pwc deals corporate finance and transaction services

PwC Deals Corporate Finance and Transaction Services

Financing for tech companies May 2012

PwC

Craig Hanna – Vice President PwC Corporate Finance

• Craig Hanna is a vice president with PwC Corporate Finance specializing in financial strategy and advisory services to technology companies at all stages of their growth.

• Craig is a recognized subject matter specialist on technology related corporate finance issues. He is a co-author of the firm's Software CEO Survey report, a regular contributor to numerous technology thought leadership reports, a mentor at Toronto technology incubators, and a regular speaker technology M&A and valuations.

• Craig obtained his Bachelor of Applied Science in Engineering from Queen’s University and MBA from the DeGroote School of Business at McMaster University.

2

PwC

Shelley Sylvester Manager, Transaction Services

• Shelley is an experienced Manager in PwC Toronto's Transaction Services Group who is on a two year secondment from the Trinidad and Tobago advisory practice. For the last six years, Shelley has focused on both buy and sell side, advising clients on the full continuum of the transaction process, from initial analysis of financial and operational performance through to the determination of the final purchase price. She has extensive experience managing large multi faceted teams through complex time critical projects and, while doing so, also effectively coordinating with clients and their various other advisors.

• Her industry experience spans many sectors including oil and gas services, manufacturing, agribusiness, telecommunications, industrial products, financial services, entertainment and media. Recent telecommunications clients include Globalive Wireless Management Corp. (dba. WIND Mobile) and Rogers Communications Partnership.

• She holds an M.B.A. (Strategy and Finance) from the Imperial Business School in London, United Kingdom, and is a fellow of the Association of Certified Chartered Accountants (ACCA). She is currently enrolled in the Canadian Institute of Chartered Business Valuators (CBV) program.

3

PwC

About PwC Corporate Finance services

4

PricewaterhouseCoopers Corporate Finance Inc. (“PwCCF”) is the Corporate Finance subsidiary of PricewaterhouseCoopers LLP. We provide two main services as follows:

Sell-side Advisory

Sale of company

Divestiture of subsidiary

Sale of minority interest

Private Debt Placements

Bank debt, term facilities, lease financing, asset based

lending, bridge financing, junior “Tranche B” placements,

rated debt, subordinated debt, distressed debt

Private Equity

Preferred shares, common equity, convertible debt,

warrants

Buy-side Advisory

Lead advisory role

Acquisition/merger

Joint venture

MERGERS & ACQUISITIONS

CAPITAL RAISING

What we’re seeing in deals

Acquisition process

Validate strategy

Assess options

Evaluate deal

Negotiate & close

Integrate acquisition

Capture value

Define your purpose

Manage your process

PwC’s Transaction Services – how we help

• M&A strategy

• financial due diligence

• IT/operational due diligence

• human resources due diligence

• tax diligence and structuring

• Insurance risk diligence

• integration considerations

• valuation and financial reporting considerations

PwC’s Transaction Services specialists can help companies make informed and empowered investment, divestment, capital market or reorganization decisions. We've found that deal value is best achieved by an integrated business approach, combining:

We perform financial due diligence to analyze and validate all the financial, commercial, operational and strategic assumptions. and can bring in a tailored team to help clients address any or all these aspects of the deal. For divestitures and separation, capital market transactions, and financial and operational restructuring in turnaround situations, our teams can advise on technical aspects of the process so clients can execute quickly and effectively on their strategy and get back to running their business.

With 1,2145deal professionals in 16 cities in the U.S. and 9,582 deal professionals in over 90 countries, experienced teams can be deployed with deep industry and local market knowledge, and technical experience tailored to each client’s situation. Our field-proven, globally consistent, controlled deal process helps clients minimize their risks, progress with the right deals, and capture value both at the deal table and after the deal closes.

Why PwC? PwC was

recognized as having the largest Transaction Advisory Services Practice by revenue and named a "Vanguard" firm with the highest breadth and depth of service capabilities. Source:

Kennedy; “Transaction Advisory Consulting Marketplace Report 2009 - 2012”; © BNA Subsidiaries, LLC. Reproduced under license.

Divestiture process

• Growth related opportunities rather than a strategy focused on recovery is the focus for corporate transactions

• Over one trillion in corporate cash on S&P 500 company balance sheets available to fund growth strategies (source: Standard & Poor’s, March 2010)

• Recovery in multiple ratios on transactions indicates the return of buyer’s ability to close transactions at a higher price

• Resurgence of middle market M&A deals as the days of mega-deals/large ‘club’ deals is slower to return

• Fewer auctions/fewer participants = more exclusives and ‘pseudo’ auctions. Although we are seeing a pick-up in auction processes.

• Divestitures near an all-time high in terms of composition of M&A activity in the YTD 2010 period and is anticipated to continue in 2011.

• IPO market recovery driven by private equity backed offerings

• Emerging markets is an increased focus of investment across sectors

• Increased participation by banks and lenders in diligence process; tightened credit terms

• Greater focus on cash flow generation and operational improvements

• Deal timeline increasing; many are ‘start/stop’ in nature

Prepare preliminary financial information

Address carve-out issues, benefit plans, taxes, structure

Circulate financial information/ business summary to buyers

Prepare data room information

Selected potential buyers; access to data room

Detailed due diligence for selected buyer(s)

Contract drafting/ negotiation/ Transition Service Agree-ment

Reach Tentative Decision to Divest

Signing and closing

Post closing adjustment completion

IPO considerations

Readiness assessment

• Objectively assess readiness for going public

• Identify key gaps and issues • Develop an action plan for “Going

Public” and “Being Public”

Going public

• Complex accounting, SEC reporting issues

• Tax implications of legal entity structure changes

• Tax and accounting of equity compensation programs and FAS123R; pension & OPEB support

Being public

• Accounting, reporting and financial effectiveness

• Board of Directors, independent Audit Committee & ethics compliance programs

• Sarbanes implementation • Tax, HR, technology, treasury and risk

management, media /investor relations

About PwC Transaction Services

5

PwC

Rank Advisor No. of

deals

Rank value ($’m)

1 PwC 226 1,602

3 KPMG 218 1,298

3 Deloitte 207 1,110

4 Ernst & Young 150 1,215

5 Rothschild 128 789

6 Lazard 116 953

7 Houlihan Lokey 97 384

8 Morgan Stanley 90 682

9 IMAP 89 511

9 Goldman Sachs 89 309

Corporate Finance latest league tables Global M&A – 2010

6

Top 10 Global Advisors (by volume)

Year ended December 2010

Undisclosed Values and Deal values <$50M

Source: Thomson Reuters, January 10, 2011

1st by volume of Global deals up to $50m in 2010

1st

PwC

Upper Mid-Market Adviser of the Year Acquisitions Monthly Awards 2010 & 2011

7

“Upper Mid-Market

Adviser

of the Year”

“This is the first time Acquisitions Monthly has awarded the Upper Mid-Market of the Year category and we trust it goes some way to reflecting your firm’s exceptional market strengths in M&A.”

Henry Gibbon

Editor Acquisitions Monthly

2010

PwC

Corporate Finance M&A deal record 10 years to December 2010

8

247 deals $40.7bn North, South & Central America

32 deals $3.2bn Middle East & Africa

1,645 deals $258.5bn Western Europe

65 deals $8.7bn CEE 666 deals

$88.3bn Asia including Japan

465 deals $21.4bn Australasia

Global total 3,120 deals $418.2bn 39% cross-border On average advising on over 300 announced deals globally per year with an average deal size of $134 million in the 10 years to December 2010

Note: Based on nationality of target company. PwC announced deals only. In C$. Source: Thomson Financial, January 2011

PwC

Agenda

1. The Canadian deal environment

2. The capital raising process

3. Getting the money in the bank – due diligence best practices

4. Raising capital – capital structure options

5. Valuations when raising capital

9

PwC

The Canadian deal environment

PwC

The evolution from pre- to post-recession deal making

Then: Pre-recession Today: Post-recession

Process • Broad auctions • Targeted auctions

Value • Bidding wars, high deal value • Buyers more conservative, values

reasonable with some exceptions

Structure • 100% equity deals, often

leveraged • Alternative structures including

joint ventures and minority deals

Private equity buyers dominated. Corporates were “priced out” of the

market

Corporates have time to seek out targets and pay a “fair”

price to fully or partially acquire them

11

PwC

Technology vs tradition industries: The technology deal market has rebounded faster

Technology Other Industries

Deal process

• Varied deal processes often in

response to unsolicited interest from potential buyers

• Buyers desire increased

disclosure and detailed diligence early in the process

• Unsolicited buyers may be most

logical acquirer, processes are often used to validate pricing and increase negotiating leverage

• Tendency to work with industry

focused deal advisors

• Controlled deal processes with

distinct planning, execution, closing and integration phases

• Increased disclosure and detailed

diligence occurs mid-process, diligence is extensive

• Processes are engineered to

encourage competitive bidding • Tendency to work with specialized

deal advisors

12

PwC

Technology vs tradition industries: Value is very buyer dependent for technology companies

Technology Other Industries

Approach to deal value

• Sellers value expectations often

linked to public market multiples or publicized transaction multiples

• Strategic value to “right buyer” can be much higher than intrinsic value

• Initial term sheets lack clarity on

valuation parameters, creating significant negotiation issues later on

• Aggressive financial models, sellers often resistant to adjustments

• Sellers value expectations typically

based on average earnings or cash flow multiples of precedent transactions, with qualitative value drivers impacting the discount rate

• Initial term sheet approximates “actual” deal value

• Financial models typically based on audited historical financial information and well supported

13

PwC

Canadian financing deal trends 365 days, 235 deals and $11.5 billion.

Volume of Canadian financing deals increased 38% and value increased 69%.

Source: Thomson Reuters, PwC Analysis

14

-

5.0

10.0

15.0

20.0

25.0

30.0

-

50

100

150

200

250

2006 2007 2008 2009 2010 2011

Valu

e (

US

D B

illio

ns)

Vo

lum

e (

# o

f an

no

un

ced

deals

)

Volume Value (US$ Billion)

PwC

Canadian financing deal trends Outlook for 2012.

Deal value and deal volumes are up Q1-12 over Q1-11.

15

Source: Thomson Reuters, PwC Analysis

-

1

2

3

4

5

6

7

-

10

20

30

40

50

60

70

80

Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11 Q1-12

Valu

e (

US

D B

illio

ns)

Vo

lum

e (

# o

f an

no

un

ced

deals

)


PwC

Canada’s deal market is robust and diverse 2011: 365 days, 3,173 deals, $189 billion.

16

Quarterly Canadian middle market M&A

PwC

Global technology deal trends 365 days, 3,749 deals and $224 billion.

Volume of global technology M&A deals increased 15% and value increased 19%.

Source: The 451 Group, PwC Analysis

-

100

200

300

400

500

-

1,000

2,000

3,000

4,000

5,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Valu

e (

US

D b

illio

ns

)

Vo

lum

e (

# o

f an

no

un

ced

deals

)


17

PwC

Canadian technology deal trends 365 days, 190 deals and $9.3 billion.

Volume of Canadian technology M&A deals increased 31% and value increased 218%.


-

2.5

5.0

7.5

10.0

12.5

-

50

100

150

200

250

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Valu

e (

US

D b

illio

ns

)

Vo

lum

e (

# o

f an

no

un

ced

deals

)


18

PwC

Global technology deal trends Outlook for 2012

Pace of M&A slowed modestly in Q4-11 and this has continued into Q1-12, however we remain above 2010 levels.


-

10

20

30

40

50

60

70

80

-

200

400

600

800

1,000

1,200

Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11 Q1-12

Valu

e (

US

D B

illio

ns)

Vo

lum

e (

# o

f an

no

un

ced

deals

)


19

PwC

Canadian technology deal trends What’s in store for 2012?


-

10

20

30

40

50

60

Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11 Q1-12

Vo

lum

e (

# o

f an

no

un

ced

deals

)

The number of deals completed in the first quarter of 2012 was up modestly from the same period last year (5%).

20

PwC

What Canadian technology subsectors are active and who is doing the buying?

21

Canadian tech M&A deals by buyer geography

North American buyers have dominated the Canadian M&A market – interestingly the split is 50:50, Canadian to US.

2011 Canadian technology M&A deals by subsector

Application software

Internet content & commerce

IT services & distribution

Mobility Information management

IT outsourcing

Infrastructure management

Communications services

Hosted services

Carrier infrastructure

Semiconductors

Media technologies Security

Systems Enterprise networking Storage


Source: th451.com, PwC Analysis

0

10

20

30

40

50

60

Vo

lum

e

Canada United States of America Europe Asia Australia

PwC

The capital raising process

PwC

Our Approach to Financings

23

Prepare

confidential

memorandum

Develop list of

potential funders

Finalize debt

restructuring

strategy

Contact potential

funders:

• Confidentiality

Agreements

Create competitive

environment and

respond to queries

Develop

presentation that

analyzes term

sheets

Solicit and assess

term sheets

Coordinate

management

presentations

Assist in

negotiating term

sheets

Select final

funders

Advise on structure:

• Tax & accounting

ramifications

Assist in final

negotiations

Assist with detailed

due diligence

Assist with closing

matters

Define Shareholder

objectives:

• Price

• Structure

• Timing

Initial valuation

and capital

structure

Assess issues and

collect information

Assist with

projections

Develop

presentation for

Company which

outlines our

recommendations

Market Strategy

Preparing

for the

Financing

Marketing

the

Company

Selecting

the

Funder

Closing

the

Transaction

PwC

Getting the money in the bank – due diligence

PwC

A robust due diligence process uncovers the Target’s strengths and weaknesses… drawing on the industry expertise and knowledge of the deals team.

25

Human Resources

Core Due Diligence

Considerations

Financial and Accounting

Taxation

Industry Expertise

Regulatory compliance

Risk Mgt/ Insurance

IT/ Operations

PwC

Consistency, Completeness and Timeliness of information mitigates value erosion during Financial Due Diligence.

26

Package the business for

maximum value

Define diligence process & Mgmt team responsible

Documentation of key

agreements

Financial Information

• Managing process:

– How do you go about getting the information together?

Is there a dedicated Management team to execute both deal and operational issues.

Need to balance running business with demands of diligence process – Do you hire external consultants?

– How do you know the information is applicable/ right?

Quality of financial information/ information systems?

What information to present i.e. financial & operational metrics?

Consistency thereof with financial statements.

PwC

Consistency, Completeness and Timeliness of information mitigates value erosion during Financial Due Diligence.

27


maximum value



agreements


• Ensure proper documentation of agreements

– Patents (Owned? Time to expiry?)

– License agreements

– Customer contracts/ Supplier contracts

– Intellectual property

• Change of control provisions embedded within agreements

– Employment agreements

– Debt agreements

PwC

Financial due diligence provides a view on the quality of historical revenue and earnings, as well as expected revenue and cost synergies. It assists in bridging current and projected results and identifies any near-term cash commitments.

28


maximum value



agreements


• Understanding of financial close process

• Revenue and margin trend analysis, quality of earnings

– Revenue recognition/ customer contracts

– Order book/ back-log

– Customer/ industry concentration

– Cost structure: variable vs fixed costs

• Key business drivers - How do you analyze your business? Key reports/ operational KPIs tracked?

• Other: Cash flow absorbed/ generated, Working capital and seasonality, Capex, Commitments and contingencies and accounting policies (IFRS, CGAAP US GAAP)

– Bridging of current and projected results

– One-time, non-recurring revenue and costs

– Restructuring/ Cost reduction?

PwC

Raising capital – examining the options

PwC

Raising capital Capital structure options

• Capital structuring is the process through which the optimal combination of securities is chosen to maximize value to shareholders. In this appendix, we highlight the primary capital alternatives available in the Canadian market today and the practical circumstances in which different structures are appropriate.

• The underlying premise of capital structure in Canada is the risk / return relationship as outlined below

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Seniority of asset security

Return on

Capital

High

Low

Low

High

Operating Line

Asset Based Lending

Senior Term

Subordinated Debt

Private Equity

Alternative Lenders

PwC


31

• Revolving debt facility used to finance working capital

• Provided by banks

• First fixed charge against a company’s most liquid assets - A/R and inventory. Usually encompasses floating first charge against all other assets

• Borrowing availability margined against A/R and inventory (usually 75% on A/R and ~ 30% on inventory)

• Restrictive financial and non-financial covenants

• Usually can be repaid at any time, at the bank’s option - On Demand. For a higher cost, banks can provide committed facilities for up to three years

• Cost varies by issuer credit quality and can range from Prime (highest credit quality) to Prime + 400 bps (moderate credit quality)

• Borrowing also available via Bankers Acceptance (BA’s) or LIBOR

Operating Line

Asset Based Loan

Senior Term Debt

Subordinated Debt

Equity

PwC


32

• Same characteristics as an operating loan (i.e. security, pricing, availability)

• Provided by most Canadian banks and an array of US based financial institutions

• Strict reporting and monitoring of A/R, inventory, sales and cash flow reduces underwriting risk and allows banks to be more accommodating on availability, pricing, covenants and margining

• Ideal for working capital intensive businesses like distribution – does not work well for service industries

• Historically, greater ability to leverage rendered this type of financing effective to finance equity take-outs and buy-outs

Operating Line

Asset Based Loan

Senior Term Debt

Subordinated Debt

Equity

PwC


33

• Used to finance fixed assets – PP&E. Collateralized by a first lien on those assets

• Provided by banks and other financial institutions as well as private placement from institutional investors or via a public bond issuance

• Usually three year term, with amortization over 5-7 years

• Restrictive financial and non-financial covenants covering leverage, minimum EBITDA, minimum equity, fixed charge, prohibitions on distributions to shareholders

• Pricing usually ~100 bps above what would be charged on an operating line – indicates higher risk on less liquid asset security

• Individual banks are likely only to commit $25-$30 million of senior debt per institution

Operating Line

Asset Based Loan

Senior Term Debt

Subordinated Debt

Equity

PwC


34

• Higher risk, higher cost debt usually used to finance cash flow rich, asset poor companies (such as companies which provide services)

• Used to finance high growth, dividend recapitalizations, and LBO’s.

• Provided by several Canadian and US financial institutions, institutional money managers and life co’s

• Secured rank is subordinate to operating line or term debt

• Covenants usually mirror that of the issuer’s bank

• Provides up to 1x EBITDA in addition to that provided by senior debt

• Minimal amortization – normally 5 years to a bullet repayment

• Indicative pricing of between 15%-20% in total, with the potential to accrue interest or grant equity coverage for the balance of the sub-debt provider’s required return

Operating Line

Asset Based Loan

Senior Term Debt

Subordinated Debt

Equity

PwC


35

• Highest risk form of capital

• Unsecured; equity holders get paid last in bankruptcy proceedings

• In leveraged situations, equity holders do not receive distributions until debt holders are paid and covenants met

• Highest risk means highest targeted return – target 20% to 30% per annum

• Equity can be raised privately, financed by high net worth individuals / angel investors or institutional money managers (ie. private equity, or venture capital)

• Equity can also be raised publically through stock exchanges (ie. TSX, NYSE, NASDAQ)

• The determination of what company could attract equity and what form the equity would take depends on an array of factors including size of company, history, industry, market position, financial results, projections, management, issuer status, valuation, etc.

Operating Line

Asset Based Loan

Senior Term Debt

Subordinated Debt

Equity

PwC

Raising capital Selected Canadian market participants

36

Operating Line & Senior Term

Lenders

Asset-Based Lenders

Subordinated Debt Lenders

Private Equity

Scotiabank

Royal Bank

BMO

TD

CIBC

National Bank

HSBC

BMO ABL

JP Morgan

TD/ABN AMRO ABL

Wells Fargo

Bank of America

TD Capital

HSBC Capital

Crown Capital

BMO Capital

CIBC Capital

American Capital

BirchHill Equity Partners

Kilmer Capital

Torquest

Teachers Private Capital

ONCAP

The following table outlines a select group of Canadian and US based capital providers who are active in the Canadian market:

PwC

There are a variety of ways to finance a business

The amount and cost of deal capital will depend on the capital mix and unique circumstances of the deal.

Equity

Subordinated Debt

Bank

Debt

4.25- 6%

6- 10%

10-

15% 15-

22%

3.5

2.0

Cost of Capital

De

bt

to E

BIT

DA

4.5

> 22%

‘Stretch’ Senior Debt R

ati

o

37

PwC

Comments Consideration

• Growth prospects and cyclical nature of the industry

• The competitive advantages the Borrower has within its industry

• Recurring nature of sales, size of the customer base, and evaluation of customer concentration

Industry

Fundamentals

• Key credit metrics considered include:

– Loan to Value

– Senior and Total Leverage

– Interest Coverage Ratio / Fixed Charge Coverage

• Credit metrics are measured against competitors and peers of the Borrower

• Rating agencies’ views and pro forma ratings are also considered

• Ability to generate positive free cash flow (defined as operating cash flow less capex) over the term

of the credit facility

• Assessment of the Borrower’s ability to repay / refinance any debt maturities during the term of the

credit facility

• Borrower’s access to the debt and equity markets for additional liquidity, if necessary

Liquidity

• Credit only risk adjusted return on capital is typically not above internal hurdles

• As part of the overall relationship, Lenders will look for ancillary revenue opportunities, including

derivative lines, cash management, and advisory services

Ancillary Revenues /

Relationship

Returns

Capital Structure

• Key factor in credit decisions is the amount of pari passu debt in the capital structure, given that

pari passu debt is dilutive to Lender’s security

• Level of subordinate debt and rights of subordinated debt holders

• Lenders look favourably upon any equity cushion that ranks behind senior lenders

• Support provided by parent company / equity sponsor is also viewed favourably

Board /

Management

• Lenders will look for capable management and board members with the experience and ability to

manage through the cycle

• Lenders look favourably upon management and board members that are highly regarded in their

industry

Credit

Metrics

Cost of credit for private companies? It depends.

38

PwC

Deal valuation – a closer look

PwC

How much is my business worth

40

“It Depends!”

Early Stage Valuation is not an exact science. Valuation depends on:

• Stage of investment

• Availability of quantitative and qualitative data (# of users, etc)

• Quality of the management team

• Time to market

• Market potential

• Strength of intellectual property

• Revenue model

• Profitability

• Estimated capital needs and burn rate

• Syndicated risk

• Sector volatility

• Deal structure

• AND MORE...

PwC

The basic math

41

• Failure rates for early stage companies are high

• Investors want to be compensated for risk

Pre-Money Valuation Invested Capital Post-Money Valuation = +

$0

$5

$10

2011-Q1 2012-Q1 2013-Q1 2014-Q1 2015-Q1 2016-Q1 2017-Q1

Investor vs Company Projections

Invested Capital Post-Money Valuation / = Dilution %

Company

Investor

PwC

Other things to consider

• Understand your short and long term capital requirements

• Develop financing scenarios - How much money do you need?

• Don’t forget a safety margin

42

$0

$5

$10

$15

$20

2011-Q1 2012-Q1 2013-Q1 2014-Q1 2015-Q1 2016-Q1 2017-Q1

Long-term Financing Strategy

Revenue Post-$ Valuation

Seed Round A

Round B

Round C

Exit

PwC

Difficulties in financing rounds

43

$0

$5

$10

2011-Q1 2012-Q1 2013-Q1 2014-Q1 2015-Q1 2016-Q1 2017-Q1

Flat Round of Financing

Revenue Post-$ Valuation

Seed Round A Round B

Round C

$0

$5

$10

2011-Q1 2012-Q1 2013-Q1 2014-Q1 2015-Q1 2016-Q1 2017-Q1

Down Round Financing

Seed

Round A

Round B Round C

PwC

Factors that influence value

Competition for your deal

Sub-sector / vertical

Unique and defendable IP

Quality of the development team

Technology lead

Quality of customers

Revenue model

Revenue mix (recurring vs one-time)

Size of the market

Size of business (revenue, # of users)

Profitability

Growth rate

Synergies

High capital requirement

Substitute products/ technology

Non-scalable models

Customer churn

Competitive solutions

Timing (too early or too late)

44

PwC

Technology company valuation— it’s not just about the numbers

The value analysis of a technology company encompasses both qualitative and quantitative considerations.

It is critical to determine the key value drivers of the business and to identify parties to whom you would bring the most strategic value.

As well, your advisor should prepare an acceptable valuation range before initiating a process – this isn’t the place to test the water. This information will provide your company with:

• A value range to for you, your board of directors, and other shareholders to evaluate and decide if it is prudent to proceed;

• A framework to evaluate initial offers;

• Support for your “negotiating” position;

• Market data to support accepting an offer without feeling like you “left money on the table”

The value analysis therefore forms the basis of the negotiations. The qualitative and quantitative aspects of a value analysis follow.

45

PwC

Liquidation Assumption

Going Concern Assumption

Liquidation Value

Approach

Investment Approaches

Tangible Net Assets

Earnings or Cash Flow

Earnings Cash Flow

Market Approaches

Trading Multiples

Transaction Multiples

Rules of Thumb

Multiple of: • Sales • Multiple of EBITDA • Multiple of Earnings • Multiple of Cash Flow • Multiple of Book Value or Similar Measures • Engineers/Developers/Employee • Users/Customer/Subscriber

Enterprise, Equity or Adjusted Present Value

Consolidated or Unconsolidated Basis Enterprise or Equity Value

Consolidated or Unconsolidated Value

Capitalized Cash Flow Approach

Discounted Cash Flow

Approach— Make-vs-Buy

Adjusted Net Asset Approach

Capitalized Earnings Approach

Cash Flow/Earnings or Economic Profit Basis

Valuation: Quantitative approaches

46

PwC

Capitalized Earnings/Cash Flow Maintainable Earnings or Cash Flow (estimated future maintainable after-tax amounts) x Multiple (based on investor required rates of return) + (-) Redundant (Non-Operating) Net Assets (not required for business operations) = Fair Market Value (equity or enterprise value)

Applicability of approach:

• Company has reached a steady state, in that either no growth is expected or growth is expected to be reasonably constant

• Historical (normalized) earnings/cash flow are representative of future earnings/cash flow

• This approach is not typically utilized by early-mid stage companies with a viable product/solution (given that these companies are typically “high growth”)

Discounted Cash Flow Present Value of Cash Flow for Explicit Forecast Period + Present Value of Terminal Value (based on capitalized value or market approach) + (-) Redundant (Non-Operating) Net Assets (not required for business operations) = Fair Market Value (equity or enterprise value)

Applicability of approach:

• Historical results are not indicative of future expected results

• Typically, significant near-term growth expected

• Also used to value limited-life investments

• This approach is not typically utilized by early-mid stage companies (purchasers are likely buying technology - not a cash flow stream).

Quantitative valuation Earnings and cash flow approaches

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PwC

Quantitative valuation Multiples approach

Market Trading Analysis

• Valuing a company or business using multiples at which comparable public companies trade.

Precedent Transactions Analysis

• Valuing a company or a business using multiples paid in actual merger & acquisition transactions involving comparable companies.

Similarities & Differences

• Approaches are similar in that both require you to:

• Identify and select comparable companies.

• Obtain relevant data and calculate multiples.

• Determine the multiples appropriate for the subject company.

Main Differences/Challenges

• Identified transactions or multiples may not be “good” comparables.

• Trading multiples are identified for companies which are typically larger and may have more diverse operations than an early-mid stage technology company.

• Transaction multiples are identified for companies who are not “direct” comparables. (i.e.. difference in business model, customer base, growth potential, time period etc.)

• Multiples for large transactions/companies may not reflect the “high growth” potential inherent in an early-mid stage technology company.

• There may be a lack of transaction data in the case of precedent transactions.

• Trading multiples reflect prices paid for minority interests in (typically) relatively liquid investments, whereas transaction multiples reflect prices paid for control interests and often include a strategic premium.

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PwC

Quantitative valuation Common multiples

Enterprise Value (EV) Multiples

• Based on EV and pre-interest/pre-debt financial data

• EV = Market value of equity + Market value of debt - Cash

• Most common multiples used for early-mid stage technology companies are EV/Sales.

• EV and Equity Value are often similar for technology companies who have limited cash or debt

Multiples

• Other relatively common ratios include EV to cash flow or price to cash flow

• Other ratios exist, but tend to be industry specific. Examples include:

• Multiples of employees for “acqui-hires”

• Multiple of subscribers in the cable, satellite television or newspaper industries

• Multiple of barrels of oil equivalents in the oil & gas industry

Enterprise Value Multiples

Price-Based Ratios

EV to Earnings Before Interest Tax Depreciation and Amortization (EBITDA)

EV to Earnings Before Interest and Taxes (EBIT)

EV to Book Value

EV to Sales

EV to Cash Flow

Price to Earnings

Price to Sales

Price to Book Value

Price to Cash Flow

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PwC

Intrinsic Value Transaction Structure

• Current revenue & EBITDA

• Expected growth

• Capital requirements

• Capital structure

• Cost of capital

• Operating & financial risks

• Debt capacity

• Market returns

Forms:

• Divestiture

• Asset vs share

• Merger or joint venture

• IPO

• Income trust

• Break-up or spin-off

Other Issues

• Financial or M&A market conditions

• Regulation

Synergies Price vs Value

• Immediate entry into new market

• Elimination of competition

• Strong management team

• Cost of capital

• Diversification

• Intellectual property rights

• Technology expertise & market know-how

• Deal costs

• Professional advisors

• Management time

• Deal processes

• Deal packaging & presentation

• Negotiation positions

• Knowledge & information

• Form of Consideration

• Motivations

• Legal or other restrictions

Company

• Market share & position • Technology • Competitive Advantages • Cost structures • Benchmarking

Industry

• Life cycle • Time-to-market need • Competitive behavior • Barriers to exit/entry

PRICE

Qualitative drivers of value & price

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PwC

Technology valuations: Your business isn’t average, so is an average multiple relevant?

“An investment bank boutique reports average EV/Revenue multiples from 1.1x to 4.2x across over 20 sub-sectors at the end of 2011”

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“One M&A advisor reported that average public company EV/Revenue multiples ranged from 1.8x to 2.7x across the 6 markets they track at the end of 2011.”

Case Study 1: Sector – Education

In March 2012, PLATO software acquired Archipelago Learning for 4.1x revenue. Previously, PLATO had bid on Renaissance Leaning, which was ultimately acquired at a 3.3x multiple. The premium paid for Archipelago when compared the Renaissance valuation is partially explained by Achipelago’s recent growth; a 3 yr CAGR of 42% for versus 6% for Renaissance.

Case Study 2: Human Capital Management

In December 2011 Salesforce.com announced its acquisition Toronto-based Rypple, a SaaS HCM company. At the time of the acquisition, Rypple was just over years old and was acquired for approximately 30.0x sales. Saleforce.com intends to “rebrand the service as Successforce and revolutionize HCM starting with an exciting social performance management app” (Source: Saleforce.com press release).


PwC

Technology valuations What does it mean to be comparable?

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Technology M&A transaction values

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

Oct-09 Jan-10 May-10 Aug-10 Nov-10 Feb-11 Jun-11 Sep-11 Dec-11 Apr-12 Jul-12

EV

/Rev

en

ue M

ult

iple


PwC

Technology valuations Making sense of the noise

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Hosted service provider M&A transaction valuations

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x


EV

/Rev

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ue M

ult

iple

All Transactions Hosted Services

Novacap acquires iWeb

j2 Global acquired Protus IP


PwC

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x


EV

/Rev

en

ue M

ult

iple

All Transactions CRM

Technology valuations Making sense of the noise

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CRM provider M&A transaction valuations

Oracele acquires RightNow (SaaS)

Enghouse acquires CosmoCom

Oracle acquires Inquira (SaaS)

Enghouse acquires Mettoni


PwC

Current valuations in select technology subsectors

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Company LTM Revenue EV/Revenue

Q1-12 EV Revenue

Q4-11

Human Capital Management

Taleo Corp. $ 315.4 5.8x 5.0x

Kenexa Corp. $ 282.9 2.7x 2.6x

Automatic Data Processing, Inc. $ 10,349.8 2.5x 2.5x

Security

Trend Micro Inc. $ 1,252.8 2.3x 2.1x

Symantec Corporation $ 6,722.0 2.0x 1.7x

Sourcefire, Inc. $ 165.6 7.6x 5.3x

Supply Chain Management

The Descartes Systems Group Inc $ 114.0 4.2x 3.4x

JDA Software Group Inc. $ 671.8 1.7x 2.0x

Retalix Ltd. $ 236.0 1.3x 1.2x

Content Management

Open Text Corp. $ 1,157.9 3.2x 2.9x

EMC Corporation $ 20,007.6 3.0x 2.3x

EasyLink Services Intl Corp $ 186.1 1.2x 1.1x

Networking

Cisco Systems, Inc. $ 44,844.0 1.9x 1.6x

F5 Networks, Inc. $ 1,205.3 8.4x 6.9x

Allot Communications Ltd. $ 77.8 6.9x 5.4x

IT Consulting

CGI Group, Inc. $ 4,192.1 1.6x 1.4x

Accenture plc $ 27,279.5 1.3x 1.1x

Cognizant Technology Solutions Corp $ 6,121.2 3.4x 3.0x

Source: Capital IQ, PwC Analysis

Thank you

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in

this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information

contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability,

responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision

based on it.

© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member

firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Craig Hanna Vice President – Corporate Finance 416 947 8923 [email protected] Shelley Sylvester Manager – Transaction Services 416 815 5071 [email protected]

PwC

Appendix PwC’s deal approach

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PwC

PwC’s M&A tax specialists create value through structure and effective diligence.

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Benefits to our Clients

Review of the Target’s tax position for potential exposure

• Our M&A tax teams will assess income taxes, along with indirect taxes including nexus for state sales tax reporting, sales tax remittance procedures, and employee vs. independent contractor withholding policies.

• Practical approach to identification and quantification of potential tax exposures provides an ability to assess the overall potential risk and courses for remediation.

• Assistance with identifying the impact from a financial accounting perspective .

• Assistance with ensuring that purchase contracts are structured appropriately.

Identification of hidden tax value

• Review of the Target’s tax attributes – Non-Capital Losses, credits, hidden potential tax losses and identification of the potential value of such tax attributes, including any potential limitation on their utilization.

Incorporate diligence findings into further development of structuring opportunities

• Practical suggestions to integration opportunities and challenges.

Our tax specialists support you with tax planning and diligence, including:

• Identification of material tax exposures and realization of hidden tax opportunities.

• Leveraging the results of due diligence, we help you refine and optimize the deal structure and value/cash flows post deal.

PwC

Our human resources specialists identify and quantify issues that affect value.

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Financial due diligence matters

• Evaluating potential exposures under golden parachute rules and devising related tax minimization strategies.

• Assessing historical and projected cash run rate impact on EBITDA from employee compensation-related matters.

• Identifying potential future cash savings opportunities.

• Assessing funded/unfunded employee benefit obligations, including appropriateness of assumptions used.

Compensation matters

• Structuring incentive programs to align with new strategic objectives.

• Developing compensation strategies for retaining key management.

• Developing stock compensation strategies and plans.

HR due diligence procedures and focus areas typically include:

• Our HR due diligence findings frequently result in EBITDA and purchase price adjustments.

• Advice on whether to assume or pay for an actuarially-determined liability can sometimes result in the discovery of millions of dollars of hidden deal value.

• Input on HR-related reps and warranties in the purchase agreement.

PwC

Our insurance risk management specialists help you manage risk and realize quantifiable insurance benefits.

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Pre-Transaction Focus

• Identifying critical risks, and uninsured or underinsured exposures.

• Assessing adequacy and appropriateness of program design features such as coverage terms, limits and deductibles.

• Analyzing quality of earnings issues – such as adequacy of balance sheet insurance accruals and costs minimization – and the resulting impact on purchase price.

• Assessing premiums paid and reconciling them back to the target’s accrual basis financial statements; determining the cash impact of insurance costs on historical and projected future run rate EBITDA.

• Identifying potential synergies that can be achieved during the transition and integration.

• Assistance in eliminating deal barriers using insurance risk transfer vehicles (i.e., coverage for reps and warranties, environmental, loss portfolio transfers).

Post Transaction Focus

• Design and implementation of a stand-alone insurance program.

• Assistance in program integration.

• Monitoring of run-off issues.

Insurance Risk management diligence includes:

• Identify material exposures on self-insurance liabilities (worker’s compensation and professional, products and public liability).

• Identify and secure potential insurance-related synergies.

PwC

Our investigation specialists can help you assess the integrity of Management through conducting Regulatory compliance diligence.

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• Helping to gain competitive advantage by mitigating the political, legal, financial and reputational risks of the business in markets vulnerable to corruption, fraud and misconduct.

• Identifying, quantifying and mitigating fraud risks, waste and abuse arising from supply chain, procurement, sales and marketing, and finance activities. Where necessary, redesign business practices to prevent fraud, improve internal controls and identify vulnerable IT systems.

• Reviewing the target’s operations and trade relationships for potential exposures under the Foreign Corrupt Practices Act (FCPA) and violations of anti-money laundering statutes and guide them in developing strategies to avoid post-transaction FCPA violations.

• Conducting investigative background checks on an open or discrete basis to help you better understand the Target’s management team and their background. Helping you acquire in-depth information about future partners and identify potential vulnerabilities.

Our services around regulatory and other such qualitative risks include:

• Protection of your reputation, in particular as you engage in M&A/ lending activities in developing countries.

• Determine the impact of any potential exposures from a Target’s practices that may be questionable.

PwC

Our IT and Operations specialists help identify areas of under investment, overspending and mismatches between IT and operations plans and overall business goals, while also identifying areas of potential synergy value.

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• Business Applications: level of support and automation provided to the core value streams.

• Infrastructure: Stability and scalability.

• Management Reporting: Systems and quality of timely and accurate information.

• Projects: Status of current and planned IT projects and risks of failure.

• Spending: Capex and operating spending.

• Organization and leadership: Structure, size and skill sets.

• Controls: Internal financial controls.

• Contracts: significant third party agreements and one-time costs.

Our IT and Operations diligence process is conducted through a business lens and is focused on core value streams (Lead to Order, Order to Cash, Procure to Pay, Record to Report)

• We identify significant IT and operations issues that impact deal value – Issues identified during diligence reviews frequently result in identifying positive and negative EBITDA adjustments of $1M or more.

• Our analysis includes reviewing the potential synergies from combining the IT, back-office, manufacturing and distribution operations of two or more entities.

• Specific opportunities include headcount reduction, facility rationalization, standardization of technology platforms and business applications, and potential cost reductions through volume discounts or vendor selection.

• Core Operations Areas: Level of maturity of Supply Chain, Back-office, and Customer Support areas. Opportunities to standardize processes, increase effectiveness, reduce cost or enhance controls.

• Projects: Status of cost savings and efficiency improvements. Review operating improvement strategies.

• Spending: Capex and operating spending.

• Organization and Leadership: Structure, size and skill sets.

• Facilities: Current distribution, warehouse operations and office capacity. Understand the extent of shared facilities with the Parent.

IT diligence includes evaluating Operations diligence assesses

PwC

Our Strategy specialists focus on market analyses, helping validate the investment thesis and challenging management forecasts.

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• Support client business plan development via appropriate analyses and financial modeling.

• Analyses typically include: current state review, competitive review, operational review, customer referencing/research, and market review.

• Analyses typically generate strategy options and ultimately support the financial plan.

Our Strategy specialists support you with Commercial Due Diligence and Business Plan Development

• In 2007, ~80% of our project resulted in findings that had a material impact on the bid price or deal viability.

• Helps clients confirm the value in deals by validating the investment thesis and uncovering potential upsides.

• Reduces costs by focusing on “go/no go” topics – issue driven scope.

• Integrated with PwC Financial Due Diligence.

• Focus of commercial diligence is on scoping and executing appropriate analyses to validate the investment thesis and challenge management forecasts.

• Analyses may include, as appropriate given investment thesis; market sizing and research, competitor, channel, costs, business model, customer, and other.

Business Plan Development Commercial (Strategic) Due Diligence

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