Company Sale Process

Harvard Business School Case # 206108

Case Software # XLS-715

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 $100 Million Deal $1.0 Billion Deal $2.5 Billion Deal

Retainera $100,000 $150,000 $250,000

Success Fee 1.1% 0.75% 0.40%
Total Fee $1,100,000 $7,500,000 $10,000,000

a
Credited against success fee at time of close of transaction.
Key Event Day

Receive Confidential Information Memorandum 1

Staple Financing—Preliminary Terms 20
Preliminary Bids Due 30
Data Room Available 31
Management Presentations Begin 38
Final Bid Deadline 82

Source: Casewriter.
Date Termination
Announced Target Name Prospective Acquirer Name Fee ($ mil)
11/04/1999 Warner-Lambert Co. American Home Products Corp. $1,800
03/22/1999 MediaOne Group Inc. Comcast Corp. 1,500
05/14/2001 Wachovia Corp. SunTrust Banks Inc. 780
12/15/2004 Guidant Corp. Johnson & Johnson Inc. 705
03/12/2001 American General Corp. Prudential PLC 600
08/06/2001 Hughes Electronics Corp. EchoStar Commus Corp. 600
11/01/1996 MCI Communications Corp. British Telecommunications PLC 450
01/27/1998 American Bankers Ins Group Inc. Cendant Crop. 400
10/23/2000 Constellation Energy Grp-Merch Goldman Sachs Group Inc. 355
05/17/1999 US WEST Inc. Global Crossing Ltd. 240
06/26/2006 Inco Ltd. Phelps Dodge 231
02/17/2000 Champion International Corp. UPM-Kymmene Oyj 210
Source: SDC Platinum/Thomson Financial.
Seller Reverse Breakup Fee

Harmon International Industries, Inc. $225 million

PHH Corp. $50 million
SLM Corp. (Sallie Mae) $900 million
United Rentals, Inc. $100 million
 (millions)
Financial Sponsor Equity $200
Bank Debt 500
High Yield Debt 300
Total $1,000
 Nalco Holding Company

Date Event Cash to (from) Financial Sponsor

(millions)
Nov. 2003 Equity invested to acquire firm. ($992)

Feb. 2004 New debt financing—proceeds dividended to sponsor. 446

Nov. 2004 Initial public offering—proceeds dividended to sponsor. 554

Sponsor continues to own 64% of common stock.

Celanese Corp.

Date Event Cash to (from) Financial Sponsor

(millions)
April 2004 Equity invested to acquire firm. ($650)

Sept. 2004 New debt financing—proceeds dividended to sponsor. 500

Jan. 2005 Initial public offering—proceeds dividended to sponsor. 800

Sponsor continues to own 58% of common stock.

Source: Casewriter.
 Loans for Payouts to Equity Owners of Leveraged Buyouts
($ billions)

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1st Half
2007

1.5 0.8 3.8 2.1 1.1 1.9 6.3 20.4 22.8 25.6 25.7

Source: Standard & Poor’s Q2 Leverage Buyout Review.

 Speed and Size of Equity Investment Recovery via Debt Financed Dividends by Private Equity Sponsors
January 2002 – September 2007

Dividends to Sponsor Funded

via New Debt Issue Bond Rating Changes
Sponsor # of Deals with In 1st Year Extracting > Downgrades Upgrades %
Bonds Rated > Following 80% of Equity %
1 Year Acquisition Invested

Madison Dearborn 12 33% 83% 25% 17%

Welsh Carson 13 31 54 38 8
Blackstone 15 27 40 40 7
Thomas H. Lee 16 38 38 63 25
Providence Equity 11 27 36 27 18
Apollo 22 36 32 41 14
Carlyle 32 16 31 25 3
J.P. Morgan 13 15 31 46 8
Texas Pacific Group 10 10 30 20 10
Cerberus 7 14 29 14 14
Goldman Sachs 12 8 25 33 8
Bain 25 12 24 40 24
Warburg Pincus 13 8 23 38 8
KKR 19 16 11 5 16
Total 220 20% 39% 33% 11%

Source: “Private Equity: Tracking the Largest Sponsors”, Moody’s Investor Service, January, 2008.
Exhibit 1 (Selling) Company XYZ “Who Gets What” Tally Sheeta

Wealth Additions from a Change-in-control (Sale) Transaction

(f) = (a) + (b) +
(a) (b) (c) (d) (e) (c) + (d) + (e) (g) (h) = (f)+(g)

Potential Gain Combined

Options Restricted Stock from Change-in- Certain and
Options Restricted Vested Due to Vested Due to control Potential
Current Stock Vested by Stock Vested Change in Change in Total Certain Agreement Change-in-
Ownership Sale Date by Sale Date control control Gain Paymentsb control Gain
—————————————————————————— ($ 000s) ——————————————————————————
Senior Officers
Adams CEO 3,148 5,280 NA 2,625 2,100 13,153 4,865 18,018
Baily CFO 1,126 2,820 1,816 705 6,467 2,060 8,527
Austin Gen’l Counsel 840 1,410 780 416 3,446 1,410 4,856
Lipson Div. GM 1,326 1,876 915 602 4,719 1,968 6,687
Teman Div. GM 1,106 2,107 1,027 815 5,055 2,078 7,133

Non-Management Directors
Testa 140 NA 50 NA NA 190 NA 190
Williams 218 110 328 328
Van Hook 18 80 98 98
Santo 340 208 548 548
Miller 218 176 394 394
Koss 623 290 913 913
Keller 112 35 147 147
Falsey 427 196 623 623

Other Senior Managers

Mead 425 415 NA 340 180 1,360 NA 1,360
Long 375 317 310 160 1,162 1,162
Harwood 640 420 380 210 1,650 1,650
Daly 43 204 160 98 505 505
Cote 718 610 512 315 2,155 2,155
Briggs 285 340 250 176 1,051 1,051

Total Company 296,117 19,406 1,145 13,055 8,603 338,326 12,381 350,707

Source: Casewriter.

a
All gains are calculated assuming a $50.00/share sale price versus a current price of $37.00/share for Company XYZ’s common stock. This is approximately a 35% premium.

b
Assumes executive’s employment is terminated by acquirer. Potential gain equals two to three times salary and bonus and continuation of benefits per executive’s employment contract.
Exhibit 2 2007 Fees to Top 10 Financial Advisors in Merger and Acquisition Transactions

Worldwide Financial Advisors Rankings, by Fees

Target & Acquiror
Financial Advisor Fees,
Rank Financial Advisor Total Amount ($ mil) Number of Deals

1 Goldman Sachs & Co 1,854 373

2 Morgan Stanley 1,537 349
3 Merrill Lynch 1,122 243
4 Citi 1,104 398
5 JP Morgan 1,073 330
6 Lehman Brothers 836 208
7 UBS 718 350
8 Banc of America Securities LLC 642 108
9 Credit Suisse 634 302
10 Lazard 344 253

Source: Thomson Financial, (2/28/2008)

Exhibit 3 Financial Advisor’s Involvement in M&A Deals in Company XYZ’s Business Sector over the Past Three Years

Recent M&A Activity in Sector —— Our Involvement Representing ——

Date Company Deal Size ($ millions) Seller Buyer Non-Winning Bidder Comments

Pending ABC NA ü
Pending DEF NA ü
Pending GHI $ 2,000+ ü ● In XYZ’s business sector we have been
Pending JKL NA ü involved in 83% of the transactions.
Dec. ‘05 MNO 1,047 ü
Nov. ‘05 PQR 869 ü
Nov. ‘05 STU NA ü
July ‘05 VWX 426 ü
May ‘05 YZA 515 ü
Feb. ‘05 BCD 1,667 ü ● We have never run a failed auction in
Nov. ‘04 EFG 4,026 ü XYZ’s business sector.
Oct. ‘04 HIJ 840
July ‘04 KLM 625
April ‘04 NOP 426 ü
Dec. ‘03 QRS 210
Dec. ‘03 TUV 3,170 ü
Nov. ‘03 WXY 625 ü
Aug. ‘03 ZAB 1,816 ü
July ‘03 CDE 615
May ‘03 FGH 476 ü
Mar. ‘03 IJK 1,780 ü
Feb. ‘03 LMN 4,200 ü
Feb. ‘03 OPQ 180 ü
Total 23 10 5 4

Source: Casewriter.
Exhibit 6 Internal Revenue Code Sec. 280G Base Amount Calculation for CEO of Company XYZ

(a) (b) (c) (d) (e) (f)

Line # 2001 2002 2003 2004 2005 5-Year Total
—————————————— ($ 000s) ——————————————
1 Salary paid in year 500 550 600 650 700 3,000
2 Bonus paid in year 400 450 300 600 650 2,400
3 Gain on exercised options in year 1,000 1,000 2,000
4 Total 900 1,000 1,900 1,250 2,350 7,400

5 5-Year average compensation (from line 4) 1,480

6 3 times 5-year average compensation (threshold) 4,440

Source: Casewriter.
Exhibit 7 Internal Revenue Code Sec. 280G Excise Tax and Non-Deductible Payments for All Company XYZ Employees a

CEO All Other Employees Total Company

———————— ($ 000s) ————————
A Total Payments
1 Salary continuation (36 months for CEO)a 2,100
2 Bonus paymenta 1,950
3 Benefits continuationa 400
4 Early option vesting 700
5 Early restricted share vesting 1,300
Subtotal 6,450

B Less: Non-parachute payments

1 Non-compete considerations 800
2 Consulting payments 0
3 Pension payments 0

C Total parachute payments (A-B) 5,650 7,026 12,676

D Threshold for 280 G trigger (Exhibit 6, line 6, column f) 4,400 5,106 9,506

E Amount by which payments exceed 1/3 of threshold (C—1/3D)b 4,183 5,324 9,507

F Excise tax (20% of amount in E) 837 1,065 1,902

G Gross-up paymentc from company to executive for excise tax (2.5 × F) 2,093 2,663 4,756

H Aggregate deduction lost by company (E + G) 6,276 7,987 14,263

Source: Casewriter.

a
Assumes that all Company XYZ employees affected by IRC Sec. 280G are terminated as a result of the change in control.

b
While no excise tax obligation is incurred until parachute payments exceed 300% of compensation averaged over five years (Exhibit 6, line 5), once the obligation is incurred it
is actually calculated on parachute payments in excess of 100% of compensation averaged over five years.
c
Assuming a 40% personal tax rate and a 20% excise tax rate, $100 of gross-up payments are required to deliver $40 in after-tax cash to the executives. The gross-up payment
thus has to be 100/40 or 2.5 times the actual excise tax obligation.
Exhibit 9 Preliminary Bids Summary—Company XYZ ($ millions except per share data)

Bidder Enterprise Value Per Share Value EBITDA Multiple Financing

Range Range -- 2005 -- -- Last 12 Months -- -- 2006 E --

Strategic Buyer A 950 1,025 47.50 51.25 7.6 8.2 7.5 8.1 7.0 7.6 Self
Strategic Buyer B 950 1,000 47.50 50.00 7.6 8.0 7.5 7.9 7.0 7.4 Self
Financial Buyer A 950 1,000 47.50 50.00 7.6 8.0 7.5 7.9 7.0 7.4 Staple/Bank ABC
Financial Buyer B 920 985 46.00 49.25 7.4 7.9 7.2 7.8 6.8 7.3 Staple/Bank DEF
Financial Buyer C 875 975 43.75 48.75 7.0 7.8 6.9 7.7 6.5 7.2 Staple/Banks ABC, GHI
Financial Buyer D 900 975 45.00 48.75 7.2 7.8 7.1 7.7 6.7 7.2 Staple/Bank GHI
Financial Buyer E 900 960 45.00 48.00 7.2 7.7 7.1 7.6 6.7 7.1 No mention
Financial Buyer F 890 950 44.50 47.50 7.1 7.6 7.0 7.5 6.6 7.0 Staple/Bank DEF
Financial Buyer G 870 940 43.50 47.00 7.0 7.5 6.9 7.4 6.4 7.0 Staple/Banks ABC, GHI
Financial Buyer H 875 925 43.75 46.25 7.0 7.4 6.9 7.3 6.5 6.9 Staple/Bank JKL
Strategic Buyer C 840 900 42.00 45.00 6.7 7.2 6.6 7.1 6.2 6.7 Self
Financial Buyer I 790 880 39.50 44.00 6.3 7.0 6.2 6.9 5.9 6.5 Bank ABC, DEF
Financial Buyer J 700 850 35.00 42.50 5.6 6.8 5.5 6.7 5.2 6.3 Staple
Financial Buyer K 780 850 39.00 42.50 6.2 6.8 6.1 6.7 5.8 6.3 Staple

Source: Casewriter.
Exhibit 11 Financial Buyer Discounted Cash Flow Rate of Return on Equity Investment as a Function of (1) EBITDA Growth and
(2) EBITDA Purchase versus Sale Multiple

Enterprise Value ($ millions) 875 938 1,000 1,063 1,125

Stock Value/Share ($) 42.89 46.47 50.00a 53.58 57.11

Purchase Price Multiple of EBITDA (Last 12 Months)

Exit EBITDA Multiple

of Future EBITDA
7.0x 7.5x 8.0x 8.5x 9.0x

Estimate
7.0x 26.2% 24.4% 22.8% 21.4% 20.0%
7.5x 29.1% 27.4% 25.7% 24.2% 22.8%
8.0x 31.9% 30.1% 28.4% 26.9% 25.4%
8.5x 34.4% 32.5% 30.9% 29.3% 27.8%
9.0x 36.7% 34.9% 33.1% 31.5% 30.1%

Last 12 Months Actual Year 1 Year 2 Year 3 Year 4 Year 5

———————————————— ($ millions) ——————————————————
EBITDA Estimate Used Above 137 146 155 166 188

Source: Casewriter.

a
See Exhibit 12 for calculation.
Exhibit 12 Adjustments to Enterprise Value to Calculate
per Common Share Value

($ and shares in millions, except per share data)

Enterprise Value = 1,000

Less: Borrowed Money 100
Plus: Cash 32
Less: Change-in-control payments 17a
Less: Debt prepayment penalties 6
Less: Fees 30
Value of Common Stock 879

Common Shares Outstanding 17.58

Price/Share 50.00

Source: Casewriter.

12.4 million per column (g) of Exhibit 1, plus $4.8million per column G of
a

Exhibit 7.