Investment Banking Services John A. Lee, Senior Managing Director jlee@go 2 griffin. com 610 -205 -6106 Michael J. Sobota, Vice President mjs@go 2 griffin. com 610 -478 -2294 CONFIDENTIAL 236198 v 3 Member FINRA/SIPC FEBRUARY 2012
Table of Contents I. II. Griffin Overview Comparable Public Company and Comparable Transaction Analysis III. Preliminary Financial Analysis IV. Sell-Side Process V. Potential Purchasers VI. Summary Appendix I. CONFIDENTIAL Selected Griffin Team Members 2
I. Griffin Overview CONFIDENTIAL
Griffin Overview ¨ Established in 2001, Griffin is the largest middlemarket corporate investment banking firm in Pennsylvania with over 40 Investment Banking professionals ¨ Griffin is a FINRA licensed merger and acquisition advisory and institutional private placement investment banking firm serving middle market companies, family-owned businesses, financial institutions and private equity sponsors ¨ Principals include former CEOs, CFOs, CIOs and several other executives who bring a wealth of management experience and ability to assist Griffin in looking at problems from the perspective of senior management ¨ Unlike most investment banks, we have strong technical, financial and tax accountants with Big 4 backgrounds who provide efficient, timely and complete investment banking and placement services Experienced Focused Driven CONFIDENTIAL 4
Investment Banking Services M&A Advisory Services Private Placement Services ¨ Sale and merger transactions (sell side) ¨ ¨ Acquisitions (buy side) ¨ ¨ Recapitalizations ¨ ¨ Management buyouts ¨ ¨ Divestitures ¨ ¨ Going private transactions ¨ Financial Restructuring Services ¨ ¨ ¨ Consulting Services Chapter 11 – Section 363 asset sales (going concern) UCC Article 9 – Simultaneous foreclosure and sale Balance sheet restructurings including conversion of debt to equity conversions and new capital infusions Creative capital solutions, including bridge loans Disposition of under-performing divisions CONFIDENTIAL Senior debt Subordinated debt Equity capital Bridge loans Units of limited partnership interests on behalf of financial sponsors Secondary investment and co-investment advisory ¨ ¨ ¨ 5 Strategic alternatives studies Review of strategic and business plans Outsourced corporate development Capital planning alternatives Capital study and analysis Review of capital plans
II. Comparable Public Company and Comparable Transaction Analyses CONFIDENTIAL
ABC Financial Services Overview ¨ The Company is a privately held financial services firm that has two primary lines of business, the financial advisory business and the asset management business ¨ Financial Advisory Business · · · ¨ The financial advisory business provides advice to corporations related to the issuance of their publicly-traded debt The financial advisory business charges a fixed fee based on the complexity of the issuance. While some of these fees are retainer or hourly based, the vast majority are contingent on the underlying debt actually being issued. Once the Company is hired, however, it is rare that the debt issuance doesn’t close Although the financial advisory business also has repeat clients, the majority of the revenue cannot be deemed recurring because it does not occur in consecutive years (typically the Company will do work for its repeat clients once every three-five years) Asset Management Business · · · The asset management business manages corporate cash balances. The Company invests these funds primarily in short and medium–term fixed income securities The asset management business charges a quarterly fee based on the amount of its asset under management (“AUM”). AUM is currently around $30 billion The asset management business has a strong recurring revenue model because its client retention rate of close to 100% CONFIDENTIAL 7
ABC Financial Services Overview ¨ The Company has a national platform with 30 offices in the U. S. staffed by approximately 400 professionals. It has grown from a small, local, 4 -partner firm 35 years ago ¨ In the early days, the Company relied on client contacts and relationships held by the individual partners. Today, the ABC name carries the same weight among corporate finance and treasury professionals that IBM carries with technology professionals. Indeed, “nobody ever gets fired for hiring ABC” ¨ The feeling amongst the Company’s shareholders, particularly the older ones, is that this institutional value isn’t reflected upon shareholder retirement when the Company purchases the shares at book value ¨ The Company has proven to be strongly recession-resistant · · · Revenue reached a record $100 million in 2011. The Company’s revenue CAGR from 20072011 was 8% and is projected to grow 10% in 2012 In 2011, approximately 55% and 45% of its revenue came from the financial advisory business and the asset management business, respectively The Company has made several small financial advisory acquisitions in its past, but they have all been below $5 million in value because equity funding is limited to shareholder contributions and the Company’s lender doesn’t lend much to asset-light services companies. This shortage of acquisition capital has been frustrating, because the Company has several larger Asset Management acquisition opportunities in the $30 -50 million range that have significant operating expense synergies with the Company’s asset management business CONFIDENTIAL 8
ABC Financial Services Overview ¨ Like many professional services firms (i. e. law firms and accounting firms), the Company pays virtually all of its profits to its owners each year in the form of compensation (not distributions) ¨ Reported EBITDA is used to fund income taxes and capital expenditures. Therefore, net income and EBITDA in 2011 were $1. 0 million and $5. 0 million, respectively ¨ Based on a research performed on other financial advisory and asset management firm, the range of compensation expense/revenue ratio is 40 -70%, with an average of 55%. The Company’s compensation/revenue ratio is 65% CONFIDENTIAL 9
ABC Financial Services Overview ¨ The Board of Directors of ABC Financial Services Firm has the following objectives for any proposed transaction: · · A transaction that would transform the Company from being run for maximum employee compensation to building long term shareholder value Obtain partial liquidity for all of its 50 Managing Directors (“MD”) Owners, yet keep them incented going forward A transaction partner(s) must have sufficient capital that can be used for larger acquisitions in the future All 400 employees are to be retained post-closing CONFIDENTIAL 10
Methodology Introduction ¨ The only true way to know what the Company is worth is to approach the market in a controlled, competitive process ¨ However, prior to approaching the market, it is helpful to develop a preliminary range of value(1) for the Company based on commonly used methodologies, some of which may also be employed by prospective transaction partners ¨ The methodologies Griffin will employ to develop its preliminary view of value include: · · · ¨ The type of partner will also influence value: · Strategic partners – Includes partners that are within ABC Financial Services (“ABC”) industry or · (1) Comparable public company analysis Comparable transaction analysis Private Equity LBO IRR analysis related industry and see the acquisition as a long-term strategic growth opportunity Financial partners – Includes financial investor groups that invest in private companies, with leverage buyout structures, with the intent to grow the business and then sell the company in three to five years in order to realize a return on their investment Procedures performed do not constitute a formal valuation but rather a range of possible values based on Griffin experience and recent market data. A formal assessment of the valuation of ABC Financial Services is subject to the Fair Market Value and Fairness Opinion Committee of Griffin. CONFIDENTIAL 11
Comparable Public Company Analysis ¨ Based on Griffin’s understanding of ABC’s business, Griffin reviewed and selected public companies in the following categories that perform the same or similar services of ABC, including: · · ♦ Investment Banking Asset Management Certain similar businesses are private and, therefore, do not have available public information CONFIDENTIAL 12
Comparable Public Company Analysis – Investment Banking Source: Capital. IQ, data as of 01/16/12 CONFIDENTIAL 13
Comparable Public Company Analysis – Asset Management Source: Capital. IQ, data as of 01/16/12 CONFIDENTIAL 14
Comparable Transaction Summary ¨ Griffin searched for comparable transactions announced or closed after January 1, 2009. Transactions were selected based on a review of ABC’s industry classification and key business description terms: · · ¨ Investment Banking Asset Management The results yielded many transactions from which the most applicable ones were chosen based on their similarity to ABC’s business CONFIDENTIAL 15
Comparable Transaction Analysis – Select M&A Transactions Investment Banking ¨ Comparable transactions analysis yielded 22 transactions in this industry, only 1 of which disclosed the deal multiple Source: Capital. IQ, data as of 1/16/12 CONFIDENTIAL 16
Comparable Transaction Analysis – Select M&A Transactions Investment Banking Source: Capital. IQ, data as of 1/16/12 CONFIDENTIAL 17
Comparable Transaction Analysis – Select M&A Transactions Asset Managers ¨ Comparable transactions analysis yielded 27 transactions in this industry, 7 of which disclosed deal multiples Source: Capital. IQ, data as of 1/16/12 CONFIDENTIAL 18
Comparable Transaction Analysis – Select M&A Transactions Asset Managers Source: Capital. IQ, data as of 1/16/12 CONFIDENTIAL 19
Comparable Transaction Analysis – Select M&A Transactions Asset Managers Source: Capital. IQ, data as of 1/16/12 CONFIDENTIAL 20
Comp Analysis Summary ¨ Comparable Public Company Analysis implies an EV/LTM EBITDA multiple of 6. 8 x and 5. 2 x (after illiquidity and size discount) for Investment Banks and Asset Managers, respectively ¨ Comparable Transaction Analysis implies an EV/LTM EBITDA multiple of 8. 3 x for Asset Managers while Investment Banks did not yield a sufficient population of transactions with disclosed multiples ¨ Based on the comparable public company, comparable transaction analyses, and Griffin experience, Griffin would expect the range of value for ABC to be around 6. 5 x to 7. 5 x EV/EBITDA range CONFIDENTIAL 21
III. Preliminary Financial Analysis CONFIDENTIAL
Preliminary Financial Analysis Overview ¨ Griffin completed a detailed analysis of ABC to better understand the Company’s strengths and weaknesses ¨ Griffin analyzed the Company’s financial performance to explain trends and variances ¨ Griffin examined ABC’s financial statements “from the perspective of a buyer” CONFIDENTIAL 23
Preliminary Financial Analysis Balance Sheet Source: All information obtained from ABC audited financial statements. CONFIDENTIAL 24
Preliminary Financial Analysis Income Statement – Company Projections ¨ Griffin feels that potential transaction partners will discount the future growth rate to 5% from 10% to more conservatively underwrite the transaction CONFIDENTIAL 25
Preliminary Financial Analysis Income Statement – Griffin Conservative Projections CONFIDENTIAL 26
Preliminary Financial Analysis Valuation Analysis – No Compensation Cap CONFIDENTIAL 27
Preliminary Financial Analysis Compensation Policies of Publicly Traded Investment Banks ¨ ¨ CONFIDENTIAL 28 Average compensation expense as a percentage of revenue for investment banks is approximately 55% ABC Financial Services compensation as a percentage of revenue is 65%
Preliminary Financial Analysis 2011 Income Statement – Actual vs. Proforma for 55% Compensation Cap ¨ ¨ 29 Capital gains on the sale of stock are taxed at 15% (federal) vs. compensation taxed at 35% (highest marginal federal rate) ¨ CONFIDENTIAL If ABC Financial Services were to cap compensation at 55% of revenue, EBITDA would increase by $10 million and create significant equity value Average compensation per MD would decrease by $200, 000 from $750, 000 to $550, 000. Based on compensation studies, $550, 000 is in line with industry standards
Preliminary Financial Analysis Valuation Analysis – 55% Compensation Cap CONFIDENTIAL 30
Preliminary Financial Analysis Private Equity LBO Model – Assumptions ¨ Middle of valuation range is 7. 0 x EBITDA = $105 million ¨ Private Equity investor wants MDs to have “skin in the game” via retained or “rolled” equity investment ¨ Griffin estimates approximately 28% Rolled Equity stake would be required ($26. 5 million) ¨ Aligns economic interest between Private Equity and MDs via “second bite of the apple” for MDs ¨ Through the effect of leverage, the MDs still own 47% of the common equity post-closing ¨ Prudent levels of leverage used: 2. 5 x Senior Debt, 1. 0 x Subordinated Debt ¨ ¨ Reflects “asset-light” balance sheet Assumes the Company is sold in 5 years for same exit multiple (7. 0 x) ¨ ¨ ¨ Model #1: 10% growth Company projections used Model #2: Conservative 5% growth model is used Cash liquidity to MDs is substantial, but not so much per MD ($1. 2 million average after-tax) to enable them to quit and retire post-closing ¨ ¨ MDs will also have to sign a 5 -year Non-Compete and Non-Solicit Agreement Private Equity common ownership on a fully-converted basis of 53% provides a 20 -24% IRR depending on the growth scenario utilized CONFIDENTIAL 31
Preliminary Financial Analysis Private Equity LBO Model – Summary – 10% Revenue Growth CONFIDENTIAL 32
Preliminary Financial Analysis Private Equity LBO Model – Summary – 5% Revenue Growth CONFIDENTIAL 33
IV. Sell-Side Process CONFIDENTIAL
Typical Engagement Phases Overview Evaluation ¨ Determine shareholder objectives and priorities · Economic · Family · Management · Continued involvement · Company name and culture ¨ Perform preliminary analysis of Company and industry ¨ Research market environment ¨ Negotiate and sign engagement agreement with Shareholders / Company Preparation Solicitation Negotiation ¨ Perform Griffin’s ¨ Contact potential buyers ¨ Provide data room files ¨ Prepare potential ¨ Sign confidentiality ¨ Distribute draft purchase Company and industry due diligence documents to “go to market” · “No-name” company summary · Confidentiality agreement · Memorandum ¨ Research and identify potential buyers / investors ¨ Determine potential buyers / investors to contact ¨ Prepare buyer / investor data room files / investors on a “noname” basis agreements with potential buyers / investors ¨ Distribute memorandum to potential buyers ¨ Solicit and negotiate 1 st to remaining potential buyers / investors agreement to remaining potential buyers ¨ Address due diligence questions and requests ¨ Solicit and negotiate 3 rd* round bids / letters of intent and, in some cases, “mark-up” to the transaction agreement round bids ¨ Select potential buyers / investors to meet with management and participate in facility tours ¨ Hold management presentations / tours ¨ Solicit and negotiate 2 nd Finalization ¨ Lead negotiation of the “business” and “economic” issues in the transaction documents · Maximize of after tax net proceeds · Minimize escrows and indemnity exposure ¨ Interface with clients other advisors · Legal · Accounting / Tax ¨ Choose a potential buyer ¨ Coordinate and manage * ¨ Maintain transaction / investor to move to the final phase additional bid rounds may be required or desired depending on the process final buyer/ investor due diligence momentum and sense of urgency until close round bids In each phase, the client has the opportunity to control the direction of the process CONFIDENTIAL 35
Typical Engagement Timeline PHASES I. EVALUATION II. PREPARATION III. SOLICITATION Tailor Process Confidential Competitive Atmosphere 2 weeks 2 – 3 weeks 4 - 6 weeks IV. NEGOTIATION 4 weeks V. FINALIZATION 8 - 10 weeks Approximately 5 -6 Months CONFIDENTIAL 36
Griffin’s Role and Responsibilities CREATE COMPETITIVE ATMOSPHERE AND TRANSACTION MOMENTUM ¨ Interview and advise the Seller on goals and objectives of the process ¨ Tailor transaction process to achieve the Seller’s goals and objectives ¨ Determine and collect information from the Seller that is necessary to market the business ¨ Compose comprehensive written materials describing the operational, strategic, managerial, and financial elements of the business ¨ Anticipate and advise the Seller on potential “business” and “valuation” issues that may be raised during the transaction process ¨ Research and develop a list of prospective strategic and financial buyers / investors, and work with the Seller to determine which parties to approach ¨ Contact and qualify prospective buyers or investors and secure confidentiality agreements ¨ Distribute written materials describing the business and address questions about the business ¨ Solicit and negotiate multiple rounds of offers and prioritize relative to Seller’s goals and objectives ¨ Arrange and prepare management for meetings with prospective buyers / investors ¨ Manage buyer / investor due diligence process including the organization of comprehensive data room files to be shared with interested parties in the later stages of the process ¨ Advise Seller on offers received and selection of a buyer / investor ¨ In conjunction with the Seller’s attorney, assist with negotiation of transaction documents CONFIDENTIAL 37
Company’s Role and Responsibilities STAY FOCUSED ON THE BUSINESS AND ACHIEVE BUDGET / FORECAST ¨ With Griffin’s assistance and advice, determine and prioritize the goals and objectives of the transaction process ¨ Provide financial and operational information to Griffin for preparation of written materials describing the business ¨ Review and approve written materials prepared by Griffin ¨ Provide answers and / or information to Griffin in response to follow-up questions from prospective buyers / investors ¨ Participate in presentations and facility tours with prospective buyers / investors ¨ Provide Griffin with information for data room files, which will be shared with prospective buyers in the later stages of the process ¨ Review offers and select buyer / investor based on consultation with Griffin ¨ Respond to selected buyer’s / investor’s final due diligence requests ¨ Review and execute transaction documents CONFIDENTIAL 38
V. Potential Purchasers CONFIDENTIAL
Potential Purchasers Private Equity Buyers ¨ 2006 -2008 were record-breaking private equity fund raising years. There continues to be a tremendous amount of liquidity in the U. S. private equity markets waiting to be deployed (estimated $500 billion) ¨ U. S. Fundraising and the number of funds continues to slow drastically from Q 4 2007 through Q 4 2011. When 2007 -2008 fund capital commitments expire in 2012 -2013, private equity liquidity could dry up dramatically unless fund raising picks up ¨ Griffin believes ABC has the characteristics of a private equity platform company ¨ Based on Griffin’s recent experience with professional/financial services companies, Griffin believes ABC fits the criteria for at least 200 private equity firms CONFIDENTIAL 40
Potential Purchasers Strategic Buyers ¨ Griffin anticipates ABC will also have significant interest from strategic buyers · · ¨ Buoyed by record levels of corporate cash and poor organic revenue growth, strategic M&A buyer activity is strong Foreign buyers are able to use the weak U. S. dollar to make favorable purchases Griffin anticipates strategic buyers to include: · · ¨ Investment Banks Asset Managers · · Commercial Banks Consulting Firms The major issue with large strategic buyers is they will most likely not want the MDs to retain ownership. They will substitute the Rolled Equity for an Earn-out – an inferior solution ¨ There will also be operational and strategic risk inherent in any strategic combination that is lessened considerably with a Private Equity partner CONFIDENTIAL 41
VI. Summary CONFIDENTIAL
Summary Questions and Answers ¨ What is the value of ABC Financial Services Firm? ¨ ¨ ¨ Griffin believes the range of purchase price multiples for ABC Financial Services is 6. 5 x-7. 5 x The equity value of ABC Financial Services depending on ABC Financial Services compensation cap. Below is a summary of equity value ranges: We expect you to market the Company to strategic and financial buyers. What are the pros and cons of partnering with each type of buyer/investor? ¨ Strategic: ¨ Pros: 1) Likely to pay a higher price, 2)knowledge of the industry ¨ Cons: 1) Likely will not allow ABC Financial Services to roll equity, and participation in future upside is limited to an earn-out, 2) Likely will not keep all 400 employees (i. e. will look for synergies), 3) Change in Company culture and integration risks ¨ Financial: ¨ Pros: 1) Will allow partial liquidity and rolled equity so MDs can take some chips off the table, yet still participate in future upside, 2) capital and incentive to make acquisitions, 3) Company culture and 400 employees remain as is ¨ Cons: 1) Likely will not be able to pay as much as a strategic buyers, 2) Company will have to CONFIDENTIAL operate with more leverage 43
Summary Questions and Answers ¨ What form of consideration to do you expect ABC Financial Services Firm to receive at closing? Post-closing? ¨ ¨ ¨ Strategic: Likely cash and earn-out (earn-out percentage from 20 -50%) Financial: Part cash, part rolled equity (20% – 40% rolled equity) What type of transaction capital structure should ABC Financial Services Firm expect if it is purchased by a financial buyer (i. e. senior debt, subordinated debt, equity)? ¨ ¨ ¨ ABC Financial Services should expect a financial buyer to use senior debt, subordinated debt and equity to finance the transaction ABC Financial Services should expect approximately 60% of the purchase price to be funded using debt and the remaining 40% to be equity from a financial buyer’s committed fund Please explain your sell-side process and how long it will take? ¨ 5 -6 months (please refer to Section IV for a detailed timeline) CONFIDENTIAL 44
Appendix I. Selected Griffin Team Members CONFIDENTIAL
Selected Griffin Team Members EXPERIENCE ¨ Mr. Lee has over 18 years of investment banking and private equity investing experience with middle market commercial and industrial companies ¨ Personally initiated or managed over 50 transactions as an investment banker, and 3 as a private equity principal ¨ 50% of transaction experience is in sell-side mergers and acquisitions, 25% in private placements of debt and equity capital, and 25% in management buyouts and other buy-side merger and acquisition assignments ¨ Experience includes Principal of Horizon Partners, Ltd (private equity investment firm), Director at Berwind Financial, L. P. , and Investment Banking Officer at Crestar Securities Corp. Current President for the Philadelphia Chapter of the Association for Corporate Growth and past Board Director for Realpoint, LLC, Lantor, Inc. , and Air. Wave Services Corp. John A. Lee Senior Managing Director Griffin Financial Group LLC Contact Information: Phone: (610) 205 -6106 Email: jlee@go 2 griffin. com Office Address: 620 Freedom Business Center Suite 210 P. O. Box 61926 King of Prussia, PA 19406 CONFIDENTIAL 46
Selected Griffin Team Members EXPERIENCE ¨ Mr. Sobota provides investment banking services to middle market commercial, industrial and services companies ¨ Experience includes merger and acquisition advisory, capital raise and strategic planning services. Also advises clients on financial accounting matters ¨ Public accounting experience with Deloitte & Touche LLP As an Audit Manager led client engagements for Fortune 150 and other clients within the commercial, industrial and services sectors · Involved in the accounting aspects of mergers and acquisitions and private and public placements of debt and equity · Michael J. Sobota Vice President Griffin Financial Group, LLC ¨ Certified Public Accountant and member of the Pennsylvania Institute Contact Information: Phone: (610) 478 -2294 Email: mjs@go 2 griffin. com ¨ Received a B. S. in Accounting and a B. S. in Finance from De. Sales of Certified Public Accountants and the American Institute od Certified Public Accountants University Office Address: 607 Washington St. P. O. Box 1497 Reading, PA 19603 CONFIDENTIAL 47
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