’s motivation might diminish over this period

6June 26, 2001



…which permits us to discount it, effectively reducing it 17%

$0

$5

$10

$15

$20

$25

$30

Undiscounted Discounted

Asking Price ($MM)

Notes• 8% discount rate used• 2001 not discounted, each year thereafter at full discount rate

7June 26, 2001



However, the purchase price, assuming the base case, is well above market, which is 4-6X EBT

$0

$5

$10

$15

$20

$25

$30

Undiscounted price Discounted price Annual payment

At asking price

At 6X EBT

At 4X EBT

Notes• All values in $K• Price comparison is between discounted price and projected 12 months earnings (undiscounted)• Discounted asking price/projected 12 months earnings = 7.6• Payback at asking price is 5.7 years; at 6X EBT, 4.8 years; at 4X EBT, 3.6 year• Market multiples from middle market investment banks

8June 26, 2001



To assess the acquisition, we had to discount its cash flows….

$0

$5

$10

$15

$20

$25

$30

Undiscounted Discounted

Cash Flow ($MM)

Notes• 15% discount rate used, higher than rate for payouts above due to uncertainty• 2001 not discounted, each year thereafter at full discount rate

9June 26, 2001



…and we looked at a number of scenarios

$0

$20

$40

$60

$80

$100

$120

2001 2002 2003 2004 2005 2006

Hypergrowth

Rapid growth

Medium growth

Breakeven on purchase DCF

Base case

Moderate underperformance

Stagnation

Disaster

Scenarios: Revenues

Notes• EBT margin assumed constant at base case 20%• Rapid growth scenario models ClientCo’s expectations

10June 26, 2001



To break even on the discounted purchase price, 2006 revenues would have to be 139% of the base case ($5.0 MM)

0%

50%

100%

150%

200%

250%

300%

Disaster Stagnation Moderate under. Base case Breakeven onpurchase DCF

Medium growth Rapid growth Hypergrowth

2006revenue/basecase (%)

DCF of EBT/DCFof asking price(%)

ClientCo makes moneyClientCo loses money

11June 26, 2001



An earnout is unlikely to be attractive to the seller...

0%

10%

20%

30%

40%

50%

60%

70%

80%

25% of EBT 50% of EBT 75% of EBT 100% of EBT

DCF of earnout/DCF of askingprice (%)

Note: analysis is similar with a blend of flat fee and earnout

Base Case Earnout Scenarios

12June 26, 2001



0%

50%

100%

150%

200%

250%

0% 50% 100% 150% 200% 250% 300%

Seller indifference

…and unlikely to be attractive to ClientCo when it is attractive to the seller

DCF of Earnings as % of Base Case

% o

f EBT

to S

elle

r

Earnout > DCF of asking price

Notes• Points correspond to scenarios disaster through hypergrowth respectively• Line shows earnout levels at which seller and ClientCo are indifferent to an earnout or a fixed payment

Earnout < DCF of asking price

Example bet

ClientCo Expectations

13June 26, 2001



Conclusions and Recommendations

The acquisition is expensive

Given the asking price, whether the acquisition is worth it depends on whether ClientCo thinks it can substantially beat the seller’s base case

An earnout is likely to be a tough sell

Consider setting a minimum earnings level each year as a condition of payment

14June 26, 2001



Appendix

15June 26, 2001



Scenario revenues to base case (%)

0%

50%

100%

150%

200%

250%

300%

350%

2001 2002 2003 2004 2005 2006

Hypergrowth

Rapid growth

Medium growth

Breakeven on purchase DCF

Base case

Moderate underperformance

Stagnation

Disaster

acquisition analysis

Documents

base case

substantially beat

fixed payment

ebt

price

year

discounted

attractive