bill brady head of global technology corporate finance credit suisse first boston technology group...
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Bill BradyBill BradyHead of Global Technology Corporate FinanceHead of Global Technology Corporate FinanceCredit Suisse First Boston Technology GroupCredit Suisse First Boston Technology GroupNovember 9, 2001November 9, 2001
Plop, Plop, Fizz, Fizz, Oh What A Relief It Is!Plop, Plop, Fizz, Fizz, Oh What A Relief It Is!
TeleSoft Annual MeetingTeleSoft Annual Meeting
AgendaAgenda
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
Source: Factset based on data from 4/9/90 and 10/31/2001.
Category
> $1 Bn
$100MM - 1Bn
< $100MM
33
118
134
$194
$38
$5
322
582
759
$2,807
$210
$23
# Companies# Companies Market Cap ($Bn)Market Cap ($Bn)
# Companies# Companies
19901990 20012001AllAll
Market Cap ($Bn)Market Cap ($Bn)
285 $237 $3,0401663
Dramatic Growth in New Companies and Market CapDramatic Growth in New Companies and Market CapTechnology Companies and Market Cap by Size Now vs. 1990Technology Companies and Market Cap by Size Now vs. 1990
16.5% CAGR 24.7% CAGR
The Mighty Have Fallen…The Mighty Have Fallen…Top 40 US-Traded Technology Companies 1 year agoTop 40 US-Traded Technology Companies 1 year ago
* Companies not included in 2001 top 40 list.Technology Group
$54.552.351.851.351.348.746.044.243.241.238.235.734.033.232.731.330.330.129.928.1
$3867.4
Cisco Systems Microsoft
IntelNokiaEMCOracleSun MicrosystemsIBMNortel Networks AOL Time WarnerEricsson
Hewlett-PackardTexas InstrumentsLucent TechnologiesJDS UniphaseDellSiemens
* Juniper NetworksVeritas Alcatel
Motorola* Broadcom
CompaqTSMC
PhillipsQualcommSTMicroelectronics
* Siebel Applied Materials
Automatic Data Processing* Network Appliance* Marconi PLC* I2 Technologies
NEC* Yahoo* Ariba* Palm* Ciena SAP * GemstarTOTAL
$387.4366.1302.9186.3216.9220.4178.5174.8136.6117.0110.9
90.684.978.978.376.475.561.957.657.5
Market Value ($BN)Market Value ($BN)
$123.9313.2164.3
96.227.275.433.0
187.718.6
209.034.432.648.522.910.562.643.1
7.111.316.1
(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)
10/31/2000 10/31/2001 %Change
$36.28.6
14.842.329.637.425.0
7.527.832.2
4.41.22.0
15.26.20.81.45.3
18.28.4
$1862.2
(33.6)(83.6)(71.4)(17.5)(42.3)
(23.2)(45.7)(83.0)(36.6)(21.8)
(88.5) (96.6)(94.1)(54.2)(81.0)
(97.4) (95.4)(82.4)(39.1)(70.1)(51.8)
10/31/2001 10/31/2000 %Change
% %
Market Value ($BN)Market Value ($BN)
$313.2187.7164.3137.8123.9
96.275.462.6
48.5 43.142.337.436.2
34.4 33.032.632.230.229.627.8
$27.225.825.022.918.718.618.217.816.115.215.114.8
14.3 14.113.713.713.612.411.310.5
10/31/200110/31/2001Market ValueMarket Value
($BN)($BN)
10/31/200110/31/2001Market ValueMarket Value
($BN)($BN)
Microsoft IBMIntelAOL Time Warner Cisco Systems NokiaOracleDellTexas InstrumentsSiemensTSMCQualcomm MotorolaEricssonSun MicrosystemsHewlett-PackardAutomatic Data ProcessingElectronic Data SystemsPhilipsApplied Materials
EMC* First Data Corp
STMicroelectronicsLucent Technologies
* UMCNortel Networks
SAP* Computer Associates
AlcatelNEC
* Maxim Integrated ProductsCompaq
* Ebay* Accenture* Concord EFS* Analog Devices* Micron Technology* Linear Technology
Veritas JDS Uniphase
This Year’s Leader BoardThis Year’s Leader BoardTop 40 US-Traded Technology Companies NowTop 40 US-Traded Technology Companies Now
* Companies not included in 2000 top 40 list.
*
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
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Moore’s Law of Nasdaq Ran Out of Gas in Y2KMoore’s Law of Nasdaq Ran Out of Gas in Y2K
January 1983 - Present
Doubles in 8 years
Doubles in 4 years
Doubles in 2 years
Doubles in 1 year
$40.1
$18.1 $17.4
$149.6
$92.0
$58.3
$49.5$40.9$33.2
0
20
40
60
80
100
120
140
160
1993 1994 1995 1996 1997 1998 1999 2000 2001YTD
ConvertiblesFollow-OnsIPOs
Equity New Issue MarketEquity New Issue MarketTechnology Equity & Equity-Related Offerings, 1993-2001Technology Equity & Equity-Related Offerings, 1993-2001
Source: Securities Data Company as of 10/31/01.
US and Int’l Technology transactions completed.
100
168
410
44
366
240
51
27
66
57
49
60
111
221
124
6135
145
226
40206295
1457830
14796
$ Billions$ Billions
Performance of Top IPOs of 1999 and 2000Performance of Top IPOs of 1999 and 2000
Top 50 IPOs of 1999Top 50 IPOs of 1999 Top 50 IPOs of 2000Top 50 IPOs of 20001805%
78%-6%
-92%-72%
1004%
-200%
0%
200%
400%
600%
800%
1000%
1200%
1400%
1600%
1800%
2000%
IPO Priceto
12/31/99
IPO Priceto High
High to5/23/00
5/23/00 to7/17/00
7/17/00 toCurrent
IPO Priceto Current
328%
103%
-32%
-66%-62%
84%
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
350%
400%
IPO Priceto
12/29/00
IPO Priceto High
High to5/23/00
5/23/00 to7/17/00
7/17/00 toCurrent
IPO Priceto Current
Continued Volatility Results in Short Market WindowsContinued Volatility Results in Short Market Windows
# of Negative Pre-Announcements (1)
(1) 3 weeks into each quarter
1Q 2001 2Q 2001 3Q 2001 4Q 2001
61 110 118 161
1/2/01 4/4/01 6/19/01 9/23/01- - - -
1/24/01 5/22/01 7/2/01 10/16/01
# Days 22 48 13 23 27 23
Trough to Peak 24.8% 41.2% 7.8% 21.0% 23.7% 22.9%
1/24/01 5/22/01 7/2/01 10/16/01- - - -
4/4/01 6/19/01 9/23/01 10/23/01
# Days 70 28 83 7 47 49
Peak to Trough -42.7% -13.9% -33.8% -1.0% -22.8% -23.8%
PEAKS Average Median
TROUGHS Average Median
$153.0 $123.2
$318.9
$691.0
$33.8$10.0 $16.6
$111.1$97.3
$0.0
$100.0
$200.0
$300.0
$400.0
$500.0
$600.0
$700.0
$800.0
1993 1994 1995 1996 1997 1998 1999 2000 2001
M&A MarketM&A MarketTechnology Mergers & Acquisitions, 1993-2001Technology Mergers & Acquisitions, 1993-2001
$ Billions$ Billions
YTD
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.
95 95 228228 833833
289289
120 120 164 164 48748765 65 3535# of
Deals
Perceptions Towards Strategic Transactions Have Perceptions Towards Strategic Transactions Have Changed in This Difficult Market Environment…Changed in This Difficult Market Environment…Perceptions Towards Strategic Transactions Have Perceptions Towards Strategic Transactions Have Changed in This Difficult Market Environment…Changed in This Difficult Market Environment…
THEN: MAY 1999 NOW: OCTOBER 2001
Accretion/DilutionAccretion/Dilution
Acquirors willing to accept significant earnings dilution for promise of significant growth opportunity
Acquirors typically accept zero to small amount of earnings dilution in exchange for growth prospects
Little tolerance for cash burn
ValuationValuation
Many bidders drove up valuation Public market offered liquidity
events for startups, driving up valuation
Few acquirors in this market Public market more stringent;
therefore, fewer startups obtaining liquidity
Time to revenueTime to revenue
Revenue could be more than one year away
Clear path to revenue and profitability
Must be at least in customer trial phase of development
Customer baseCustomer base
Potential for customers Small base, many in trial stage Highly concentrated revenue
Quality, well-financed and diversified customer base with recurring revenue stream
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
Current Status
Public MarketScrutiny
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
……Resulting in a Challenging Near-Term EnvironmentResulting in a Challenging Near-Term Environment……Resulting in a Challenging Near-Term EnvironmentResulting in a Challenging Near-Term Environment
Valuation
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”
(90%) (90%)
(68%)(74%)
(100%)
(75%)
(50%)
(25%)
0%
Many Potential Buyers Have Seen Their Share Many Potential Buyers Have Seen Their Share Prices Plummet Over the Last YearPrices Plummet Over the Last YearMany Potential Buyers Have Seen Their Share Many Potential Buyers Have Seen Their Share Prices Plummet Over the Last YearPrices Plummet Over the Last Year
PERCENTAGE CHANGE IN STOCK PRICE SINCE MARCH 1, 2000
Comm. Equipment eBusiness Internet Infrastructure
Semiconductors Optical Internet
Nortel Lucent Alcatel Cisco
(94%) (98%) (98%)
(72%)
(100%)
(75%)
(50%)
(25%)
0%i2 Ariba C1 Siebel
(96%) (99%)
(80%)
(99%)(100%)
(75%)
(50%)
(25%)
0%Inktomi Akamai VeriSign InfoSpace
(56%)
(83%)(91%) (88%)(100%)
(75%)
(50%)
(25%)
0%Intel BroadcomPMC-SierraConexant
(94%) (98%) (94%)(85%)
(100%)
(75%)
(50%)
(25%)
0%
JDSUniphase Sycamore Corvis
New Focus
(88%) (93%)
(44%)
(23%)
(100%)
(75%)
(50%)
(25%)
0%Amazon Yahoo! AOL eBay
Note: Corvis and New Focus data is from IPO Pricing of $36.00 and $20.00, respectively.
Let’s not forget the companies that have gone bankrupt:
As a Result, Companies Have Begun to Use Cash As a Result, Companies Have Begun to Use Cash ToTo Fund Their AcquisitionsFund Their AcquisitionsAs a Result, Companies Have Begun to Use Cash As a Result, Companies Have Begun to Use Cash ToTo Fund Their AcquisitionsFund Their Acquisitions
With stock prices at record lows, the notion that cash is king is being reinforced
In particular, large cap companies with depressed P/Es are using cash as their preferred acquisition currency
Sellers prefer liquidity in these uncertain times
Interest rates are at unprecedented lows
Many companies are taking advantage of the convertible market’s tremendous appetite for technology issues to build “war chests”
Premium PaidAnnc. FD Equity NTM 1-Day 30-Days
Date Target / Acquiror Value ($MM) P/E Prior Prior Acquisition Currency
2/22/01 1,492 NM 89.9% 121.2% Cash
6/11/01 1,208 54.9 91.5% 101.9% Stock/Cash
4/24/01 1,000 - NA NA Cash
3/30/01 400 - NA NA Cash
10/2/01 200 - NA NA Cash
SELECTED ACQUIRORS USING CASH AS ACQUISITION CURRENCY
VC Returns Under PressureVC Returns Under PressureCumulative Vintage Year Performance of U.S. Venture Capital Funds Cumulative Vintage Year Performance of U.S. Venture Capital Funds
Source: Venture Economics Information Services
Pooled IRR average % (09/30/00)Pooled IRR average % (03/31/01) Pooled IRR average % (12/31/00)
Market Rallies and Subsequent DownturnsMarket Rallies and Subsequent Downturns
(1) Trailing P/E multiples.
MARKET RALLIES8/1/82 - 6/22/83
12/13/84 - 8/21/87
10/28/87 - 10/9/89
10/11/90 - 3/18/94
12/9/94 - 7/20/98
10/8/98 - 3/10/00
Length 11 33 24 42 44 17
Trough to Peak:NASDAQ 96% 91% 66% 147% 180% 256%S&P 500 60% 108% 54% 59% 165% 45%
Range of S&P
500P/E Multiples(1)
11x – 13x 10x – 22x 11x – 15x 14x – 26x 15x – 29x 28x - 34x
AND SUBSEQUENT DOWNTURNS
6/22/83 - 12/13/84
8/21/87 - 10/28/87
10/9/89 - 10/11/90
3/18/94 - 12/9/94
7/20/98 - 10/8/98
3/10/00 - 10/31/01
Length 18 2 12 9 3 20
Peak to Trough:NASDAQ -27% -36% -33% -11% -30% -67%S&P 500 -5% -31% -18% -5% -19% -24%
Range of S&P 500
P/E Multiples(1)
9x – 13x 15x – 20x 14x – 16x 15x – 20x 24x – 28x 23x – 29x
Net Market Move Net Market Move% CAGR % % CAGR %
NASDAQ 95% 8.5% 419% 16.1%S&P 500 176% 13.2% 259% 12.3%
Recessions Are Followed by Market RalliesRecessions 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
Expected Timing of Recovery by Sector
Overviews of Previous Recessions
Peak-to-Trough3M Pre - 3M Post
Trough
RecessionLength of
RecessionDecline in
GDPPerformance Of
S&P500Performance Of
S&P500
Dec-69 - Nov-70 12 Months -0.6% -7.0% 18.7%
Nov-73 - Mar-75 16 Months -3.0% -23.0% 38.8%
Jan-80 - Jul-80 7 Months -2.2% 12.7% 19.9%
Jul-81 - Nov-82 17 Months -2.9% 5.6% 23.9%
Jul-90 - Mar-91 9 Months -1.5% 4.8% 12.4%
Average 12 Months -2.0% -1.4% 22.7%
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
ImplicationsImplications
Return to “irrational exuberance” any time soonReturn to “irrational exuberance” any time soon
Indefinite losses will be bankableIndefinite losses will be bankable
Me-too, undifferentiated companies will be bankableMe-too, undifferentiated companies will be bankable
Valuations on private financings will hold upValuations on private financings will hold up
Don’t Count On:Don’t Count On:
Focus on business model, sponsorship, uniqueness, barriersFocus on business model, sponsorship, uniqueness, barriers
Develop alternative financing plans, merger partnersDevelop alternative financing plans, merger partners
Shift business models to accelerate profitability and cash flowShift business models to accelerate profitability and cash flow
Finance ahead of needs when windows present themselvesFinance ahead of needs when windows present themselves
Plan To:Plan To:
The Bar is Set Higher for IPOsThe Bar is Set Higher for IPOs
2000 2001
$2 - 5MM $10MM
Time to Profitability 6 - 8 Quarters 2 - 3 Quarters
Valuation Metrics Revenue Multiples P/E Multiples
Revenue Base (in quarter going public)
Equity Private Placement Market OverviewEquity 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 EnvironmentCurrent M&A Environment
Strategic rationale for M&A stronger than everStrategic rationale for M&A stronger than ever
Few deals near-term due to “reality distortion field”Few deals near-term due to “reality distortion field”
Strategic buyers’ currency and confidence reducedStrategic buyers’ currency and confidence reduced
Sellers’ value expectations need to adjustSellers’ value expectations need to adjust
Financial buyers’ interest growingFinancial buyers’ interest growing
Expect strong rebound in M&A as reality sets inExpect strong rebound in M&A as reality sets in
2000- 2001 Total TechnologyFinancing and M&A (Number of Deals)
The Clear Leader in Technology Investment BankingThe Clear Leader in Technology Investment Banking
2000- 2001 Total Technology Financing and M&A (Dollars in Billions)
Notes:Transactions announced 1/1/00 through10/31/01. Includes private placement deals.(1) JP Morgan deals include deals completed by H&Q.
402
240 238
197
166146
101 100
0
50
100
150
200
250
300
350
400
CSFB MS GS JPMCIT/SSB ML DBAB RS
$382.8
$352.2
$238.9
$192.8$185.0
$132.7$103.4
$81.1
$0
$50
$100
$150
$200
$250
$300
$350
$400
CSFB MS GS CIT/SSBJPM ML LEH BofA
CSFB: Clear Winners Do Not Need RecountsCSFB: Clear Winners Do Not Need Recounts
Reuters’ Survey of Fund Managers*
* 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.
Ranking
Category 1st Place 2nd Place
Investment Bank 2000 1999
Credit Suisse First Boston 23% 11%
Goldman Sachs 17 14
Morgan Stanley Dean Witter 16 14
Merrill Lynch 9 12
Salomon Smith Barney 6 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