Financial World

1
Financial World

• Financial Framework
• Execution of Capital Structure Plan
• Funding Start Ups

2
Financial Framework

• Financial Institutions
• Regulatory Framework
• Profile of Investment Bank

3
Financial Institutions

• Commercial Banks
• Investment Banks
• Private Equity Firms
• Institutional Investors
• Mutual Funds
• Insurance Companies
• Units of Banks
• Pension Funds
• Credit Agencies
• Financial Relations Firms

4
Large Investment Banks

• Credit Suisse First Boston
• Solomon Smith Barney
• Goldman Sachs
• Morgan Stanley
• Bank of America
• JP Morgan Chase
• Deutsche Bank
• Merrill Lynch
• Lehman Brothers
• UBS Warburg

5
Regulatory Framework

• Securities and Exchange Commission
• Federal Reserve
• Treasury Department
• Federal Trade Commission
• Financial Accounting Standards Board

6
Profile of Investment Bank

• Senior Management
• Specific Industry Groups
• Corporate FinanceUS/Europe/Asia
• Mergers and Acquisitions
• Leveraged Finance
• Senior Debt Capital Markets
• Public Debt Capital Markets
• High Yield
• Investment Grade
• Equity Capital Markets
• Specific Industry
• Equity Research
• Debt Research
• Rating Advisory Group

7
Capital Structure Plan

• Selection of Investment Bank
• Acquisition
• Funding of Acquisition
• Refinancing of Debt
• Toward Future Equity Financing

8
Capital Structure PlanSelection of Investment
Bank

• Initial Group Selected for Interview
• Investment Bank Presentation/Interview
• Criteria for Selection
• Engagement Letter

9
Capital Structure PlanInvestment Bank
Presentation

• Investment Bank Attendees
• Presentation Why They Are Best Suited
• Organization
• Rankings/Awards
• Experience in Industry Situational Analysis
• Analysis of Company
• Mergers Acquisition Expertise
• Financing Alternatives
• Overview
• Recommendation
• Company Attendees

10
Capital Structure PlanCriteria For Selection

• Chemistry
• Knowledge of Company and its Markets
• Well Thought Out Strategy
• Specific Deals within Industry
• Global Strength
• Statistics
• Transactions Debt/M A
• Total Underwriting Global Equity/Debt Issues
• Ranking of Research Analysts
• Commercial Bank In House
• Strength/Reach of Sales Force
• Cost

11
AcquisitionSteps

• Initial Contact
• Preliminary Information
• Letter of Intent
• Hart-Scott-Rodino Filing
• Due Diligence
• Subsequent Negotiations
• Finalize Deal Structure/Purchase Agreement
• Develop Organization Structure
• Legal
• Operational
• Develop/Execute Strategic Plan
• Develop/Execute Integration Plan
• Public Announcements/SEC Filings
• Other Government Filings
• Communicate/Communicate/Communicate
• Evaluation of Process

12
AcquisitionDue Diligence

• Corporate/Legal/Compliance
• Financial
• Historical/Projected Statement
• Testing of Accounts/Physical Assets
• Financial Commitments
• Sales/Customer Data
• Contractual Arrangements
• Organization/Personnel
• Employee Benefits
• Environmental Issues
• Taxes
• Systems/Procedures
• Acquisition Data Base

13
AcquisitionImportance of Due Diligence

• Adjustments to Purchase Price
• Discovery of Unstated Liabilities
• Discovery of Compliance Issues
• Confirmation of Financial Statements
• Assists in Establishing Representations and
  Warranties
• Helpful in Evaluation of Personnel
• Establish Responsibility for Employee Benefits
• Essential for Integration Plan
• Essential for Establishing Legal/Organizational
  Structure
• Essential for Determining Synergies
• Financial Data Needed for Financing
  Documents/Statements

14
AcquisitionDeal Structure/Purchase Agreements

• Representations and Warranties
• Purchase Price
• Identification of Business/Assets in Deal
• Liabilities/Responsibilities
• Resolution of Contested Matters Remedies

15
AcquisitionIntegration Plan

• Communicate/Communicate/Communicate
• Act Quickly
• Establish Integrated Team Prior Completion of
  Acquisition
• Establish New Operating Organization Prior to
  Acquisition Completion
• Clearly Define Synergy Opportunities and
  Establish Detail Plans
• Establish Detailed Timetable of
  Events/Responsibilities
• All Necessary Filings Ready to go at Closing
• Insurance, Benefits and Other Programs in Place
  at Closing
• Establish System for Timely/Accurate Financial
  Reporting
• DONT DISRUPT CUSTOMERS!!

16
AcquisitionInvestment Bank

• Lead Negotiator Buffer
• Aids in Due Diligence and Interviews
• Migrates Due Diligence Data to Offering
  Memorandum
• Helps Arrange Schedule of Interaction Between
  Buyer and Seller
• Recommends Purchase Price
• Helps Frame Deal Structure

17
Funding of AcquisitionOverview of Process

• Commitment Letter/Terms/Fees
• Preparation of Credit Facility
• Preparation of Offering Memorandum
• Preparation of Presentation to Credit Agencies
• Meetings with Credit Agencies
• Meetings with Core Banks
• Negotiations with Core BanksBank Commitments
• Meeting with Banks/Institutional Investors
• Syndication Process
• Finalize Credit Facility

18
Funding of AcquisitionInitial Documents

• Commitment Letter
• Lead Arranger/Syndication Agent
• Underwrite Credit Facility
• Various Terms/Conditions of Process
• Summary of Terms and Conditions
• Credit Facility
• Guarantors
• SecurityConditions of Fall Off (Credit Rating)
• Maturity/Amortization
• Affirmative Covenants
• Negative Covenants (Maintenance Covenants)
• Use of Proceeds
• Fee Letter
• Fee
• Fee Sharing

19
Funding of AcquisitionSummary of Debt

• Revolving Credit Facility (Banks)
• Multiple Currency
• Swing Line Facility for Short Term Borrowing
• Letters of Credit
• Term Loans
• Dollar Term A Five Year Maturity (Banks)
• Euro Term A Five Year Maturity (Banks)
• Term Loan B Seven Year Maturity (Institutional
  Investors)
• Interest Rates
• LIBOR (50 bps higher for Term Loan B)
• Decreases as Leverage Ratio Decreases

20
Funding of AcquisitionFinancial Maintenance
Covenants

• Interest Coverage
• Fixed Charge Coverage
• Leverage Ratio
• Net Worth

21
Funding of AcquisitionKey Components of Offering
Memorandum

• Summary Business/Terms
• Risk Factors
• Capitalization
• Managements Discussion and Analysis of Operating
  Results/Financial Condition
• Business in Detail
• Description of the Notes
• Exchange Offer/Registration Rights
• Financial Statements

22
Funding of AcquisitionCredit Agencies

• Agencies
• Moodys
• Standard Poors
• Fitch
• Issuer Rating
• Moodys B1
• Standard Poors BB
• Outlook Positive
• Importance of Rating
• Impact on Execution and Price
• Security Fallaway Provision
• Equity Crossover

23
Funding of AcquisitionCredit Agencies

• Key Drivers of Credit Ratings
• Size Assets/Sales/Market Capitalization
• Leverage Ratio Total Debt/EBITDA
• Coverage Ratio EBITDA/Interest
• Profitability
• Free Cash Flow
• Operating Cash Flow
• Return on Assets
• Stability
• Company
• Industry

24
Funding of AcquisitionKey Factors Moodys

• Positive
• Global Leader in Industry
• Purchasing Leverage
• Diversified Product Mix
• Potential Synergies/Cost Savings
• Fortune 500 Customer Base
• Geographic Diversity
• Cost Efficient Operations
• Moderate Balance Sheet
• Negative
• Integration Challenges
• Moderate Leverage
• Challenges of Operating with Leverage
• Future Acquisitions

25
Funding of AcquisitionFactors for Credit Upgrade

• Successful Completion of Integration
• Managements Ability and Willingness to
  De-leverage
• Competitive Activity
• Strength and Experience of Management Team
• Financial Performance/Balance Sheet
• Execute Growth Strategy without Impairing Credit
  Profile
• Rating Agencies View of the Industry

26
Refinancing of DebtOverview of Process

• Activity Time Required
• Offering Memorandum 3 4 Weeks
• Description of Debt 2 3 Weeks
• Due Diligence (Business and Legal) 1 2 Weeks
• Sales Force Presentation 1 Week
• Road Show Presentation 1 2 Weeks
• Rating Agency Presentation 1 2 Weeks
• Rating Agency Meeting 1 Day
• Road Show 1 2 Weeks
• Pricing/Closing
• Completion 8 to 12 Weeks

27
Refinancing of DebtBenefits from issuing Public
Debt

• Operating/Financial Flexibility
• Less Scheduled Debt Amortization
• Amend Credit Facility for more Operating
  Flexibility
• Creates Loan Capacity for Future Strategic
  Initiatives
• Ability to Raise Capital Quickly and Easily
• Broaden Investor Base (Debt and Equity)
• Potential Benefit on Future Equity Value
• Debt Research Coverage
• Positive Future Ramifications on Credit Rating

28
Refinancing of DebtMarket Conditions

• Technical Factors
• Cash Positions of Investors
• Default Rates
• Anticipation Economic Cycle
• Favorable Outlook
• Manageable Supply
• Investors Looking for Yield
• Benign Interest Rate Environment
• Assessment of Future Risks
• Rising Interest Rates
• New Supply
• Interest in Higher Rated, Higher Quality Deals
• Federal Fund Rate
• Performance of Industry to General Market

29
Refinancing of DebtSenior Subordinated Notes

• Size
• Maturity Ten Years
• Call Protection Non Call 5 Years/Declining
  Premium Thereafter
• Use of Proceeds Repay Senior Secured Debt
• Security None
• Mandatory Redemption None
• Change of Control Investor Put at 101
• Equity Claw back 35 at Par Plus Coupon
• Covenants Standard High Yield Incurrence Based
  Covenants with Limitations
• Distribution Rule 144A with Registration Rights
• Indicative Coupon 8.250 to 8.500
• Covenants Fall Away If Investment Grade Rating
  Attained

30
Refinancing of DebtIncurred Base Covenants

• Additional Indebtedness
• Restricted Payments
• Liens
• Asset Sales
• Subsidiary Incumbrances
• Transactions with Affiliates
• Mergers and Consolidation

31
Refinancing of DebtAmendments to Existing Credit
Agreement

• Interest
• Limitation on Indebtedness
• Fixed Charge Coverage Ratio
• Total Leverage Ratio
• Loans and Investments

32
Toward Future Equity Financing

• Refinancing of Debt
• Successful Integration
• Financial Performance
• External Communication Program
• Financial Coverage
• Proper Stock Exchange

33
Stock ExchangeNYSE vs NASDAQ

• NYSE NASDAQ
• Market Structure Order Driven Quote Driven
• Central Order Flow Dealers
• Specialists vs Dealers Long Term
  Relationship Discretionary
• Obligated to Commit Capital No Obligation
• Evaluated No Evaluation
• Short Sale Governance Little Governance
• Market Open Single Opening Price No Single
  Opening Price

34
Stock ExchangeMeasurements for Efficiency

• Price Continuity Price Change From Trade to
  Trade
• Market Depth Price Change Over 3K, 5K and 10K
  Trading Sequences
• Volatility Average of (Daily High Daily
  Low)/Daily High

35
Stock ExchangeMarket QualityTransfer From
NASDAQ to NYSE

• Pre Listing Post Listing
• Price Continuity 0.05 0.03
• Volatility 4.6 3.2
• Market Depth
• 3,000 Share Sequences 0.11 0.08
• 5,000 Share Sequences 0.13 0.10
• 10,000 Share Sequences 0.17 0.15

36
Stock ExchangeTrading Costs

• SEC Research concludes that NYSE has the lowest
  Execution Costs.
• Plexus Group Study concludes that on an average,
  Institutional Trading Costs are 34 lower on the
  NYSE
• Institutional Investor States NYSE has lowest
  cost Trading Venue in US and one of the lowest in
  the World

37
Funding Start UpsEarly Stage

• Activities
• Proof of Principle/Concept
• Identify Market
• Initial Business Plan
• Begin Product Development
• Filing Patent
• Meet with Investors
• Funded By
• Family Friends
• State/Federal Grants
• Angels

38
Funding Start UpsMidcourse

• Activities
• Continue Product Development
• CEO/Management
• Substantive Business Plan
• Seek Strategic Partner
• Regulatory Filing if Required
• Meet With Investors
• Administrative Systems in Place
• Funded By
• Angels
• State/Federal Funds
• Venture Capital
• Strategic Partner
• Private Equity

39
Funding Start UpsTo Market

• Activities
• Complete Organization Staffing
• Space for Business
• Initiate Market/Sales Plan
• Funding
• Venture Capital
• Strategic Partner
• Private Equity
• Specialized Bank

40
Funding Start UpsExit

• Initial Public Offering
• Strategic Partner
• Acquired by Third Party