1. Investment Banking University of Colorado Rob Kaufman November 3, 2004

2. Investment Banking Agenda Overview of IB industry Perspectives on market risk Valuation perspective Case study:.com valuation Case study: Sell-side M&A Q&A

3. Investment Banking Agenda Overview of IB industry Perspectives on market risk Valuation perspective Case study:.com valuation Case study: Sell-side M&A Q&A

4. RWK Bio Rob Kaufman BA in Economics, Yale University (1981-85) International Capital Markets, Goldman Sachs (85-89) MBA in finance, Harvard Business School (1989-91) Partner, Sierra International Partners (1991-1995) Partner, The Wallach Company (1995-1999) CFO and CEO, netLibrary, Inc. (1999-2002) Partner, Q Advisors LLC (2002-present)

5. Sales/Trading Public company research Stock brokers Retail/institutional sales coverage Corp. Finance Corporate and municipal issuance of equity/debt Capital markets Investment Banking Private placements Mergers and acquisitions LBOs, MBOs Hybrid Securities Overview of the I-Banking Industry

6. Investment Banking Agenda Overview of IB industry Perspectives on market risk Valuation perspective Case study:.com valuation Case study: Sell-side M&A Q&A

7. An attempt to define the expected return which corresponds to investments at various levels of risk. Perspectives on market risk

8. The Risk/Reward Frontier Required Rates of Return Developing an appropriate discount rate for an investment decision Risk/Reward Relationship

9. An attempt to define the expected return which to corresponds investments at various levels of risk Risk/Reward Frontier LowRISK U.S. T-Bills

10. LowRISKHigh U.S. T-Bills Seed-Stage VC Risk/Reward Frontier An attempt to define the expected return which to corresponds investments at various levels of risk

11. Seed Stage Venture Capital Start-up Venture Capital Early Stage Venture Capital Private Equity Mezzanine Debt “Junk” Bonds Senior Debt Small Capitalization Equities Large Capitalization Equities U.S. T-Bills High RISK Low Risk/Reward Frontier

12. Expected Annual Returns 50%+ 40-50% 35-45% 25-35% 18-25% 14-20% 8-12% 14-18% 10-14% 4-5 % Seed Stage Venture Capital Start-up Venture Capital Early Stage Venture Capital Private Equity Mezzanine Debt “Junk” Bonds Senior Debt Small Capitalization Equities Large Capitalization Equities U.S. T-Bills High RISK Low

13. Risk Return Venture Capital U.S. T-Bills Large Cap Equities Small Cap Equities Senior Debt Mezzanine Debt Private Equity Required Rates of Return

14. Investment Banking Agenda Overview of IB industry Perspectives on market risk Valuation perspective Case study:.com valuation Case study: Sell-side M&A Q&A

15. Valuation perspective Why is valuation important? Fundamental to all boutique investment banking work Private placements require premoney valuation M&A work requires relative value of acquirer/acquiree Financing of transactions requires fundamental understanding of value

16. Methodologies Public Comparable Analysis Control Transactions Discounted Cash Flow Analysis Valuation perspective

17. Public Comparable Analysis Select publicly-traded comparable companies Analyze financial and operating performance Derive valuation multiples for minority position based on performance of comparables Adjust for size/liquidity discount and control premium

18. Control Transactions Collect historical transactions in SIC Codes Compute financial performance of targets Derive valuation multiples from disclosed information (multiple of sales, EBIT, EBITDA, NI) Adjust for size discount Apply multiples to target

19. Discounted Cash Flow Analysis Develop financial model with aid of management Projected after-tax, free cash flows, discounted to present Terminal value calculated as a multiple of final year Operating Profit, discounted to present Appropriate discount rates applied to cash flows and terminal values Appropriate terminal value multiples applied to final year profit

20. Investment Banking Agenda Overview of IB industry Perspectives on market risk Valuation perspective Case study:.com valuation Case study: Sell-side M&A Q&A

21. Case study:.com valuation Valuations gone haywire: 1998-2000 Case Study: netLibrary, Inc.

22. Case study: netLibrary, Inc. The netLibrary Story Founded 1998, three founders Raised $120+ million Grew to 520+ employees in March 2000

23. The netLibrary Story Founded 1998, three founders Raised $120+ million Grew to 520+ employees in March 2000 Reduced headcount to 122 in September 2001 Sold in Chapter 11 for $10 million Zero capital returned to investors, shareholders Case study: netLibrary, Inc.

24. Founding Founded 1998, three founders Create an ASP model for reference content Compete in $5+ billion market for published content from leading publishers into institutional libraries in academic, public and corporate libraries Early support from University of Colorado libraries and University Press Raised $5 million 8/98 Anschutz and Sequel Case study: netLibrary, Inc.

25. Growth Bring on CFO in February 1999 Raising venture funds Requirements:  Executive Summary  PowerPoint Challenges  Too many interested parties  Valuation ramping too high/too quickly Case study: netLibrary, Inc.

26. Funding Venture funding Series A, $5 million at $5 million premoney Series B, $25 million at $40 million premoney Series C, $72 million at $225 million premoney Series D, $15 million at $450 million premoney Public offering CSFB/Merrill Lynch/JP Morgan Timing  April 2000 Case study: netLibrary, Inc.

27. Restructuring Headcount reduction Focus on customers/publishers and not investors Aggressive move toward EBITDA positive Move toward sale of Company as endgame, not IPO or organic growth Case study: netLibrary, Inc.

28. Lessons Learned Running the business Meet customer needs, not investor/buyer needs (“Built to Flip”) “Traditional” business requirements apply Financial Cost of capital  higher valuation needs to be earned Beware competing stage investors Case study: netLibrary, Inc.

29. netLibrary Epilogue Investor conflict Series A/B aligned against Series C/D Buyers identified (three @ $40-50 million) Conflict over the “cram down” Sale in Chapter 11 bankruptcy despite cash in bank Currently 60+ employees, $20+ million revenue and still EBITDA positive Case study: netLibrary, Inc.

30. Investment Banking Agenda Overview of IB industry Perspectives on market risk Valuation perspective Case study:.com valuation Case study: Sell-side M&A Q&A

31. Sale/Merger Characteristics Must possess strategic/financial value to buyer Established product/service and installed customer base Management team optional Proprietary process or technology preferred Opportunity for moderate growth or enhanced market share Sufficient company size Case study: Sell-side M&A

32. Advantages Value could be the highest of alternatives Greatest liquidity of Alternatives Possibly tax-deferred exchange No Publicity if private transaction Complete exit from business Moderately expensive transaction costs Disadvantages Loss of Control Management could be dramatically affected No “upside” for future performance for 100% sale You could be unemployed Your company could lose its identity Case study: Sell-side M&A

33. Case study: Gates Rubber Company Facts World’s leading manufacturer of rubber hoses and belts with revenues of over $1.5 billion Family owned business Desire for a tax deferred transaction IBer had completed seven other assignments for Gates

34. Case study: Gates Rubber Company Facts World’s leading manufacturer of rubber hoses and belts with revenues of over $1.5 billion Family owned business Desire for a tax deferred transaction IBer had completed seven other assignments for Gates Assignment Conduct a worldwide sale process to a limited number of strategic buyers

35. Facts World’s leading manufacturer of rubber hoses and belts with revenues of over $1.5 billion Family owned business Desire for a tax deferred transaction IBer had completed seven other assignments for Gates Assignment Conduct a worldwide sale process to a limited number of strategic buyers Result Nine entities approached; three final offers Sold to Tomkins PLC for a package of securities valued at $1.2 billion Case study: Gates Rubber Company

36. Investment Banking Agenda Overview of IB industry Perspectives on market risk Valuation perspective Case study:.com valuation Case study: Sell-side M&A Q&A

37. Investment Banking University of Colorado Rob Kaufman November 3, 2004