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Slide 1: Jefferies TMT Equity Capital Markets Update 2009 First Quarter Review Jefferies TMT Equity Capital Markets Alex Lehmann Managing Director TMT Equity Origination 212.323.3946 alehmann@Jefferies.com Jefferies & Company, Inc. 520 Madison Avenue New York, NY 10022 www.jefferies.com ISSUE HIGHLIGHTS: • A Tale of Two Quarters: Negative sentiment in January and February is replaced by cautious optimism in March • Current Trends in TMT New Issue Activity: – IPO activity gains momentum – Convertible Markets re-open – Structured Equity activity remains strong APRIL 2009
Slide 2: Quarter in Review: The 2009 “New World Order” We entered 2009 in the cliché of a “new world order”. After the so-called “bulge bracket” had been acquired, bankrupted, or converted into bank holding companies during the last four months of 2008, the entire sell- and buy-side landscape had changed. As one example, Jefferies entered the year as the largest independent full-service U.S. investment bank. This “new world order” applied to the Technology, Media, and Telecom (“TMT”) sector as well. While most companies – private and public – seemed to be doing well and continuing to grow, very few were immune to the impact of the broader economic slowdown. Moreover, dislocations in the equity and fixed income markets resulted in public and private valuations that were substantially lower than they were just six months earlier and often didn’t take into account the growth prospects of their relevant companies or industries. This attitude prevailed for much of the first quarter of 2009. As Q4 results – and projections – were as dismal (or perceived to be dismal) as expected, the sector traded down with the rest of the broader markets. Moreover, as credit markets continued to remain unstable and financial services companies were deemed to be increasingly questionable, those conditions carried over to virtually every other vertical of the economy, impacting stocks, bonds, consumer confidence, and enterprise-level conditions. In short, the financial services industry – and the lack of resolution to its many troubles – dragged the rest of the economy down. US QUARTERLY DEBT ISSUANCES SINCE 2006 Number of Offerings 600 507 500 466 459 399 390 US High Yield Corporate Debt US Investment Grade Corporate Debt 486 400 300 264 219 217 289 200 110 42 14 4Q07 1Q08 2Q08 62 14 3Q08 4 4Q08 173 99 20 93 24 1Q09 100 67 82 49 77 83 0 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 Source: Dealogic investor sentiment towards equities. As a result, March was the strongest month performance-wise in six years, and TMT stocks benefited particularly well. The level of M&A activity has been particularly pertinent with a strong ‘barbell’ shape to the activity. The first quarter saw 31 U.S. deals in the TMT sector valued at less than $250 million in size coupled with the select, speculated larger transactions like IBM’s potential acquisition of Sun and Cisco’s potential purchase of EMC. This level of activity has multiple impacts on the financing markets. First and foremost, some of these deals will likely require funding, which could lead to debt, equity and convertible activity. Second, as some companies are speculated to be potential acquisition targets, investors will likely move into those stocks. Third, it re-focuses investors on the fundamentals of the TMT sector rather than A Tale of Two Markets This sentiment – and its impact – prevailed through early March. At that point, a combination of the Federal government’s statement regarding a detailed plan to deal with “toxic” loans on many banks’ balance sheets, along with increased levels of M&A activity, managed to turn around FIRST QUARTER TMT SNAPSHOT TMT STOCKS PERFORMED SIGNIFICANTLY BETTER IN MARCH Percent 120 115 110 105 100 95 90 85 80 75 70 S&P 500 Index NASDAQ Composite Index PHLX Semiconductor Index S&P 500 Computers & Peripherals Index S&P 500 Diversified Telecommunication Services Index S&P 500 Internet Software & Services Index 09 9 9 9 9 25 /0 9 /0 9 09 09 09 09 09 /0 /0 1/ /0 3/ 11 / 11 / 7/ /0 4/ 2/ 25 4/ 14 1/ 2 1/ 28 18 18 2/ 2/ 3/ 2/ 3/ Source: Capital IQ Jefferies TMT Equity Capital Markets Update | APRIL 2009 1/ 1/ 1 3/ 4/ 1/ 09
Slide 3: Quarter in Review: Drivers of the Equity Markets the broader emotion around the equity markets – and for the most part that is a positive for TMT companies. Fourth, it appears that private equity firms are cautiously wading back into the M&A markets, which adds to the overall tension of M&A processes and thus to equity valuations. Additionally, the attitude towards Q1 earnings has become increasingly benign. First, there is a belief that earnings from financial services companies could come in much stronger than reported – due primarily to two factors: one, many of the assets that they wrote down were written down to levels where they may need to be written up; and two, their core businesses have been profitable due to fewer active banks in the traditional investment banking activities of trading, financing, and advisory work. For TMT companies, visibility seems to have improved and there is a growing belief among many buy-side investors that the current stock prices take into account the uncertainty of how the next three quarters will fare for these companies. Finally, the markets have turned as investors have re-focused on their desire to have growth assets in their portfolios. In 2009, it is very likely that up to 70% of publicly-traded companies will not grow; as a result “growth” companies are now those that may grow 5-10% this year and “hyper”growth companies are those that may grow more than 20%, certainly bars that have been re-set relative to where they were just 12 months ago. As investors start to re-invest in growth assets, this will undoubtedly help feed the equity funding markets, particularly in the TMT sector: those who will benefit will include private companies raising capital TMT ANNOUNCED M&A TRANSACTIONS 2009 US YTD ANNOUNCEMENT DATE ACQUIROR TARGET INDUSTRY DEAL VALUE ($ MM) MONTHLY EQUITY MUTUAL FUND FLOW DATA $ in Billions $10.0 $0.0 ($10.0) ($20.0) ($30.0) ($40.0) ($50.0) ($60.0) Sept Oct 2008 Nov Dec Jan Feb 2009 Mar ($47.4) $4.9 ($18.3) ($24.4) ($25.1) ($18.3) ($25.2) Source: Bloomberg through IPOs and public companies looking to grow organically or through acquisitions through equity funding. Equity New Issue Activity The TMT equity markets look like they will be led by four to five products for the remainder of the year: • IPOs: we are seeing a re-opening of companies coming to market and others accelerating their IPO preparation • PIPE and Registered Direct (“RD”) activity: this has been somewhat strong to-date and should get stronger 04/01/09 04/01/09 03/25/09 03/23/09 03/23/09 03/19/09 03/12/09 03/05/09 03/02/09 02/27/09 02/09/09 01/15/09 Source: Dealogic Fidelity National Information Services Rockwell Collins Hearst Corporation Cox Enterprises Deloitte & Touche Cisco Systems Carl Icahn TriNet Group TNS Kudelski CSR PLC Nuance Communications Metavante Technologies DataPath Hearst-Argyle Television Cox Radio BearingPoint Pure Digital Technologies Lions Gate Entertainment Gevity HR VeriSign OpenTV SiRF Technology Zi Corporation Software Software Media Media Services Hardware Media Services Services Services Software Software 2,978.3 129.6 67.5 65.2 350.0 590.0 175.0 98.8 230.0 87.2 128.6 175.0 Jefferies TMT Equity Capital Markets Update | APRIL 2009 2
Slide 4: Quarter in Review: Equity New Issuance Activity • Reverse enquiry PIPEs by private equity firms: a growing trend that has seen some activity and should see more in coming months • Public accelerated follow-on and convertible financings: a recent trend in the past month • Potential rights offerings: a lot of discussion on this topic but there has been a minimal amount of activity in the TMT space thus far TMT IPO BACKLOG ISSUER FILING DATE AMT. FILED ($MM) SECTOR OpenTable Inc Medidata Solutions FriendFinder Networks Bridgepoint Education Rosetta Stone Avago Technologies NextG Networks Open Link Gomez Digitalglobe Solarwinds LogMeIn Intelius Inc Source Photonics ExactTarget Broadview Networks Intcomex Inc Vitacost.com Source: Dealogic 01/30/09 01/26/09 12/23/08 12/22/08 09/23/08 08/21/08 06/05/08 05/12/08 05/07/08 04/14/08 03/21/08 01/11/08 01/10/08 12/26/07 12/14/07 11/30/07 07/27/07 06/20/07 40.0 75.0 460.0 230.0 115.0 400.0 150.0 200.0 80.5 250.0 250.0 86.3 143.8 130.0 500.0 86.3 250.0 125.0 57.3 Internet HCIT Internet Internet Software Semiconductors Telecom Services Software New Media Software Software Software IT Services Semiconductors Internet Software Telecom Services Computer Equipment Internet IPOs There are currently 19 TMT companies on file for IPOs, with total proceeds of approximately $3.5 billion expected. The mix of companies on file is reasonably well distributed between Software, Internet, Telecom Services, IT Services, and Hardware companies. We have not seen many semiconductor or traditional media filings. After a lull in pricing activity (the last TMT IPO to price was the Grand Canyon IPO in November 2008), we have seen one IPO price recently (Changyou, a Chinese mobile gaming company); two others that have launched and should price in mid-April (Rosetta Stone and Bridgepoint Education); and many others that we expect to be priced between now and the end of the second quarter. In total, we may see as many Education Management 12/21/07 TMT FIRST QUARTER PIPE TRANSACTIONS COMPANY NAME AT CLOSING CLOSING DATE GROSS PROCEEDS ($MM) FIXED CONVERSION PREMIUM/DISCOUNT AT ANNOUNCEMENT INTEREST OR DIVIDEND RATE WARRANT COVERAGE SECURITY SOLD LoopNet, Inc. Lecere Corporation CommScope, Inc. China Tel Group Inc. ParkerVision, Inc. Paradigm Holdings, Inc. Advanced Micro Devices, Inc. Clearwire Corporation Genius Products, Inc. ImageWare Systems, Inc. Pipeline Data Inc. Omniture, Inc. Nuance Communications, Inc. 3/30/09 3/30/09 3/19/09 3/9/09 3/3/09 3/3/09 3/2/09 2/27/09 2/24/09 2/12/09 2/2/09 1/27/09 1/13/09 50.0 7.1 100.0 300.0 6.2 6.2 124.7 10.0 5.0 5.0 15.0 25.0 175.2 10.0% N/A 10.0% N/A N/A N/A N/A N/A N/A N/A 103.3% N/A N/A N/A N/A 3.5% N/A N/A 12.5% N/A N/A 5.0% 5.0% 16.0% N/A N/A N/A N/A N/A 0.0% 0.0% 167.7% 60.3% N/A 776.4% 17.1% 0.0% 0.0% 22.2% Convertible Preferred Stock Common Stock Convertible Senior Subordinated Debentures Common Stock Registered Direct Non-Convertible Preferred Stock Common Stock Common Stock Promissory Notes Non-Convertible Secured Promissory Notes Convertible Preferred Stock Common Stock Common Stock Dealogic, transactions below $5 million not included. N/A - Not available or undisclosed. Jefferies TMT Equity Capital Markets Update | APRIL 2009 3
Slide 5: Quarter in Review: Equity New Issuance Activity as 4-6 TMT IPOs price in Q2 2009. While for the most part these offerings are coming at relatively cheap pricing levels (Grand Canyon was priced at a 30% discount to its comparables, and Changyou priced at 8x PE, a 40% discount to its comparables), we believe there is an increasing level of reconciliation between the buyside and boards and management teams around valuation expectations. PRECURSORS TO A RETURN OF THE IPO MARKET Step s e to “R cove ry” PIPEs and RDs Non-traditional PIPE and RD activity has remained strong despite the market turmoil since last September. Some examples include another investment by Warburg Pincus in Nuance Communications and a second funding by Elevation Partners in Palm. However, more recently we have seen more traditional PIPEs and RDs be marketed (e.g. to multiple buyers) and while this has been less prevalent among TMT companies we do expect that activity to pick up as issuers continue to try to avoid market exposure and risk. Improved Sector Valuations Increased M&A Activity More Active Mid/LargeMore Active Cap IPO Follow On Market and Convert Activity Improved Early Stage IPO Market Improved Overall Market Sentiment Reverse enquiry PIPEs by private equity sponsors As private equity investors continue to have reasonably strong levels of cash, they are increasingly approaching companies directly about making investments in those companies. The structures are usually convertible preferreds and they are usually a 3-5 year maturity based on a cash-on-cash return of 2.0 – 3.0x or roughly a 20-30% IRR. Depending on the company and its relative need for capital, some of these suggested structures are gaining traction with corporates. That said, we are hearing more discussion among corporates and advisors regarding rights offerings, and have seen one offering marketed within the TMT industry. This could be a bellwether for future offerings. In sum, it does feel as if the market tone has improved and activity can pick up for at least a month or two before potentially slowing down, depending on market conditions. Fund flows for mutual funds have stabilized and based on anecdotal conversations, many hedge funds are doing very well so far this year. As a result, they are looking for new investment ideas. We would encourage almost every public company that can to get on file with a shelf to take advantage of this window and for those with IPO aspirations to consult their advisors about the viability and timing of a potential public exit for their companies. As always, please feel free to contact us if you would like to discuss any of these topics further. Public follow-on and convertible offerings After a period in January and early February in which there were no marketed follow-on offerings and no convertible transactions pricing since the demise of Lehman Brothers in September of 2008, the market for both products began to thaw in late February. In the TMT sector, Teradyne (a test and measurement company) raised $150 million with terms of a 4.5% coupon and 25% conversion premium. In the follow-on market, there have been very few transactions but we do expect that overnight or 1-2 day marketed offerings will pick up. Rights offerings Finally, rights offerings have become more visible. A staple of European and some Asian countries for years, there have been very few rights offerings of any size in the U.S., as investors typically prefer to take their chances with a marketed follow-on. Additionally, the regulatory environment in Europe and Asia is more conducive to rights offering as opposed to the more stringent U.S. environment. Jefferies TMT Equity Capital Markets Update | APRIL 2009 4
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