Transcript Investment Banking Division
Plop, Plop, Fizz, Fizz, Oh What A Relief It Is!
TeleSoft Annual Meeting
Bill Brady
Head of Global Technology Corporate Finance Credit Suisse First Boston Technology Group November 9, 2001
Agenda
1. Changing Leaders in the Technology Market 2. Taming the Volatile Equity Markets 3. The New M&A Environment 4. What to Expect in the Future 5. Implications for Liquidity Options 6. CSFB Technology Group - The Clear Leader
Dramatic Growth in New Companies and Market Cap
Technology Companies and Market Cap by Size Now vs. 1990 # Companies Market Cap ($Bn) Category > $1 Bn $100MM - 1Bn < $100MM 322 $2,807 # Companies 33 118 134 All 285 1990 Market Cap ($Bn) $194 $38 $5 582 759 $237 1663 2001 $210 $23 $3,040 16.5% CAGR 24.7% CAGR
Source: Factset based on data from 4/9/90 and 10/31/2001 .
The Mighty Have Fallen…
Top 40 US-Traded Technology Companies 1 year ago Market Value ($BN) 10/31/2000 10/31/2001 %Change 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
$123.9
313.2
164.3
96.2
27.2
75.4
33.0
187.7
18.6
209.0
34.4
32.6
48.5
22.9
10.5
62.6
43.1
7.1
11.3
16.1
(68.0) % (14.4) (45.7) (48.4) (87.5) (65.8) (81.5) 7.4 (86.4) 78.6
(69.0) (64.0) (42.9) (71.0) (86.6) (18.1) (42.9) (88.5) (80.4) (72.0) Market Value ($BN) 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 $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
TOTAL $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
$1862.2
(33.6) % (83.6) (71.4) (17.5) (42.3) (23.2) (45.7) (83.0) (36.6) (21.8) (88.5) (96.6) (94.1) (54.2) (81.0) (97.4) (95.4) (82.4) (39.1) (70.1) (51.8)
* Companies not included in 2001 top 40 list.
Technology Group
This Year’s Leader Board
Top 40 US-Traded Technology Companies Now Microsoft IBM Intel AOL Time Warner Cisco Systems Nokia Oracle Dell Texas Instruments Siemens TSMC Qualcomm Motorola Ericsson Sun Microsystems Hewlett-Packard * Automatic Data Processing Electronic Data Systems Philips Applied Materials 10/31/2001 Market Value ($BN) $313.2
187.7
164.3
137.8
123.9
96.2
75.4
62.6
48.5 43.1
42.3
37.4
36.2
34.4 33.0
32.6
32.2
30.2
29.6
27.8
EMC * First Data Corp STMicroelectronics Lucent Technologies * UMC Nortel Networks SAP * Computer Associates Alcatel NEC * Maxim Integrated Products Compaq * Ebay * Accenture * Concord EFS * Analog Devices * Micron Technology * Linear Technology Veritas JDS Uniphase 10/31/2001 Market Value ($BN) $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
* Companies not included in 2000 top 40 list.
Moore’s Law of Nasdaq Ran Out of Gas in Y2K
January 1983 - Present
5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0
Doubles in 1 year Doubles in 8 years Doubles in 2 years Doubles in 4 years
Equity New Issue Market
Technology Equity & Equity-Related Offerings, 1993-2001 160 $ Billions Convertibles 140 Follow-Ons 120 IPOs 100 80 60 40 20 0 $18.1
40 96 147 1993 $17.4
30 78 145 1994 $33.2
35 145 226 1995 $40.9
61 124 295 1996 $149.6
66 $49.5
60 111 221 1997 $92.0
240 44 $58.3
57 168 $40.1
100 206 410 366 51 49 27 1998 1999 2000 2001 YTD
US and Int’l Technology transactions completed.
Source: Securities Data Company as of 10/31/01.
Performance of Top IPOs of 1999 and 2000
2000%
Top 50 IPOs of 1999
1805% 1800% 1600% 1400% 1200% 1000% 1004% 800% 600% 400% 200% 78% -6% 0% -200% IPO Price to 12/31/99 IPO Price to High -72% High to 5/23/00 -92% 5/23/00 to 7/17/00 7/17/00 to Current IPO Price to Current
Top 50 IPOs of 2000
400% 350% 300% 250% 200% 328% 150% 100% 50% 0% 84% 103% -50% -100% IPO Price to 12/29/00 IPO Price to High -32% -62% -66% High to 5/23/00 5/23/00 to 7/17/00 7/17/00 to Current IPO Price to Current
Continued Volatility Results in Short Market Windows
PEAKS # Days Trough to Peak TROUGHS # Days Peak to Trough 1/2/01 1/24/01 22 24.8% 1/24/01 4/4/01 70 -42.7% 4/4/01 5/22/01 48 41.2% 5/22/01 6/19/01 28 -13.9% 6/19/01 7/2/01 13 7.8% 7/2/01 9/23/01 83 -33.8% 9/23/01 10/16/01 23 21.0% 10/16/01 10/23/01 7 -1.0% Average Median 27 23.7% 23 22.9% Average Median 47 -22.8% 49 -23.8%
1Q 2001 61
# of Negative Pre-Announcements (1)
2Q 2001 110 (1) 3 weeks into each quarter 3Q 2001 118 4Q 2001 161
M&A Market
Technology Mergers & Acquisitions, 1993-2001 $ Billions $800.0
$700.0
$600.0
$500.0
$400.0
$300.0
$200.0
$100.0
$0.0
$10.0
1993 $16.6
$33.8
1994 1995 $97.3
$111.1
$153.0
1996 1997 1998 $318.9
1999 $691.0
2000 $123.2
2001 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…
THEN: MAY 1999 NOW: OCTOBER 2001
Acquirors willing to accept significant earnings dilution for promise of significant growth opportunity Accretion/Dilution
Acquirors typically accept zero to small amount of earnings dilution in exchange for growth prospects Little tolerance for cash burn
Many bidders drove up valuation Public market offered liquidity events for startups, driving up valuation
Revenue could be more than one year away
Potential for customers Small base, many in trial stage Highly concentrated revenue Valuation Time to revenue Customer base
Few acquirors in this market Public market more stringent; therefore, fewer startups obtaining liquidity
Clear path to revenue and profitability Must be at least in customer trial phase of development
Quality, well-financed and diversified customer base with recurring revenue stream
…Resulting in a Challenging Near-Term Environment
Current Status Valuation
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” Public Market Scrutiny
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
Many Potential Buyers Have Seen Their Share Prices Plummet Over the Last Year
0% (25%)
PERCENTAGE CHANGE IN STOCK PRICE SINCE MARCH 1, 2000 Comm. Equipment Nortel Lucent Alcatel Cisco
0%
i2 eBusiness Ariba C1 Siebel
0%
Internet Infrastructure Inktomi Akamai VeriSign InfoSpace
(25%) (25%) (50%) (25%) (50%) (50%) (75%)
(68% ) (74% )
(100%)
(90% ) (90% ) Semiconductors Intel BroadcomPMC-SierraConexant
0% (75%)
(72% )
(100%)
(94% ) (98% ) (98% ) Optical JDS Uniphase Sycamore Corvis New Focus
0% (75%) (100%)
(96% ) (99% ) Internet (80% ) Amazon Yahoo!
AOL (99% ) eBay
0% (25%) (25%)
(23% )
(50%) (50%)
(56% )
(75%) (100%)
(83% ) (91% ) (88% )
(75%) (100%)
(94% ) (98% ) (94% ) (85% ) Note: Corvis and New Focus data is from IPO Pricing of $36.00 and $20.00, respectively.
Let’s not forget the companies that have gone bankrupt:
(50%) (75%) (100%)
(88% ) (93% ) (44% )
As a Result, Companies Have Begun to Use Cash To Fund Their Acquisitions
With stock prices at record lows, the notion that cash is king is being reinforced In particular, large cap companies with depressed P/Es are using cash as their preferred acquisition currency Sellers prefer liquidity in these uncertain times Interest rates are at unprecedented lows Many companies are taking advantage of the convertible market’s tremendous appetite for technology issues to build “war chests” Annc.
Date
2/22/01 6/11/01 4/24/01 3/30/01 10/2/01
SELECTED ACQUIRORS USING CASH AS ACQUISITION CURRENCY Target / Acquiror FD Equity Value ($MM)
1,492 1,208 1,000 400 200
NTM P/E
NM 54.9
- - -
Premium Paid 1-Day 30-Days Prior Prior
89.9% 121.2% 91.5% NA 101.9% NA NA NA NA NA
Acquisition Currency
Cash Stock/Cash Cash Cash Cash
VC Returns Under Pressure
Cumulative Vintage Year Performance of U.S. Venture Capital Funds Pooled IRR average % (03/31/01) Pooled IRR average % (12/31/00) Pooled IRR average % (09/30/00)
Source: Venture Economics Information Services
Market Rallies and Subsequent Downturns
MARKET RALLIES Length Trough to Peak: NASDAQ S&P 500 Range of S&P 500P/E Multiples (1) AND SUBSEQUENT DOWNTURNS Length Peak to Trough: NASDAQ S&P 500 Range of S&P 500 P/E Multiples (1) 8/1/82 6/22/83 11 96% 60% 11x – 13x 6/22/83 12/13/84 9x 18 -27% -5% – 13x NASDAQ S&P 500 12/13/84 8/21/87 33 91% 108% 10x – 22x 8/21/87 10/28/87 2 -36% -31% 15x – 20x 10/28/87 10/9/89 24 66% 54% 11x – 15x 10/9/89 10/11/90 12 -33% -18% 14x – 16x % 95% 176% Net Market Move CAGR % 8.5% 13.2% 10/11/90 3/18/94 42 147% 59% 14x – 26x % 419% 259% 12/9/94 7/20/98 44 180% 165% 15x – 29x Net Market Move 10/8/98 3/10/00 17 256% 45% 28x - 34x 3/18/94 12/9/94 9 7/20/98 10/8/98 3 -11% -5% 15x – 20x -30% -19% 24x – 28x 3/10/00 10/31/01 20 -67% -24% 23x – 29x CAGR % 16.1% 12.3%
(1) Trailing P/E multiples.
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
Recession Dec-69 - Nov-70 Nov-73 - Mar-75 Jan-80 - Jul-80 Jul-81 - Nov-82 Jul-90 - Mar-91 Average Overviews of Previous Recessions Length of Recession Peak-to-Trough Decline in Performance Of GDP S&P500 3M Pre - 3M Post Trough Performance Of S&P500
12 Months 16 Months 7 Months 17 Months 9 Months
12 Months
-0.6% -3.0% -2.2% -2.9% -1.5%
-2.0%
-7.0% -23.0% 12.7% 5.6% 4.8%
-1.4%
18.7% 38.8% 19.9% 23.9% 12.4%
22.7% Expected Timing of Recovery by Sector Q4'01 Q1'02 Q2'02 Q3'02 Q4'02 Q1'03 Comm. Equipment Semiconductors IT Services Internet Infrastructure & Services PC & Hardware Electronics & Contract Manufacturing Software
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) Time to Profitability Valuation Metrics 2000 $2 - 5MM 6 - 8 Quarters Revenue Multiples 2001 $10MM 2 - 3 Quarters P/E Multiples
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
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
400 2000- 2001 Total Technology Financing and M&A
(Number of Deals)
402 350 300 250 240 238 197 200 150 100 50 0 CSFB MS 166 146 101 100 GS JPMCIT/SSB ML DBAB RS 2000- 2001 Total Technology Financing and M&A
(Dollars in Billions)
$400 $350 $300 $250 $382.8
$352.2
$200 $150 $100 $50 $0 CSFB MS $238.9
$192.8
$185.0
GS CIT/SSBJPM $132.7
$103.4
$81.1
ML LEH BofA
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
Category Reuters’ Survey of Fund Managers* 1 st Place
Investment Bank
Credit Suisse First Boston
Goldman Sachs Morgan Stanley Dean Witter Merrill Lynch Salomon Smith Barney
Ranking 2 nd Place
2000
23%
17 16 9 6 1999
11%
14 14 12 12
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 Morgan Stanley DLJ Goldman Sachs Morgan Stanley Morgan Stanley Morgan Stanley
* 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.