1. Grand Junction Networks Jason Mattathil Larry Shi Tim Hoban Yongan Wu FNCE 451 March 3, 2005

2. Outline of Presentation Grand Junction Grand Junction IPO vs. Acquisition IPO vs. Acquisition Valuation Valuation Perspectives Perspectives Conclusion Conclusion

3. Grand Junction Networks Leader in the Ethernet Desktop Switching Market Leader in the Ethernet Desktop Switching Market Founded in 1992 by Howard Charney Founded in 1992 by Howard Charney Experienced rapid growth in revenues – over $65 million expected in 1996 Experienced rapid growth in revenues – over $65 million expected in 1996 Overall market projected to grow to $650 M by 1997 Overall market projected to grow to $650 M by 1997 Funded through 3 rounds of venture financing Funded through 3 rounds of venture financing Critical decision: go for IPO or be acquired by Cisco Critical decision: go for IPO or be acquired by Cisco Switching technology would complement Cisco’s router dominance Switching technology would complement Cisco’s router dominance Grand Junction files S-1 form for IPO Grand Junction files S-1 form for IPO Cisco raises the offer to $346 million Cisco raises the offer to $346 million

4. IPO vs. Acquisition IPO’s IPO’s Prestige Prestige Trading regulations Trading regulations Lack of immediate liquidity Lack of immediate liquidity Litigation exposure Litigation exposure Reporting requirements Reporting requirements Recruiting difficulties Recruiting difficulties Acquisitions Acquisitions Positive change of pace Positive change of pace Loss of autonomy/authority Loss of autonomy/authority Financial reward Financial reward

5. IPO: S-1 Based Valuation Method PRICE PER SHARE NOBOUNCE5%10%15%20%25%30% $12256.19269281.81294.62307.43320.24333.05 $13277.54291.42305.29319.17333.05346.93360.8 $14298.88313.82328.77343.71358.66373.6388.54 $15320.23336.24352.25368.26384.28400.29416.3 $16341.58358.66375.74392.82409.9426.98444.05

6. Valuation Approaches FCF Method Comparables Real Options Common industry approach Not common in the industry Extremely sensitive to terminal value, WACC Use for private company valuations can be difficult Improves on NPV through valuing contingencies built into investment Cash flow assumptions may be difficult Generally adjusted based on capital structure, illiquidity, risks Modeling real-life investment options can be difficult

7. Net Present Value Method FCF Method FCF Method Assume: 3% Terminal Growth, 17% WACC Assume: 3% Terminal Growth, 17% WACC Revenue growth rate based on $650 M Ethernet Switching market in 1997 Revenue growth rate based on $650 M Ethernet Switching market in 1997 Sensitivity analysis for WACC and Terminal Growth Rate Sensitivity analysis for WACC and Terminal Growth Rate MC Simulation for NPV MC Simulation for NPV Valuation = $433 million

8. 8 FCF Calculation NPV= $ 451 M

9. 9 Sensitivity Analysis

10. 10 MC Simulation

11. Public Companies Comparables Valuation Method 3Com 3Com Bay Networks Bay Networks Cabletron Cabletron Cisco Cisco Digital Equipment Digital Equipment Fore Systems Fore Systems Chosen from Grand Junction S-1 Chosen from Grand Junction S-1 Equally weighted Equally weighted Fiscal Year 1995 Fiscal Year 1995

12. FY 1995 Comparison Valuations Average ($=Millions) (Market Value ÷ Sales) × (Grand Junction 1995 Sales) 173.65 (Market Value ÷ Book Value) × (Grand Junction 1995 Book Value) 77.52 (Market Value ÷ Earnings) × (Grand Junction 1995 Earnings) 260.57 Averaged Valuation (No Adjustment Applied) 170.58 Public Companies Comparables Final Valuation

13. Private Companies Comparables Method All companies acquired by Cisco All companies acquired by Cisco Equally weighted Equally weighted (Acquisition Value) ÷ (Last 12 mo. Revenue) =Revenue Multiple (Acquisition Value) ÷ (Last 12 mo. Revenue) =Revenue Multiple (Revenue Multiple) × (Grand Junction Revenue) (Revenue Multiple) × (Grand Junction Revenue) Average of valuations based on multiples – $310.80 million Average of valuations based on multiples – $310.80 million Crescendo CrescendoCommunications9/21/93 Newport NewportSystemsSolutions07/12/94Kalpana09/20/94

14. Revenue Multiple CompaniesAcquisitionValue Last 12 MonthsRevenueRevenueMultiple Crescendo81.909.009.10 Kalpana198.9030.006.63 NewportSystems82.905.4015.35

15. Revenue Based Valuation CompaniesRevenueMultiple GJ 1995 Revenue Revenue Based Valuation Crescendo9.1030.00273.00 Kalpana6.6330.00198.90 NewportSystems15.3530.00460.50 Average310.80

16. (1996) Revenue Forecast Valuation CompaniesRevenueMultiple GJ 1996 Sales Forecast Revenue Forecast Valuation Crescendo9.1065.5596.05 Kalpana6.6365.51005.43 NewportSystems15.3565.5434.27 Average678.58

17. (1997) Revenue Forecast Valuation CompaniesRevenueMultiple GJ 1997 Sales Forecast GR Multiple=3 Revenue Forecast Valuation Crescendo9.10325.002957.50 Kalpana6.63325.004988.75 NewportSystems15.35325.002154.75 Average3367.00

18. 18 Grand Junction’s Options Sell to Cisco Sell to Cisco IPO at $12-14, or $16 per share IPO at $12-14, or $16 per share Remain Private Remain Private Issue Junk Bond Issue Junk Bond Shut down Shut down

19. 19 IPO Option Valuation Base Assumptions for Black-Scholes Model: S=$451.16 million, from FCF method T= 3 months, ~ time to go IPO Std Dev of Returns= 50% Risk Free Rate= 6%

20. 20 Sell to Others Option Valuation Bay Network and others' offer premium10%20%30% Others' offer Price in 3 months$357.50$390.00$422.50 Other offers' current value$342.93$374.10$405.28 maturity (years) (t)0.25 strike price (X)466.52 risk free rate (r RF)6.00% current stock price (P)$342.93$374.10$405.28 standard deviation (Sigma^2)50.00% d1-1.0461-0.6981-0.3779 d2-1.2961-0.9481-0.6279 N(d1)0.14770.24260.3527 N(d2)0.09750.17150.265 call price5.8711.9121.16 New Price=Strike( X) +Call472.39 478.43 487.68

21. 21 Real Options Method Black Scholes Model is used to value option Black Scholes Model is used to value option Valuation Options Valuation Options IPO Option IPO Option w/ $16 & 15% Bounce  $ 466 millions w/ $16 & 15% Bounce  $ 466 millions Sell Option Sell Option w/ 20% premium  $ 478 millions w/ 20% premium  $ 478 millions Final Option Valuation Final Option Valuation Valuation = $478 million

22. Valuation Summary Weighting of valuation approaches Weighting of valuation approaches Valuation Approach Valua tion Weighting Solutions Weighted Averages ABC ABC Comparables$241X33.30%40%50%=8096121 Net Present Value$451X33.30%30%20%=15013590 Real Options$478X33.30%30% =159143 Weighted Total per Solution 390375354 Average 373

23. Perspectives of various stakeholders Employees of Grand Junction: were not in favor of an acquisition strategy. Employees of Grand Junction: were not in favor of an acquisition strategy. VCs are favorable in the acquisition since they will receive a fair value for their interests as well as immediate liquidity. VCs are favorable in the acquisition since they will receive a fair value for their interests as well as immediate liquidity. Management is favorable of an acquisition because they want the technology to succeed. Management is favorable of an acquisition because they want the technology to succeed.

24. Conclusions Final Valuation = $373 million (Range : $354 million and $390 million) Final Valuation = $373 million (Range : $354 million and $390 million) Grand Junction should accept the final Cisco offer of $346 M Grand Junction should accept the final Cisco offer of $346 M