Maximizing the Value of an Exit Strategy March

Maximizing the Value of an Exit Strategy March 1, 2001 Fabian Barros Marcelo Bermudez Christopher Rowell Marimuthu Subburathinam Alexandre Wolynec

Agenda Learning Objectives Overview and opportunities for Probil The Turkish market for an IPO Cost of Capital Managing Uncertainties and Real Options Recommendations

Learning Objectives Evaluating country risks and mitigating factors Challenges of doing an IPO in Turkey Probil’s Cost of Capital Impact of Uncertainties Identifying and Modeling Real Options

Overview and opportunities for Probil Overview Founded in 1989 Provides IT solutions Networks, computer hardware, basic software Design and implementation services Support and maintenance services (unique) Multi-vendor, independent of holding groups Good reputation: banking, telco, ISPs, manufacturing Positioned to help build the internet and perhaps provide e-business software

Overview and opportunities for Probil The new Investors EMEA Technology Investment co-managed by Kagan Ceran EFG Hermes (over $2 B) Summer 2000 Invested $21 million to Merge Probil Group companies and Bordata Infuse $10 M cash Take advantage of size and reputation to grow more rapidly Expand into e-business applications Exit required by 2005

Overview and opportunities for Probil The Business Opportunities Acquire a local distributor Improve delivery efficiency, lower price multiples Acquire US Internet professional services firm Access to US market with remote, less expensive Turkey labor Improve image in Turkey Source of US$ revenue Use an IPO to raise cash for acquisitions When? How much? 25% of the Company Consider equity investment?

The Turkish market for an IPO Turkey Overview Country Risks Level Expropriation Low Currency fluctuation High War or violence Low Political instability High Corruption Low Repatriation Low Mitigation Yes Military governments an historic stabilization factor Contract with suppliers to share currency risks

The Turkish market for an IPO Turkey’s Stock Market One of the most active Emerging Markets’ Stock Exchanges High volatility Volumes ($150 m -$1. 5 bn) Prices

The Turkish market for an IPO Doing an IPO in Turkey Small IPO market 35 new issues in 2000 up from 27 in 1997($157 m) Turkey’s IPOs are among the most undervalued Pre-IPO condition of the market most important factor Investment bankers do IPOs on a “best effort” basis Investors use Adjusted EV/EBITDA ratio P/E introduces debt and tax structures which may differ Simple EV/EBITDA assumes same growth rate

Cost of Capital The Cost of Capital Goldman-Integrated Model US Risk-free rate: Market risk premium: Beta of comparable: Country premium 1: Cost of Capital 5. 5% 5. 0% 1. 45 4. 5% 17. 25% Cost of debt in US$ in Turkey: 20%-25% Somewhat inflated because of banking system crisis 1 Source: Moody’s

Cost of Capital The Cost of Capital Adjusted ICCRC model Average country cost of capital 23% Beta Adjusted 30% Mitigation factors -3% Cost of Capital 27%

Managing Uncertainties Impact of key uncertainties Revenue Growth rate Normal distribution (25%, 15%) Expected EV/EBITDA ratio Lognormal Actual EV/EBITDA ratio Lognormal, 0. 75 correlation with expected

Managing Uncertainties Base Case NPV E(NPV): $38. 5 MM St. Dev. : $15. 1 MM Skewness: 1. 02

Real Options Timing of IPO – “Wait for best moment” Alternative Funding – Use VC Funds International Expansion

Real Options Real Option I: Timing of the IPO If Expected EV/EBITDA < Strike EV/EBITDA Don’t do the IPO could be done in any of the next 5 years Depends on pre-IPO market situation Drawback Delays growth boost Open door for competitor’s IPO

Real Options Real Option II: Alternative Funding VC interested in equity investment EV/EBITDA of 10 for 10% of the company If Expected EV/EBITDA < Strike Price < 10 Accept the new equity investment offer Alternative to IPO if we delay it Allows the company to boost some growth Reduce exposure to the IPO proceeds volatility

Real Options Real Option III: Expansion/Flexibility Option to acquire internet consulting company in the US Improves image of the company Adds e-business implementation know-how skill set Reduces overall cash flow volatility (“ 0. 2” correlation) Provides flexibility Reduces cost of capital – ICCRC weighted average for US and Turkey (needs to be calculated) Requires a $5 million investment (company has this money)

Real Options Model International Expansion Strike Price IPO Forecast IPO/VC Yes Finance Domestic Expansion Revenue Growth Excess Cash Flows No - Wait next year Value to Investor Company Value 2005

Real Options Results

Conclusions Recommendations Probil should wait for a suitable moment to do its IPO If the market is unfavorable, Probil should consider raising money through VC They should pursue the international expansion Decrease growth volatility Improve image of the company

Real Options Timing of IPO Results E(NPV): $39. 9 MM St. Dev. : $15. 7 MM Skewness: . 99

Real Options Alternative Funding Results E(NPV): $40. 1 MM St. Dev. : $16. 0 MM Skewness: 1. 03

Real Options International Expansion Results E(NPV): 2001 $43. 5 MM St. Dev. : $17. 4 MM Skewness: . 99 E(NPV): 2002 $44. 0 MM St. Dev. : $17. 9 MM Skewness: 1. 01

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Managing Uncertainties Comparables for EV/EBITDA ratios

Base Case Valuation Base Case NPV: IPO in 2001