Private Alternatives to the Public Markets How to

Private Alternatives to the Public Markets How to Survive and Grow in a Capital Constrained Environment A Private Conference on May 16, 2001 J. Richard Knop Windsor Group LLC 1

Agenda u Windsor Group Overview u Middle Market M&A Trends u Recent M&A Trends u Approach on Doing a Deal on the Best Price and Terms Today 2

Windsor Group Overview 3

Windsor Group Overview u 25 -year old investment bank with 30 employees u u Industry Representation u u u Government Contracting Commercial IT Telecommunications General Middle Market Corporate Finance Locations u u u Mergers and acquisitions (buy- and sell-side) Private placements (debt & equity) Leveraged buyouts & management buyouts Headquartered in Middleburg, VA (Satellite office to open in Reston, VA, in 2001) Windsor Group Securities in Southport, CT Transactions u u 50% of engagements $20 M to $100 M, with remainder $100 M to $1 B Over 40 M&A transactions (aggregate value > $6 Billion) closed in past 5 years 4

Windsor Group Reputation u u u Reputation for closing almost every engagement on terms favorable to client Capable of managing both middle and large market transactions Strong reputation and network u u u Strong deal flow generated through banks and investment banks, law firms, “word of mouth”, marketing, industry participation, and previous clients Seasoned client staff with blend of strong operational experience, industry knowledge, and financial expertise Intense “hands-on” involvement of senior management 5

Middle Market M&A Trends 6

Middle Market M&A Trends u M&A transaction volume in the $50 -500 MM value range grew consistently through the 1990’s, driven by: u u u Strong economic environment Increasing stock market valuations Globalization of business Low cost of credit Active private equity industry 7

Recent M&A Trends 8

Deterioration of Public and Private Capital Markets u u Closing of IPO market leaves sale/merger as only liquidity path for many companies Stock market decline reduces value of stock as currency High yield market not available to fund acquisitions Bank financing terms tightened - less leverage u u u 2. 5 -3. 0 x EBITDA v. 4 -4. 5 x one year ago 40% Equity required from LBO funds v. 20% one year ago Private equity groups more conservative in underwriting acquisitions due to dot. com fallout 9

Impact on M&A Transactions u Realignment of expectations (primarily seller) u Creative capital structures required u Good opportunities for buyers with capital 10

Consolidation trend continues in government and IT industries u Industry Factors u u u Acquisition reform Outsourcing trend Commodization of products and services Competition stronger and larger Internal Factors u u “Build or buy” “Glass ceiling” syndrome “Bifurcated” shareholder issue Personal issues 11

Current Environment: “Kiss a lot of frogs until you find your Prince” u Buyers filling voids in technologies & customers v. bulking up u Buyers seeking growth & margin improvement u “Back to basics” investor/buyer psychology u More focus on intangible issues u u u Management Cultural fit Integration issues 12

Trend toward consolidations (merger of multiple companies) u Efficiencies and synergies u More critical mass u Better access to capital markets u More complicated (corporate valuations and HR/management issues) 13

Impact of Recent Legal & Accounting Changes u Pooling accounting method eliminated effective July 2001 u Potential positive development for private & financial buyers v. public buyers u HSR threshold increased from $15 to $50 Million. u Use of installment note as part of consideration 14

Valuations u Commercial market valuations have softened more than government market valuations (“flight to safety”) u Highest valuations paid for: u u u Companies with high end skill sets and intellectual property Companies with customers hard to break into Good operating margins Focused growth strategy Strong senior and mid level management team that will transition Past performance 15

Approach to Doing a Deal on Best Price and Terms Today 16

Sellers: Use systematic approach u Overall theme: exploring and developing all options will produce better results than discussion with a few competitors and colleagues u u u u Emphasize EBITDA for current year Books and records in good order Resolve litigation Hire experienced team of professionals Don’t “reinvent the wheel. ” Do only once in your lifetime Allows you to manage company Typically return is several times the cost 17

Investment banker services u u u u Evaluates alternatives Provides valuation range Packages the company Identifies, qualifies, initiates & contacts most qualified prospective purchasers Creates competition among potential purchasers Provides critical assistance in structuring and negotiating deal terms & guiding company through due diligence Brings deal to closure 18

The Windsor Philosophy “Complete the transaction as soon as possible on the best financial terms and the best strategic and cultural fit for our client. ” u Be patient u Be prepared to walk away u Continue to manage and move company forward during sales process 19

Buyers u Engage knowledgeable investment bank and other professional advisors who: u u u Identify financial resources to make acquisitions u u Know your industry Have relationships and a track record Enables you to take advantage of opportunities that arise Capital is key today Develop a well thought out acquisition plan and criteria “Kiss a lot of frogs until you find your Prince” 20

Buyers u u u Cont’d Be sensitive to cultural, management, and employee benefit issues Develop before closing an integration program with the owners/managers of the acquired company Follow the general “code of honor” in the M&A business u u u Don’t put a company under letter of intent expecting to renegotiate the terms irrespective of the results of due diligence Deal openly and directly as opposed to “playing games” Develop a reputation of being trustworthy and fair in your dealings 21

Backdrop to Current Environment u Slowing economy and Internet “bubble” are reducing the opportunities for IPO’s and secondary stock sales u u Number of United States IPO’s are down to 429 in 2000 from 538 in 1999 (down 20%) Only $8. 1 billion of proceeds in fourth quarter 2000 versus $27. 4 billion in fourth quarter 1999 Performance very poor in 2000: Rule “FD could make things worse, due to increasing uncertainty in minds of analysts and portfolio managers 22

Backdrop to Current Environment u Leveraged loan market has contracted to levels of the early 1990 s u u Proceeds of debt syndications of $1, 175 MM in 200 versus $1, 298 MM in 1999 (down 9. 5%) Bank debt multiples at a 10 -year low Bank examiners caused 60% of syndication buyers to exit the market since mid-2000 Predicting a recession - and may be getting what they predicted! 23

Backdrop to Current Environment u High-yield bond market is no longer an option for most issuers u u Assets more concentrated than in stock market, leading to larger minimum size thresholds (now $250 MM+) Returns under 5% annually since 1998 Yields and spreads have increased, but liquidity has not returned 2000 new issuance down to levels of 1994 -95 24

Backdrop to Current Environment u cont’d Significant amount of LBO capital has been raised but not invested yet Source: Venture Economics/NVCA 25

Backdrop to Current Environment u LBO funds are investing more equity in deals, despite high acquisition multiples implying a reduction in expected returns 26