copyright © deloitte development llc. all rights reserved. michigan state university topics in...

Copyright © Deloitte Development LLC. All rights reserved.

Michigan State University

Topics in Investment BankingFall 2006

Deloitte & Touche Corporate Finance LLC


Agenda

I. DTCF* at a Glance

II. Complex Carve-Outs

III. Strategic Options

IV. Company Valuation Activity

V. Why Deloitte?

*DTCF (Deloitte & Touche Corporate Finance LLC)


I. DTCF at a Glance


Deloitte Financial Advisory Services

DELOITTE & TOUCHE USA LLPDELOITTE & TOUCHE USA LLP

Deloitte & Touche LLPDeloitte &

Touche LLPDeloitte Tax

LLPDeloitte Tax

LLPDeloitte

Consulting LLPDeloitte

Consulting LLP Deloitte Financial Advisory Services LLP

Deloitte Financial Advisory Services LLP

• Corporate Finance

• Forensic & Dispute Services

• Reorganization Services

• Valuation Services


All investment banking products and services within the United States are provided exclusively by Deloitte & Touche Corporate Finance LLC

SaleDivestiture

• Pre-Sale Due Diligence

• Identify Buyers

• Prepare Confidential Memorandum

• Clear the Market

• Deal Negotiation

• Coordinate Closing

Capital Raising

• Assess Alternative Structure

• Create a Plan

• Identify Appropriate Sources

• Transaction Modeling

• Deal Negotiation

• Coordinate Closing

Merger &Acquisition

• Define Acquisition Goals

• Target Evaluation• Transaction Modeling• Finance Assistance• Deal Negotiation• Coordinate Closing

Corporate Development

Advisory• Buy-side advisory• Strategic Alternatives

Evaluation• Prioritize Shareholder

Objectives• Enhance Corporate

Finance Capabilities• Develop Financial

Models and Analyses

DTCFInvestment Banking Services

Consulting and PostMerger Integration

Services(Deloitte Consulting LLP)

Tax Services(Deloitte Consulting LLP)

Valuation Services(Deloitte Financial

Advisory Services LLP)

M&A/Due DiligenceServices

(Deloitte & Touche LLP)(Deloitte Tax LLP)

All investment banking products and services within the United States are provided exclusively by Deloitte & Touch Corporate Finance LLC

DTCF Service Offerings


Deloitte & Touche Corporate Finance ranked #8 among investment banks (in terms of number of deals closed) for the period January 1 through June 30, 2006.

Leading Global Investment Bank

Adviser RankNo. of Deals

Deal Value ($ M)

KPMG Corporate Finance 1 168 3,449PricewaterhouseCoopers 2 103 3,591Rothschild 3 84 4,260UBS 4 63 4,757Ernst & Young LLP 5 56 1,845Jefferies & Co Inc 6 54 2,938Credit Suisse 7 53 4,836Deloitte & Touche Corporate Finance* 8 51 1,915

Mitsubishi UFJ Financial Group 9 50 391Lazard 10 46 3,080M&A International 11 44 724Citigroup 12 43 2,135JP Morgan 13 41 2,934Morgan Stanley 14 40 2,873Goldman Sachs & Co 15 39 3,126Grant Thornton LLP 16 37 678Houlihan Lokey Howard & Zukin 17 36 1,964Mizuho Financial Group 18 35 1,134Global M&A 19 35 686Deutsche Bank AG 20 34 2,474

Source: Thomson FinancialIncludes all global undisclosed deals and deals under $250 million closed during the first half of 2006.*With respect to global rankings of “Deloitte & Touche Corporate Finance", the Deal Value and No. of deals are based on the aggregate deal value and number of deals undertaken by the international corporate finance practices of the member firms of Deloitte Touche Tohmatsu.


South America*

• Argentina• Chile

Africa*

• South Africa

Asia Pacific*

• Australia• China• India• Indonesia• Japan• Malaysia• New Zealand• Philippines• South Korea• Taiwan• Thailand

• Israel• Italy• Netherlands• Norway• Portugal• Spain• Russia• United Kingdom

• Austria• Belgium• Central Europe• Denmark• France• Finland• Germany• Greece

North America*

• Canada• Mexico• United States

- Chicago- Detroit- Los Angeles- New York

Europe*

South America*

• Argentina• Chile

Africa*

• South Africa

Asia Pacific*

• Australia• China• India• Indonesia• Japan• Malaysia• New Zealand• Philippines• South Korea• Taiwan• Thailand

• Israel• Italy• Netherlands• Norway• Portugal• Spain• Russia• United Kingdom

• Austria• Belgium• Central Europe• Denmark• France• Finland• Germany• Greece

North America*

• Canada• Mexico• United States

- Chicago- Detroit- Los Angeles- New York

Europe*

DTCF and the corporate finance practices of the member firms of Deloitte Touche Tohmatsu (DTT) or their affiliates are able to work together to provide industry-specific experience and execution

capabilities to assist in the completion of M&A advisory assignments around the globe.*

* In all office locations outside the United States listed above, corporate finance services are offered by the DTT member firm of the applicable country or an affiliate thereof. DTCF works closely with these DTT member firms or their affiliates to give clients access to global investment banking coverage. Each of the DTT member firms is a separate and independent legal entity.

Outstanding Global Reach


Plastic & PaperPackaging

Aerospace

Industrial Manufacturing & Distribution

Food & Beverage

ConsumerProducts

Automotive FinancialServices

Healthcare

IndustryGroups

Plastic & PaperPackaging

Aerospace

Industrial Manufacturing & Distribution

Food & Beverage

ConsumerProducts

Automotive FinancialServices

Healthcare

IndustryGroups

Industry Specialization

DTCF serves the middle-market with experienced professionals in eight specialized industry verticals.

9

DTCF Quarterly Updates

• What– Quarterly review of industry specific market

data– Focus on public company trading statistics and

M&A activity

• Who– Internal/External– Client/Non-client– Buyers/Sellers– Referral Sources

• Why– Educate potential clients and referral sources

of D&TCF industry expertise– Provide thought provoking industry insight and

encourage further dialogue with management

10Copyright © Deloitte Development LLC. All rights reserved.

II. Complex Carve-Outs


When executed properly, a carve-out allows the seller to successfully divest specific assets without interrupting the business being retained

Carve-Out Transactions

Potentially complex and disruptive process

Complicated accounting, tax, structural and execution issues

May involve supply agreements between buyer and seller

Impact on remaining business lines can be significant

Unique need for comprehensive planning and execution team

Parent CompanyParent Company

Business Line 1

AA BB CC

Business Line 2

AA BB CC

AA Define business Identify assets Create stand-alone

financials Identify organization/

headcount

Existing Businesses

11 22 33AA

Business unit carve-out

Sale of carved-out business

$

Buyer(Strategic/Financial)

Buyer(Strategic/Financial)

Illustrative Carve-Out Divestiture


M&A Environment

Driven by an overall industry push to right-size, focus on core business and strength in the general M&A market, on an annualized basis, 2006 may be one of the busiest years for carve-out activity in recent history.

2,902 2,897

2,6822,608

2,963

2,799

2,983

3,108

$125$120

$116

$66

$79$83

$127$120

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

3,100

3,200

1999 2000 2001 2002 2003 2004 2005 2006

$-

$20

$40

$60

$80

$100

$120

$140

Volume (annualized) Avg. Deal Value ($mm)

# of Deals Avg. Value ($mm)

U.S. Divestiture Activity(Deals Announced Between 1999-2006YTD)

Source: Thompson


DTCF Approach to Carve-Out Transactions

Through years of experience, DTCF has developed a unique approach to dealing with typical issues faced in carve-out scenarios.

Issue Transaction Impact DTCF Approach

Transfer vs. market pricing

In carve-outs of cost centers, transfer pricing is typically not representative of market pricing. This can result in an understatement of revenue, thus lowering profitability and overall business value.

DTCF helps clients evaluate pricing vs. the market to establish fair pricing thus helping to maximize purchase price.

Corporate overhead allocations

Corporate overhead is often allocated on a simplified basis which can result in the over/understatement of stand-alone cost. This can cause problems in negotiating purchase agreements that can slow down the sale process.

From past experience DTCF knows the typical problems encountered with overhead allocation and what related costs need to be considered in developing stand-alone financials. We can help in evaluating presentation options.

Unaudited financial statements

At the division or facility level, unaudited financial statements can cause buyers to question the validity of data. This can slow down the deal process and negatively impact purchase price.

DTCF can assemble a cross-functional deal team that includes professionals from Due Diligence, Tax, Accounting or other areas of specialization. The Deloitte name enhances credibility.

Separate financial statements, discontinued ops, FAS 144 impairment, transfer of business/ assets between units

Multi-facility carve-outs may not have rolled-up financial statements or may have inter-company accounts that need to be eliminated. Without a true stand-alone financial statement, buyers will have a hard time getting comfortable with the financials and related cash flows. It is often necessary to move products or business lines in order to create the carve-out business. If inaccurately accounted for, the resulting sales, contribution margin and asset balances will distort transaction value.

Based on past experience, D&TCF can help establish a stand-alone financial statement that accurately portrays the business for sale with detailed support that will “stand up” to buyer due diligence. D&TCF can also help the seller understand and evaluate the impact of a transaction to the remaining business (eg. accounting treatment, gain/ loss from sale).

Typical Financial/Accounting Issues to Consider:


DTCF Approach to Carve-Out Transactions (Cont’d)

Issue Transaction Impact DTCF Approach

Overload in the M&A department, lack of support from divisional level management

Business development departments often find themselves being pulled in too many directions through the course of a transaction due to many factors including: buy-side opportunities, larger sell-side transactions, hostile take over attempts, etc. Similarly, division management is often pulled in multiple directions and faced with prioritization of the transaction vs. their “day jobs”.

DTCF looks to assist your team, not replace it. When things get hectic, you can count on our professionals to manage resources, maintain focus and keep the deal moving forward.

Foreign facility locations

Carve-out facilities located in different countries can lead to transaction issues due to: lack of sophisticated accounting systems, differences in accounting principles, language barriers and customs.

No matter what country a facility is located in, DTCF can access professionals in the country of origin adding a “local” point of expertise to all aspects of the transaction.

Labor/union considerations

Carve-out divestitures may require creative staffing alternatives (buy outs, early retirement, jobs banking etc.) in order to maximize the overall transaction value. In addition, unionized facilities often require the support of the union in order to move forward with a transaction.

DTCF works to develop transaction structures that result in a “win-win-win”. We have significant experience evaluating various labor scenarios related to divestitures and can assist in developing a creative solution that maximizes value to the client. DTCF also has experience creating business cases that can be presented to union leaders.

Ancillary transaction agreements

The most valuable aspect of a carve-out transaction is sometimes represented in ancillary transaction agreements, such as a supply agreement between the buyer and seller. Knowing how to structure and value these types of agreements is key, not only in negotiating a successful transaction, but also in facilitating success of the seller’s remaining business going forward.

From past transactions, DTCF has developed a wealth of knowledge in structuring and evaluating ancillary transaction agreements. Our deep knowledge, combined with our extensive experience in negotiating agreements can maximize value in this often overlooked aspect of the carve-out process.

Typical Operating/Business Issues to Consider:


Select Carve-Out Experience

The undersigned acted as exclusive financial advisor to ThyssenKrupp Budd Company


ThyssenKrupp Stahl Companya wholly owned subsidiary of

ThyssenKrupp Budd Companyhas been acquired by

Speyside Equity LLC

Client: ThyssenKrupp Budd Company

Value: Not disclosed

Sector: Industrial Manufacturing / Metals

Transaction: Sell-side divestiture

The Deal: DTCF is pleased to announce its role as the exclusive financial advisor to ThyssenKrupp Budd Company (“TK Budd”) regarding the sale of its wholly owned subsidiary, ThyssenKrupp Stahl Company (“Stahl”), to Speyside Equity LLC (“Speyside”). The stock sale transaction encompasses all of Stahl’s aluminum casting foundries which are located in Kingsville and Warrensburg, Missouri. This transaction is another example of D&TCF’s role as financial advisor to a large corporate entity involved in a carve-out divestiture of non-core assets. Furthermore, the sale highlights DTCF’s experience in the industrial manufacturing segment.


III. Strategic Options


Strategic Options Overview

Strategic Options Analysis(1)

(1) Note: Certain strategic alternatives above can and often are done in conjunction with one another in order to achieve specific Company objectives.

Understand Company

Needs

Maintain Capital

Structure

Saleof

Company

Review Strategic

Alternatives

Recap

StrategicBuyer

FinancialBuyer

Pvt. EquityPartner

Sr./Jr.Debt

StrategicAlliances

StrategicAcquisition


Strategic Options Process OverviewThree Phases of a Strategic Options Engagement

• Develop and analyze current operating and financial performance of the stand-alone Business

• Provide assessment of stand-alone aspects such as strength of management team, IT systems, human resource and other platform considerations

• Prepare carve-out “stand-alone” financials considering intercompany sales, external sales, allocation of expenses not “pushed down” (i.e., SGA, benefits, corporate overhead, etc.)

• Evaluate the long-term forecasting and projections of the Business in light of industry dynamics

Phase I

• Develop understanding of the products, distribution channels, competitors, customers and current issues impacting the Business

• Assist the Company in analyzing the external marketplace and identifying industry dynamics that will impact growth

• Assist the Company in analyzing the industry to understand valuation multiples, value drivers, industry trends, recent transactions

• Provide value analysis guidance as to current valuation range for the Business and risks to value

• Evaluate and discuss how the findings in Phase 1 impact the Company’s overall strategic business plan

• Analyze and develop a plan to improve operating and financial performance based on findings in Phase 1

• Analyze the potential sale of the Business, identifying key transaction drivers, value implications and the potential impact of a transaction on the Company

• Analyze potential acquisition opportunities for the Business, identifying the financial and strategic impact such an acquisition might have on the Company

• Analyze and identify other companies in the marketplace with which a potential joint venture, partnership or other strategic cooperative arrangement may provide additional strategic benefit to the Business

Strategic Alternatives Evaluation

Phase II

• Meet with the Company to discuss the strategic alternatives analyzed

• Assist the Company in determining the best possible alternative for the Business

• Assist the Company in proceeding with a specific alternative

Implementation

Phase III

Internal & External Operations Assessment


Sample Public Company Valuation Metrics

Sample Deliverables

($ in millions) LTM Operating Results LTM Margin Analysis Equity Enterprise EV as a Multiple of LTM:

Company Name Revenue EBITDA EBIT Gross EBITDA EBIT Value Value Revenue EBITDA EBIT

United StatesCompany A $4,027 $701 $524 29.0% 17.4% 13.0% $4,632 $6,258 1.55x 8.9x 11.9xCompany B $3,307 $458 $309 19.6% 13.8% 9.3% $2,921 $3,633 1.10x 7.9x 11.8xCompany C $2,399 $302 $91 13.3% 12.6% 3.8% $447 $2,478 1.03x 8.2x 27.2xCompany D $1,059 $130 $71 16.8% 12.3% 6.7% $336 $750 0.71x 5.8x 10.5xCompany E $948 $56 $9 9.2% 5.9% 1.0% $41 $433 0.46x 7.7x 47.7xCompany F $902 $79 $48 17.6% 8.7% 5.4% $212 $415 0.46x 5.3x 8.6xCompany G $400 $39 $27 15.4% 9.6% 6.8% $60 $267 0.67x 6.9x 9.9xCompany H $89 $13 $8 34.6% 14.3% 9.1% $64 $78 0.88x 6.1x 9.7xCompany I $84 $9 $5 20.6% 10.6% 6.6% $36 $42 0.51x 4.8x 7.7xCompany J $31 $1 ($1) 16.6% 2.0% (2.7%) $6 $18 0.57x NM NMCompany K $5 ($2) ($2) 18.0% (33.0%) (40.8%) $51 $39 7.37x NM NM

High 34.6% 17.4% 13.0% High 7.37x 8.9x 47.7xMean 19.2% 6.8% 1.6% Mean 1.39x 6.8x 16.1xMedian 17.6% 10.6% 6.6% Median 0.71x 6.9x 10.5xLow 9.2% (33.0%) (40.8%) Low 0.46x 4.8x 7.7x

I nternationalCompany L $1,425 $174 $111 20.0% 12.2% 7.8% $803 $1,054 0.74x 6.1x 9.5xCompany M $1,039 $122 $61 18.0% 11.7% 5.9% $471 $676 0.65x 5.5x 11.1xCompany N $760 $81 $51 20.6% 10.7% 6.8% $348 $659 0.87x 8.1x 12.9xCompany O $429 $74 $42 27.8% 17.3% 9.9% $292 $495 1.15x 6.7x 11.7xCompany P $71 $7 $4 19.4% 9.7% 5.1% $25 $24 0.33x 3.4x 6.5xCompany Q $43 $3 $2 30.7% 7.4% 5.3% $20 $17 0.39x 5.3x 7.4xCompany R $40 $6 $5 22.2% 16.0% 11.8% $28 $33 0.81x 5.1x 6.9xCompany S $28 $2 $1 10.4% 8.5% 2.4% $9 $15 0.52x 6.1x 21.3x

High 30.7% 17.3% 11.8% High 1.15x 8.1x 21.3xMean 21.2% 11.7% 6.9% Mean 0.68x 5.8x 10.9xMedian 20.3% 11.2% 6.3% Median 0.70x 5.8x 10.3xLow 10.4% 7.4% 2.4% Low 0.33x 3.4x 6.5x


Sample Precedent Transaction Valuation Metrics

Sample Deliverables

Trans

Date Target Buyer Seller Value ($mm) Rev. ($mm) TEV/ Rev TEV/ EBITDA TEV/ EBIT

12/20/2005 Target 1 Buyer 1 Seller 1 975.00 630.00 0.14x 0.92x 1.35x07/10/2003 Target 2 Buyer 2 Seller 2 26.33 308.60 0.14x 0.92x 1.35x05/29/2003 Target 3 Buyer 3 Seller 3 5.00 456.70 0.26x 6.37x 9.86x04/02/2003 Target 4 Buyer 4 Seller 4 113.81 366.70 0.19x 4.60x 7.70x11/12/2002 Target 5 Buyer 5 Seller 5 134.25 85.70 0.67x 5.68x 7.70x09/06/2002 Target 6 Buyer 6 Seller 6 21.69 100.00 0.44x 4.10x 8.07x08/29/2002 Target 7 Buyer 7 Seller 7 245.60 99.90 0.67x 4.95x 13.15x06/17/2002 Target 8 Buyer 8 Seller 8 305.60 98.50 0.81x 5.39x 8.33x05/24/2002 Target 9 Buyer 9 Seller 9 313.00 79.90 0.29x 3.22x 7.01x03/28/2002 Target 10 Buyer 10 Seller 10 164.47 102.60 0.79x 4.30x 4.51x05/25/2001 Target 11 Buyer 11 Seller 11 54.30 325.40 0.37x 3.01x 4.10x01/22/2001 Target 12 Buyer 12 Seller 12 285.86 246.70 1.00x 6.20x 10.35x12/21/2000 Target 13 Buyer 13 Seller 13 245.60 129.80 0.95x 4.30x 5.68x04/24/2000 Target 14 Buyer 14 Seller 14 19.50 345.60 1.11x 4.14x 4.48x04/14/2000 Target 15 Buyer 15 Seller 15 168.08 78.90 0.87x 6.20x 7.91x01/25/1999 Target 16 Buyer 16 Seller 16 457.55 76.70 0.52x 4.07x 7.85x11/17/1998 Target 17 Buyer 17 Seller 17 7.30 56.60 0.13x 2.46x 3.67x03/02/1998 Target 18 Buyer 18 Seller 18 118.42 200.50 0.46x 5.35x 20.01x01/15/1998 Target 19 Buyer 19 Seller 19 334.21 123.40 0.54x 5.34x 8.70x07/02/1997 Target 20 Buyer 20 Seller 20 26.68 234.60 0.71x 5.56x 6.77x

High 1.11x 6.37x 20.01x

Mean 0.55x 4.35x 7.43x

Median 0.53x 4.45x 7.70x

Low 0.13x 0.92x 1.35x


Sample Discounted Cash Flow Analysis

Sample Deliverables

Historical Projected CAGR AnalysisI n (000's) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sales $31,915.1 $32,457.7 $34,639.6 $36,840.2 $39,027.6 $41,161.1 $44,454.0 $47,565.8 $50,419.7 $52,940.7 $55,058.3

EBITDA 7,390.8 8,608.7 9,885.6 11,364.1 13,077.2 15,062.8 16,267.8 17,406.6 18,451.0 19,373.5 20,148.4Less: Depreciation (1,138.5) (1,123.6) (1,290.6) (1,484.6) (1,705.5) (1,953.5) (1,960.0) (2,441.3) (2,677.5) (2,913.8) (3,150.0)Less: Amortization 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0EBIT 6,252.3 7,485.0 8,595.0 9,879.6 11,371.6 13,109.3 14,307.8 14,965.3 15,773.5 16,459.8 16,998.4Less: Taxes @ 34.0% (2,125.8) (2,544.9) (2,922.3) (3,359.0) (3,866.4) (4,457.2) (4,864.7) (5,088.2) (5,363.0) (5,596.3) (5,779.5)Tax-effected EBIT 4,126.5 4,940.1 5,672.7 6,520.5 7,505.3 8,652.1 9,443.2 9,877.1 10,410.5 10,863.4 11,219.0

Plus: Depreciation 1,138.5 1,123.6 1,290.6 1,484.6 1,705.5 1,953.5 1,960.0 2,441.3 2,677.5 2,913.8 3,150.0Plus: Amortization 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Plus: Changes in Deferred Taxes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Less: Capital Expenditures (1,859.5) (2,340.0) (2,610.0) (2,880.0) (3,150.0) (3,420.0) (3,150.0) (3,150.0) (3,150.0) (3,150.0) (3,150.0)Less: Changes in Working Capital 281.6 36.1 44.7 52.3 61.0 71.2 (90.0) (90.0) (90.0) (90.0) (90.0)Less: Changes in Other I tems 436.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Unlevered Free Cash Flow $4,123.3 $3,759.9 $4,398.0 $5,177.3 $6,121.8 $7,256.8 $8,163.2 $9,078.4 $9,848.0 $10,537.2 $11,129.0Unlevered Free Cash Flow Growth Rate (8.8%) 17.0% 17.7% 18.2% 18.5% 12.5% 11.2% 8.5% 7.0% 5.6%

Discounted PV of Terminal Value as a Cash Flows Multiple of 2015 EBI TDA Enterprise Value

Discount Rate (2006 - 2015) 6.0x 6.5x 7.0x 6.0x 6.5x 7.0x

12.0% $38,159.3 $38,923.6 $42,167.2 $45,410.8 $77,082.8 $80,326.5 $83,570.112.5% 37,225.1 37,227.8 40,330.1 43,432.5 74,452.9 77,555.3 80,657.613.0% 36,323.4 35,613.0 38,580.7 41,548.5 71,936.4 74,904.2 77,871.913.5% 35,452.8 34,074.9 36,914.4 39,754.0 69,527.7 72,367.3 75,206.814.0% 34,612.0 32,609.5 35,327.0 38,044.4 67,221.5 69,939.0 72,656.5

Net Debt Total Equity ValueDiscount Rate 12/ 31/ 2005 6.0x 6.5x 7.0x

12.0% ($409.9) $77,492.7 $80,736.4 $83,980.012.5% (409.9) 74,862.8 77,965.2 81,067.513.0% (409.9) 72,346.3 75,314.1 78,281.813.5% (409.9) 69,937.6 72,777.2 75,616.714.0% (409.9) 67,631.4 70,348.9 73,066.4

22Copyright © 2006 Deloitte Development LLC. All rights reserved.

IV. Company Valuation Activity


The Case

ABC Molecular Imaging is seeking an Investment Bank to advise them on the sale of their company. ABC has invited you, XYZ Corporate Finance, to join the competitive financial advisor selection process. As analysts you have been assigned to assemble a key component of the pitch book that will be presented to the Board of Directors, you need to determine a value at which you believe their company can be sold for.

ABC is expecting to see strong supporting analysis of how you arrived at the value. You must also bear in mind that you are competing against other top investment banks, all with the goal of providing the highest value supported by the strongest analysis. In addition, you are always aware of the in-depth review process that takes place when you lose a deal, there is a lot of pressure to win this deal.

Using the attached information which includes a company snapshot, public comps, comparable transactions, and a DCF analysis, you need to determine the value to be used in the pitch book.

ABC Molecular Imaging, Inc. manufactures and distributes Positron Emission Tomography (PET) imaging solutions. Its products include PET and CT scanners that assist in the detection and treatment of cancer, neurological disorders, and cardiac diseases. The company also develops and licenses medical image analysis applications, which provide tools for creation, display, and analysis of molecular images. Additionally, it hosts an online portal to facilitate information dissemination among physicians, radiopharmacies, patients, and PET providers. The company offers site planning, installation, preventive maintenance and repair, and technical support services. It caters to hospitals, universities, and research institutions, imaging centers, and cancer treatment centers.

Company Snapshot


Value based on comparisons with “similar” acquisition transactions

Comparable acquisitions similar in business, industry, and financial structure

Value includes control premium

Valuation benchmarks include multiples of:

- Revenue- EBITDA

Comparable Company Analysis

Comparable Transaction Analysis

Discounted Cash Flow Analysis

Leveraged Buyout Analysis

Value based on comparisons with “similar” publicly traded companies

Comparable publicly traded companies similar in business, financial structure, growth prospects, financial performance, and size

Valuation benchmarks include multiples of:

- Revenue- EBITDA

Value based on the present value of future free cash flows

Free cash flow is defined as unlevered net income plus non-cash adjustments, less changes in working capital and capital expenditures

Discount rate as determined by the weighted average cost of capital and financial risk

Value based on potential purchase price in a leveraged buyout transaction

Value constrained by credit markets, debt capacity, and equity investor return expectation

Valuation Methodologies

Valuation Analysis


Comparable Public Companies

VMSI

AverageMedian

16.5x15.6x

16.9x

13.4x14.8x

1.51x1.44x1.56x

1.43x1.68x

.0X

3.0X

6.0X

9.0X

12.0X

15.0X

18.0X

2002 2003 2004 2005 LTM - 6/12/2006

.0X

.5X

1.0X

1.5X

2.0X

2.5X

3.0X

3.5X

4.0X

EV/EBITDA EV/Sales

SOURCE: Capital IQ

EV

/EB

ITD

A

EV

/Sales

Valuation Summary Valuation Summary

Financial Performance

Ticker Company NameShare Price

Market Cap ($M)

Net Debt* ($M)

Enterprise Value ($M)

EV/ Sales

EV/ EBITDA

TMO Thermo Electron Corp. 35.59$ 5,826$ 250$ 6,076$ 2.20X 13.53X

BEC Beckman Coulter Inc. 54.03 3,411 687 4,097 1.68X 9.75X

WST West Pharmaceutical Services Inc. 33.90 1,095 240 1,335 1.73X 10.07X

VARI Varian Inc. 42.38 1,309 (88) 1,222 1.55X 11.91X

IDXX IDEXX Laboratories Inc. 77.31 2,440 (93) 2,347 3.59X 16.35X

CNMD CONMED Corp. 18.75 527 296 823 1.33X 8.31X

HGR Hanger Orthopedic Group Inc. 7.74 170 449 618 1.06X 8.22X

VAS Viasys Healthcare Inc. 24.73 801 (0) 800 1.47X 10.93X

IMA Inverness Medical Innovations Inc. 30.00 962 225 1,187 2.59X 32.20X

VMSI Ventana Medical Systems Inc. 44.35 1,616 (42) 1,575 7.56X 26.50X

Min 1.06X 8.22X

Median 1.68X 11.42X

Max 3.59X 32.20X

LTM

Ticker Company Name Sales ($M)EBITDA

($M)EBITDA Margin EBIT ($M)

EBIT Margin NI ($M) Margin

Debt/ EBITDA

Debt/ Equity ROA

TMO Thermo Electron Corp. 2,758$ 449$ 16.3% 306$ 11.1% 196$ 7.1% 1.25 0.20 4.9%BEC Beckman Coulter Inc. 2,444 420 17.2% 275 11.3% 151 6.2% 1.77 0.62 5.9%WST West Pharmaceutical Services Inc. 773 133 17.1% 82 10.6% 47 6.0% 2.05 0.75 6.9%VARI Varian Inc. 790 103 13.0% 78 9.9% 46 5.8% 0.28 0.06 5.6%IDXX IDEXX Laboratories Inc. 654 143 21.9% 118 18.1% 79 12.1% - - 15.3%CNMD CONMED Corp. 620 99 16.0% 68 11.0% 26 4.1% 3.04 0.66 4.8%HGR Hanger Orthopedic Group Inc. 586 75 12.8% 61 10.4% 11 1.9% 5.20 1.71 5.4%VAS Viasys Healthcare Inc. 543 73 13.5% 49 9.1% (9) -1.7% 0.23 0.04 5.1%IMA Inverness Medical Innovations Inc. 458 37 8.1% 8 1.7% (14) -3.1% 7.02 0.51 0.6%VMSI Ventana Medical Systems Inc. 208 59 28.5% 44 21.2% 26 12.4% 0.03 0.01 14.1%Average 16.3% 11.8% 6.2% 1.94 0.57 7.0%Median 16.3% 11.0% 6.0% 1.77 0.62 5.6%

Source: Capital IQ


Precedent Transactions

($ in millions) Enterprise TargetDate Target Industry Acquiror Value ($M) Rev ($M) Revenue EBITDA

8/14/2006 Tripath Imaging Inc Healthcare Becton Dickinson & Co $345 $94 3.7x 28.2x6/30/2006 Encore Medical Corp Healthcare Blackstone Capital Partners $791 $306 2.6x 14.7x5/11/2006 Edwards Lifesciences Corp Healthcare Edwards Lifesciences Corp $2,688 $1,006 2.7x 11.5x4/27/2006 Diagnostic Products Corp Healthcare Siemens Medical Solutions $1,665 $498 3.3x 11.9x

11/22/2005 Becton Dickinson & Co Healthcare Becton Dickinson & Co $14,869 $5,415 2.7x 10.4x8/18/2005 CyberGuard Corp High Technology Secure Computing Corp $275 $66 4.2x 43.1x8/8/2005 LabOne Inc Healthcare Quest Diagnostics Inc $899 $480 1.9x 13.7x

3/15/2005 Medicore Inc Healthcare/Services Dialysis Corp of America $143 $41 3.5x 45.7x1/4/2005 Education Lending Group Inc Financials CIT Group Inc $4,475 $127 35.2x 4124.2x

12/5/2004 Sola International Inc Healthcare Investor Group $1,083 $669 1.6x 9.6x10/26/2004 Boston Scientific Corp Healthcare Boston Scientific Corp $30,093 $4,963 6.1x 17.9x9/22/2004 Endocardial Solutions Inc Healthcare/Services St Jude Medical Inc $272 $42 6.4x 270.9x5/19/2004 ALARIS Medical Systems Inc Healthcare/Other Cardinal Health Inc $2,050 $547 3.7x 16.1x4/15/2004 Cole National Corp Healthcare Moulin Intl Hldgs Ltd $684 $1,202 .6x 9.4x1/27/2004 Becton Dickinson & Co Healthcare Becton Dickinson & Co $11,935 $4,676 2.6x 10.x4/23/2003 Apogent Technologies Inc Healthcare Apogent Technologies Inc $2,537 $1,106 2.2x 7.8x4/7/2003 Bruker AXS Inc Healthcare Bruker Daltonics Inc $67 $109 .6x 6.3x

12/9/2002 AmeriPath Inc Healthcare Amy Acquisition Corp $751 $466 1.6x 6.7x11/8/2002 Dianon Systems Inc Healthcare Laboratory Corp of America $541 $182 3.x 13.5x

10/21/2002 Meridian Medical Technologies Healthcare King Pharmaceuticals Inc $235 $82 2.8x 10.3x6/14/2002 Syncor International Corp Healthcare Cardinal Health Inc $779 $767 1.1x 9.5x

Enterprise Value as Multiple of:

Source: Thomson


DCF Analysis

ABC Company

($ in M) 2006A 2007E 2008E 2009E 2010E 2011E 2012ESales 419.0$ 455.0$ 498.0$ 520.0$ 575.0$ 665.0$ 717.0$

Terminal2006A 2007E 2008E 2009E 2010E 2011E 2012E Value

NWC 41.9$ 45.5$ 49.8$ 52.0$ 57.5$ 66.5$ 71.7$

EBIT 65.9 136.5 149.4 156.0 172.5 199.5 215.1 Less: Taxes (50.3) (54.6) (59.8) (62.4) (69.0) (79.8) (86.0) Add: Depreciation 14.7 22.8 24.9 26.0 28.8 33.3 35.9 Less: Change in NWC (3.6) (4.3) (2.2) (5.5) (9.0) (5.2) Less: Capital Expenditures (22.8) (24.9) (26.0) (28.8) (33.3) (35.9)

FCF 78.3$ 85.3$ 91.4$ 98.0$ 110.7$ 123.9$ Years Out 0.50 1.50 2.50 3.50 4.50 5.50

Discount FactorPresent Value

Present value of 2006-2012 Cashflows: Company WACC 14.4% Growth Rate 5.0%

Present Value of Terminal Value: Industry WACC 11.8%

Total Enterprise Value of ABC: Moody's WACC 12.9%


Range of Value Summary

Sales:

EBITDA:

Range of Value Summary Range of Value SummaryComparable Companies Comparable TransactionsSales EBITDA Sales EBITDA Sales EBITDA

Multiple

Implied Enterprise Value

Target Enterprise Value:

Implied Sales Multiple:

Implied EBITDA Multiple:

Discounted Cash Flow


Answer Key

($ in M) 2006A 2007E 2008E 2009E 2010E 2011E 2012ESales 419.0$ 455.0$ 498.0$ 520.0$ 575.0$ 665.0$ 717.0$

Terminal2006A 2007E 2008E 2009E 2010E 2011E 2012E Value

NWC 41.9$ 45.5$ 49.8$ 52.0$ 57.5$ 66.5$ 71.7$

EBIT 65.9 136.5 149.4 156.0 172.5 199.5 215.1 Less: Taxes (50.3) (54.6) (59.8) (62.4) (69.0) (79.8) (86.0) Add: Depreciation 14.7 22.8 24.9 26.0 28.8 33.3 35.9 Less: Change in NWC (3.6) (4.3) (2.2) (5.5) (9.0) (5.2) Less: Capital Expenditures (22.8) (24.9) (26.0) (28.8) (33.3) (35.9)

FCF 78.3$ 85.3$ 91.4$ 98.0$ 110.7$ 123.9$ 1,383.5$ Years Out 0.50 1.50 2.50 3.50 4.50 5.50 5.50

Discount Factor 0.93 0.82 0.71 0.62 0.55 0.48 0.48Present Value $73.2 $69.7 $65.3 $61.2 $60.4 $59.1 $660.2

Present value of 2004-2009 Cashflows: $388.97 Company WACC 14.4% Growth Rate 5.0%

Present Value of Terminal Value: $660.16 Industry WACC 11.8%

Total Enterprise Value of XYZ: $1,049.13 Moody's WACC 12.9%


($ in millions) Enterprise TargetDate Target Industry Acquiror Value ($M) Rev ($M) Revenue EBITDA

8/14/2006 Tripath Imaging Inc Healthcare Becton Dickinson & Co $345 $94 3.7x 28.2x6/30/2006 Encore Medical Corp Healthcare Blackstone Capital Partners

V$791 $306 2.6x 14.7x

5/11/2006 Edwards Lifesciences Corp Healthcare Edwards Lifesciences Corp $2,688 $1,006 2.7x 11.5x4/27/2006 Diagnostic Products Corp Healthcare Siemens Medical Solutions $1,665 $498 3.3x 11.9x

11/22/2005 Becton Dickinson & Co Healthcare Becton Dickinson & Co $14,869 $5,415 2.7x 10.4x8/18/2005 CyberGuard Corp High Technology Secure Computing Corp $275 $66 4.2x 43.1x8/8/2005 LabOne Inc Healthcare Quest Diagnostics Inc $899 $480 1.9x 13.7x

3/15/2005 Medicore Inc Healthcare/Services Dialysis Corp of America $143 $41 3.5x 45.7x1/4/2005 Education Lending Group Inc Financials CIT Group Inc $4,475 $127 35.2x 4124.2x

12/5/2004 Sola International Inc Healthcare Investor Group $1,083 $669 1.6x 9.6x10/26/2004 Boston Scientific Corp Healthcare Boston Scientific Corp $30,093 $4,963 6.1x 17.9x9/22/2004 Endocardial Solutions Inc Healthcare/Services St Jude Medical Inc $272 $42 6.4x 270.9x5/19/2004 ALARIS Medical Systems Inc Healthcare/Other Cardinal Health Inc $2,050 $547 3.7x 16.1x4/15/2004 Cole National Corp Healthcare Moulin Intl Hldgs Ltd $684 $1,202 .6x 9.4x1/27/2004 Becton Dickinson & Co Healthcare Becton Dickinson & Co $11,935 $4,676 2.6x 10.x4/23/2003 Apogent Technologies Inc Healthcare Apogent Technologies Inc $2,537 $1,106 2.2x 7.8x4/7/2003 Bruker AXS Inc Healthcare Bruker Daltonics Inc $67 $109 .6x 6.3x

12/9/2002 AmeriPath Inc Healthcare Amy Acquisition Corp $751 $466 1.6x 6.7x11/8/2002 Dianon Systems Inc Healthcare Laboratory Corp of America $541 $182 3.x 13.5x

10/21/2002 Meridian Medical Technologies Healthcare King Pharmaceuticals Inc $235 $82 2.8x 10.3x6/14/2002 Syncor International Corp Healthcare Cardinal Health Inc $779 $767 1.1x 9.5x

Average 2x 12x

Enterprise Value as Multiple of:

Answer Key


Ticker Company NameShare Price

Market Cap ($M)

Net Debt* ($M)

Enterprise Value ($M)

EV/ Sales

EV/ EBITDA

TMO Thermo Electron Corp. 35.59$ 5,826$ 250$ 6,076$ 2.20X 13.53X

BEC Beckman Coulter Inc. 54.03 3,411 687 4,097 1.68X 9.75X

WST West Pharmaceutical Services Inc. 33.90 1,095 240 1,335 1.73X 10.07X

VARI Varian Inc. 42.38 1,309 (88) 1,222 1.55X 11.91X

IDXX IDEXX Laboratories Inc. 77.31 2,440 (93) 2,347 3.59X 16.35X

CNMD CONMED Corp. 18.75 527 296 823 1.33X 8.31X

HGR Hanger Orthopedic Group Inc. 7.74 170 449 618 1.06X 8.22X

VAS Viasys Healthcare Inc. 24.73 801 (0) 800 1.47X 10.93X

IMA Inverness Medical Innovations Inc. 30.00 962 225 1,187 2.59X 32.20X

VMSI Ventana Medical Systems Inc. 44.35 1,616 (42) 1,575 7.56X 26.50X

Min 1.06X 8.22X

Median 1.68X 11.42X

Max 3.59X 32.20XAverage 2.48X 14.78X

Answer Key


Answer Key

Sales: $419

EBITDA: $81

Range of Value SummaryComparable Companies Comparable TransactionsSales EBITDA Sales EBITDA Sales EBITDA

Multiple 2.5x 14.8x 2.0x 12.0x 2.5x 13.0x

Implied Enterprise Value

$1,039 $1,191 $838 $967

Target Enterprise Value: $1,017

Implied Sales Multiple: 2.4x

Implied EBITDA Multiple: 12.6x

$1,047

Discounted Cash Flow


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