Meridian Capital November 6, 2013 Table of Contents Section Introductions I Investment Banking Overview II Meridian Capital Overview III The Recruiting Process IV Appendix: Valuation Overview V 2 Introductions Michael Hubert, Analyst Michael joined Meridian as an analyst in 2012 after completing an 18 month internship with the firm. At Meridian, Michael works across a variety of industries providing market research, financial analysis, and due diligence. Prior to joining Meridian, Michael worked as an Intern in Merrill Lynch’s Wealth Management Group in Bellevue, WA. At Merrill Lynch, he conducted mutual fund research and analyzed the effectiveness of portfolio sell criteria. Michael has also worked as a research assistant at Centerstone Executive Search, a Seattle-based executive recruiting firm, where he was in charge of the research, design, and presentation of corporate succession planning projects. Michael is a graduate of the University of Washington, where he earned a double major in finance and accounting, magna cum laude. Nick Colmenero, Analyst Nick joined Meridian as an analyst in 2013 after completing his undergraduate degree. At Meridian, Nick works across a variety of industries providing market research, financial analysis, and due diligence. Prior to joining Meridian, Nick worked as an intern for JPMorgan Chase & Co. in New York City. While at JPMorgan Chase & Co., Nick spent his time working in a corporate finance capacity, developing and analyzing various management reports for JP Morgan’s wholesale lines of business. Additionally, Nick spent two summers interning for PricewaterhouseCoopers and The Boeing Company, respectively. Nick is a graduate of the University of Washington, where he earned a double major in finance and accounting. 3 Investment Banking Overview • What is an Investment Bank? • What is Middle Market Banking? • The M&A Process 4 What is an Investment Bank? Most of the largest investment banks have four primary areas: • Traders: facilitate buying and selling of all types of securities • Sales: sale and provide advice to both retail and institutional clients • Trusted advisor to senior management • Advise on raising capital, M&A, takeover defense, etc. • Wealth management services for high net-worth individuals • Develop close relationships and provide a wide array of services Corporate Finance Sales & Trading Private Client Services Research • In-depth company and industry research 5 What is Middle Market Investment Banking? Strategic, Financial and Valuation Advisory Services Raising Capital and Project Financing Transaction Services Mergers and Acquisitions, Restructuring • Use industry knowledge, expertise and contacts to advise senior executives and boards of directors • Equity and equity-linked • Sell side M&A • Investment grade debt • Buy side M&A • Leveraged finance • Leverage buyout (LBO) • Identify and assess strategic opportunities • High yield debt • Hostile takeover / defense • Interpret market information and enhance shareholder value • Specialized securities and derivatives • Provide general valuation services 6 The M&A Process – Details and Timeline • A sell side auction process can be completed in as little as 19 weeks or can take up to 6 months Preparatory phase (3 -4 weeks) Marketing phase (4 - 6 weeks) Buyer/Investor Meetings (4 - 6 weeks) Structuring and Negotiation (8 - 16 weeks) • Initial due diligence meeting • Perform financial analysis • Approve buyer list • Develop blind investment summary • Prepare offering memorandum and supportive marketing materials • Contact prospects • Field initial due diligence • Introductory meetings with prospects • Select prospects to invite to management presentations • Management and strategic presentations • Discuss potential deal terms and structure • Coordinate follow-up due diligence • Select prospective buyer to move forward with • • • • Key value messages and objectives defined Identify synergies and choose qualified prospects Develop strategy and exchange due diligence Extract final concessions and value from preferred prospect Solicit letters of intent Negotiate terms Complete due diligence Definitive documentation signed 7 What Do Investment Banking Analysts Do? An analyst is the most junior member of the team and provides support to senior level bankers. Responsibility Descriptions Typical Deliverable Financial Analysis Use of excel models to provide transaction, valuation, and/or financial analysis. DCF, LBO, Comparable Transaction, Comparable Companies, Merger Models, Working Capital Analysis, Flow of Funds, etc. Research Perform detailed research and due diligence on industries covered. Analysts will use information from a variety of databases to analyze trends, competitors, capital markets, and other industry dynamics. Industry-related slides for pitch books and other ad-hoc reports that are used to help prepare senior level bankers prior to meetings. Create Pitch Books A pitch book is a marketing tool that is used to secure deals with prospective clients. A PowerPoint presentation that includes firm qualifications, industry research, potential buyer/investor pools, valuation analysis, and transaction considerations. Other Responsibilities Analysts at a boutique investment bank will also be asked to attend client meetings, prepare marketing materials, and assist with deal management. Client presentations, investor presentations, offering memorandums, creation and management of data rooms. 8 Meridian Capital Overview • Investment Banking Services • Industry Expertise • Global M&A • Middle Market Overview 9 Meridian Capital Overview Track Record of Focusing on the Middle Market • Founded in 1995 • Located in Seattle, WA – clients throughout North America and Europe • M&A and Strategic Advisory Services – sellside, buy-side, and strategic advisory • Exclusive focus on middle market transactions – transaction values from $10M - $200M • Collectively, completed over 100 transactions with deal value in excess of $5 billion Operational Experience and Vertical Focus • 14 investment banking professionals • Foundation rooted in the operational experience of Meridian’s professionals • Executive experience across a variety of verticals including niche manufacturing, aerospace, distribution, consumer goods, and business services Global Presence / Access • Founding member of Global M&A, an international investment banking group • Unmatched access to global middle-market advisors and businesses Deep Engagement Teams • Significant senior level involvement in every transaction • Relevant industry transaction experience with focus on: − Manufacturing • 45 offices worldwide − Business Services • International reach is critical for globalized industries − Industrial Services − Consumer Products − Healthcare • Experienced, tenured support staff 10 Investment Banking Services Meridian Capital focuses exclusively on serving the investment banking needs of middle-market business owners and private equity firms Meridian Capital Service Offering Distribution 40% Sales Process 20% Buy-side Process • Strategic Sale (100% common) • Targeted Buy-Side Opportunities • Minority Sale • Add-on Acquisitions • Subsidiary Divestitures • Merger of Equals • Succession Planning • Vertical & Horizontal Acquisitions 25% Recapitalization 15% Strategic Advisory • Management Buy-Outs • Exit Strategy Assessment and Roadmap • New Growth Capital • Corporate Finance Alternatives • Liquidity Events • Market Research and Analysis • Financial or Strategic Partner • Strategic Issues and Projects 40% SALES PROCESS 25% RECAPITALIZATION 20% BUY-SIDE PROCESS 15% STRATEGIC ADVISORY 11 Meridian Industry Expertise Meridian Capital focuses on industries in which its professionals have substantial operating and transaction experience. Industry Manufacturing Business Services Industrial Services Consumer Products Healthcare Sub-Segments • Electronic Components • Precision Metal Machining • Equipment manufacturing and Assembly • Aerospace Components • Technology Enabled Services • Transportation • Business-to-Business Services • Consulting and IT Services • Heavy Construction • Crane Rental and Leasing • Machinery Installation • Lifting and Heavy Haul • Juvenile Products • Specialty Retail • Housewares • Outdoor and Sporting Goods • Medical Devices and Products • Skilled Nursing • Assisted Living / Long-Term Care • Biopharmaceuticals 12 Global M&A Global M&A Partners is a leading independent M&A advisory group. Meridian Capital is a founding member. Office Locations • Unparalleled network of prominent middle-market M&A advisory firms across the world • Unique access to local knowledge about markets and available opportunities • Dedicated senior resources on the ground and available at all times to our clients • Firms actively coordinate on projects and routinely meet to expand relationships and marketing efforts • Industry sector teams with in-depth knowledge of a variety of industries Corporate/Strategic Acquisition of the Year in 2012 by North & South America Asia & Asia Pacific Argentina Brazil Canada Chile Colombia El Salvador Guatemala Mexico Panama Peru United States Australia China GCC & Yemen India Israel Japan Europe Europe Austria Belarus Belgium Bosnia-Herzegovina Croatia Czech Republic Denmark Estonia Finland France Germany Hungary Iceland Ireland Italy Latvia Netherlands Norway Poland Russia Serbia Slovenia Spain Sweden Switzerland Turkey UK Ukraine 13 Recruiting Process • Interview Process • Candidate Qualifications/Skills 14 Interview Process • Informational Interviews • Great way to learn more about the firm, gain exposure to recruiters/bankers • Be proactive, reach out directly to banks and schedule interviews on your own time • Don’t be fooled by the name, every interaction with bankers/recruiters is a chance for them to assess your skills and candidacy • 1st Round Interviews • Typically, first round interviews are 1 on 1 or 2 on 1 and usually are conducted by a Vice President or experienced Associate • Expect “Walk me through your resume”, “Why banking”, and “Why this firm” • 2nd Round Interviews • You will have between one and four interviews and meet more senior bankers (Directors and Managing Directors) • Expect some technical questions 15 Candidate Qualifications/Skills Motivation • • Know why you want to do this job Make sure you understand what this job is really about! Business Sense • • Draw on your previous experience Transferable skills, adaptability, intuition and ability to learn Personality • • Strong personal presence, energy and empathy Demonstrate that you can both lead and be a team player Technical • • Depth of questions depends on background and courses Demonstrate potential and that you are motivated to learn High Level Duties: • • • • • Must be self-motivated, possess a strong work ethic, and pay close attention to detail. Extensive knowledge of accounting and corporate finance. Financial modeling experience. Ability to manage multiple projects simultaneously. Strong oral and written communication skills with excellent research and writing capabilities. Analytical thinker with the ability to articulate complex ideas simply and summarize effectively. 16 Q&A Session Michael Hubert – Analyst Nick Colmenero – Analyst Meridian Capital Contact Info: mhubert@meridianllc.com ncolmenero@meridianllc.com 17 Appendix: Valuation Overview 18 Valuation Introduction Valuation is the central discipline in investment banking Valuation requires interpretation of information and sound judgment • Dependent on the quality of information available • Generally expressed as a range Valuation is about finding equilibrium between risk and reward • Fair market value = price at which willing buyer and willing seller will transact when both have complete information • Different categories of buyers (strategic, sponsors) may be prepared to pay different prices • Price is affected by many factors including target ownership, market trends, synergies(specific to buyer), competitive dynamics (e.g. auction vs. negotiated deal), etc. In the end, a business/asset is only worth what a purchaser will pay for it, irrespective of theory 19 Valuation – Key Definitions • Going Concern Value – value of a collection of assets that constitute an operating business • Future cash flow is key; history may be good predictor • Liquidation Value – sale of each asset or collection of assets independently • Used almost exclusively in a reorganization or restructuring • Firm Value (or Enterprise Value) • Total value of an operating business, regardless of its capital structure • Equity Value (or Market Value of Equity, or Market Cap) • Value of an operating business to its Equity holders • Net Debt • Total Indebtedness for borrowed money • Preferred claims against the value of the business (preferred stock, “out of the money” convertible securities, minority interests) • Less: Cash and cash equivalents Enterprise Value = Equity Value + Net Debt 20 What Drives Valuation? Discount Multiple Valuation Scale EBITDA: 4.0x Revenue: 0.5x Premium Multiple EBITDA: 8.0x Revenue: 1.5x Company Scale • Low sales or EBITDA compared to market segment • Significant revenue and EBITDA levels within market segment • History of flat sales or profitability • History or visibility of strong growth Operations & Management • Customer concentration • Blue-chip, diversified customer base • Market segment concentration • Recurring, highly visible revenue • Product concentration • Sophisticated operating systems / business model • Margin pressure (cost or pricing related) • Professional, deep management team • Need for management depth • Strong, defensible margins • High employee turnover • Strong, tenured employee base • Identifiable growth opportunities / potential • Low capital expenditure requirements Market Trends / Service Offering • Small, competitive industry • Strong, clearly articulated brand definition • Limited service offering capabilities • Positive industry dynamics (size, growth prospects, fragmentation) • Commoditized product • Diverse product portfolio • Private label products • High value-add capabilities • Highly competitive specialty • Differentiate products 21 Valuation – A Combination of Approaches Market Value Comparable Trading Companies Comparable Transaction • • • • Starting point for public company valuation Still must determine what an acquirer is will to pay • Valuation on the basis of key ration, or market trading multiples Reference to a set of comparable public companies • • Valuation on the basis of key rations Reference to selected precedent transactions Generally implies control premium and synergies Discounted Cash Flows LBO Analysis Other Considerations • • • • • Present value of future cash flows generated by the company or the asset Appropriate discount rate (WACC) reflecting cost of capital at target capital structure • • Value that a financial sponsor would pay Based on target rate of return Specific capital structure with large debt component (maximize returns) • • • Equity research Estimates as benchmarks Synergies Value creation Specific acquirer traits Target Valuation Range 22 Typical Valuation Methodologies The following valuation methodologies are commonly used for valuation analysis: Approach Description Comparable Public Companies Analysis Analysis of similar public companies yields a current valuation and aggregate reflection of public market value. This value is then discounted to account for the size, liquidity and comparability to Apollo Video Technology. Comparable Transactions Analysis Recent mergers and acquisitions involving businesses similar to Apollo Video Technology demonstrate how acquirers have valued comparable companies in change of control transactions. Discounted Cash Flow Analysis Cash flows for a standalone entity are projected forward and then discounted at an appropriate risk-adjusted rate to arrive at an intrinsic value of the business. Terminal value can be estimated using an implied transaction multiple or perpetuity. 23 Comparable Public Companies • Equity of fundamentally similar, or “comparable” companies tends to be valued on a relatively consistent basis by the public markets • This is assumption is not always valid! • Identify a universe of public companies which are fundamentally comparable to the target • Judgment and business sense are key • Similarity of industry/products/markets, business model, financial profile • Analyze key ratios and operating data for each comparable to determine key metrics used by public markets for valuation • Understand how comparable companies are valued relative to profitability, growth, etc. • Based on data acquired in this analysis, determine a range of values for the target • The valuation range must be adjusted to reflect the differences of the target from the universe of comparables • Private company, size premium, control premium, IPO discount, etc. 24 Comparable Public Companies – Valuation Metrics Firm Value Metrics • Enterprise Value/Revenue • Enterprise Value/EBITDA • Enterprise Value/EBIT Equity Value Metrics • Equity/Net Income • Price/Earnings Revenue • Profitability EBITDA • • • Stability (Risk) Growth Rate Size EBIT • • Capital Intensity Acquisition History Net Income • • Capital Structure Tax Position 25 Comparable Public Companies Analysis Example ($ in millions) Market Com pany Costar Technologies, Inc (OTCPK:CSTI) Beta* 1.16 Market Value of Debt Value of Equity $0.3 $4.1 Enterprise Value (m ) TTM Enterprise Value / TTM $4.3 Rev $20.3 EBITDA $0.9 Rev 0.21x EBITDA 4.78x Digital Ally Inc. (NasdaqCM:DGLY) 0.94 $2.6 $15.7 $17.9 $18.6 $0.1 0.96x NA Iteris, Inc. (AMEX:ITI) 1.31 - $59.4 $40.3 $61.7 $3.0 0.65x 13.43x IndigoVision Group plc (AIM:IND) 0.82 - 40.1 $38.8 $48.2 $3.5 0.80x 11.09x Napco Security Technologies, Inc. (NasdaqGS:NSSC) 1.02 16.8 94.9 $109.9 $69.5 $4.9 1.58x 22.43x KVH Industries, Inc. (NasdaqGS: (KVHI) 1.31 15.6 223.0 $188.2 $150.3 $15.3 1.25x 12.33x Verint Systems Inc. (NasdaqGS:VRNT) 2.01 649.5 1,923.8 $2,260.0 $847.7 $157.7 2.67x 14.33x Petards Group plc (AIM:PEG) 0.26 0.1 2.1 $2.2 $13.8 $0.6 0.16x 3.67x Harman International Industries, Incorporated (HAR) 2.14 294.4 3,990.0 $3,670.0 $4,210.0 $408.4 0.87x 8.99x Magal Security Systems Ltd. (Nasdaq: MAGS) 0.75 5.5 57.5 $20.8 $75.6 $5.7 0.27x 3.64x D-Link Corp. (TSEC:2332) 0.85 44.6 375.7 $298.1 $1,052.3 $27.9 0.28x 10.68x Median 0.80x 10.89x Average 0.88x 10.54x * Levered Beta 26 Low Comparable Transaction EBITDA Multiple Range Median 8.88x % of Median 95% Comparable Companies Valuation Example High 9.35x 9.81x 100% 105% Implied Enterprise Valuation Before Discount / Premium $53,034,508 $55,825,798 $58,617,088 Enterprise Value Range Comparable Transaction Valuation Range $53,034,508 8.88x $55,825,798 9.35x $58,617,088 9.81x Public Company Comparables Valuation 2013 EBITDA (000's) $5,972,453 Low Comparable Trading EBITDA Multiple Range % of Median Implied Enterprise Valuation Before Discount / Premium Liquidity Discount Size Discount Control Premium Enterprise Value Range Public Company Comparables Valuation Range Median High 10.34x 10.89x 11.43x 95% 100% 105% $61,760,500 $65,011,053 $68,261,606 (10.0%) (20.0%) 10.0% (10.0%) (20.0%) 10.0% (10.0%) (20.0%) 10.0% $48,914,316 8.19x $51,488,754 8.62x $54,063,192 9.05x 27 Comparable Transactions • Value a company or an asset by comparing reported comparable acquisitions and precedent transactions • Comparability of the target on the basis of similar characteristics (business mix, customer base, distribution channels, industry dynamics, etc.) • Typical benchmarks include multiples of net income (Equity Value multiples) and multiples of Revenue, EBITDA and EBIT (Firm Value multiples) • Key is also to understand the key traits of the transaction, besides the comparability of the target • Friendly vs. hostile • Auction vs. negotiated deal • Majority stake (control) vs. minority position • Merger of equals vs. outright acquisition • Consideration paid: cash, shares, cash and shares • Outright acquisitions potentially involves a “control premium” above comparable trading company multiples • Synergy potential to acquirer is key determinant of value 28 Comparable Transactions Analysis Example Enterprise Date Target Com pany 1/7/2013 Visimetrics (UK) Limited 4/24/2012 Transics International NV (69.49% Stake) 4/19/2011 Conexant Systems, Inc. Target Description Acquirer Value (m ) UK based company specialised in the design, development and Digital Barriers Plc manufacture of high-performance digital video recording, storage and management systems for and CCTV andof Video Surveillance Belgium based developer seller on-board computers, softw are and Tavares NV fleet management solutions for the transport and logistics sector Enterprise Value / Revenue EBITDA $12.9 4.55x NM $83.3 1.30x 6.50x US based developer of semiconductor system solutions for imaging, audio, video surveillance, and embedded modem applications Golden Gate Capital $302.2 1.26x 6.69x Norw ay based manufacturer of camera-based surveillance systems for marine and oil & gas installations Cooper Industries Plc $51.9 1.02x 6.56x 1/28/2011 Optelecom-NKF Inc. US based supplier of advanced video surveillance solutions TKH Group NV $18.1 0.50x NM 7/29/2010 Trafficmaster Plc UK based provider of fleet tracking, navigation capabilities, traffic and journey time data, stolen vehicle tracking and other telematics services Vector Capital Corporation $119.3 1.42x 7.25x 2/13/2009 Videolarm Inc. US based manufacturer and supplier of video surveillance systems Moog Inc. $45.0 2.31x NM 7/31/2008 AllSystem S.p.A. (40% Stake) Italy based company that manufactures and markets security and surveillance systems Teknel SpA $139.4 0.98x 13.88x 6/10/2008 Transics International NV (56.81% Stake) Belgium based developer and seller of on-board computers, softw are and ING Parcom Private Equity fleet management solutions for the transport and logistics sector $215.1 3.16x 10.45x 6/19/2013 Exacq Technologies, Inc. US based company that develops open architecture and video management system solutions for security and surveillance applications $150.2 2.73x NM 12/30/2010 Hernis Scan Systems AS Tyco International Ltd 6/16/2011 CarrierWeb LCC (European Netherlands based company offering fleet management and mobile Activities) operations management solutions Transics International NV $8.5 0.93x NM 3/14/2011 Essential View ing Systems UK based provider of video solutions to military, law enforcement and Limited local authorities COE Group Plc $7.8 3.49x NM Cooper Safety Ltd. $18.1 0.50x NM GenNx360 Capital Partners $20.1 0.45x 14.11x Linear LLC $11.2 0.79x NM 11/11/2010 Optelecom-NKF Inc. US based supplier of advanced video surveillance solutions 10/22/2009 GVI Security Solutions, Inc. Provider video surveillance and security solutions in the United States 5/15/2007 International Electronics Inc US based electronic security systems company manufacturing w ireless access control and fleet management systems for industrial mobile asset applications Median $ 45.0 1.26x 7.25x Average $ 80.2 1.69x 9.35x 29 Comparable Transactions Valuation Example Transaction Comparables Valuation 2013 EBITDA (000's) $5,972,453 Low Comparable Transaction EBITDA Multiple Range Median High 8.88x 9.35x 9.81x 95% 100% 105% Implied Enterprise Valuation Before Discount / Premium $53,034,508 $55,825,798 $58,617,088 Enterprise Value Range Comparable Transaction Valuation Range $53,034,508 8.88x $55,825,798 9.35x $58,617,088 9.81x % of Median Public Company Comparables Valuation 2013 EBITDA (000's) $5,972,453 Low Comparable Trading EBITDA Multiple Range % of Median Implied Enterprise Valuation Before Discount / Premium Liquidity Discount Median High 10.34x 10.89x 11.43x 95% 100% 105% $61,760,500 $65,011,053 $68,261,606 (10.0%) (10.0%) (10.0%) 30 Discounted Cash Flows (DCF) • Intrinsic value of a business is measured by its future free cash flows • Value = Present Value of all future cash flows • Free Cash Flow (“FCF”) • Cash generated by a company’s operations and is available for distribution to the providers of capital (Debt + Equity holders), net of the cash needed to invest for growth • Discount Rate and Weighted Average Cost of Capital (WACC) • Cash flows are discounted to reflect the time value of money and the uncertainty associated with the cash flows • The DCF analysis is one of many valuation approaches • Compare results with the valuation derived from other methods • The DCF analysis is less reliant on external market factors and focuses more heavily on internal cash flow generation • Perform sensitivity of value on key assumptions to test results UNIVERSITY OF WASHINGTON 31 Discounted Cash Flow Summary Example Enterprise Value Implied Equity Value Cumulative Present Value of FCF $6,114,519 Terminal Value Terminal Year EBITDA (2018E) Exit Multiple Terminal Value Discount Factor Present Value of Terminal Value % of Enterprise Value Enterprise Value Less: Total Debt Less: Preferred Securities Less: Noncontrolling Interest Plus: Cash and Cash Equivalents 12,600,000 9.0x 113,400,000 0.43 $48,371,034 88.8% Enterprise Value $54,485,553 ($10,774,392) $788,177 Implied Equity Value $44,499,339 Implied EV/EBITDA Enterprise Value 12/31/13 EBITDA $54,485,553 $54,485,553 5,972,453 Implied EV/EBITDA Enterprise Value 9.1x Implied Perpetuity Growth Rate Exit Multiple 17.7% 18.2% 18.7% 19.2% 19.7% Exit Multiple 8.0x 8.5x 9.0x 9.5x 10.0x 0.1 8.0x 8.5x 9.0x 9.5x 10.0x $51,096,385 $50,091,462 $49,110,994 $48,154,281 $47,220,647 $53,898,873 $52,835,620 $51,798,274 $50,786,093 $49,798,362 $56,701,361 $55,579,777 $54,485,553 $53,417,906 $52,376,077 $59,503,849 $58,323,935 $57,172,833 $56,049,718 $54,953,791 $62,306,337 $61,068,092 $59,860,113 $58,681,530 $57,531,506 17.7% 18.2% 18.7% 19.2% 19.7% 12.9% 13.4% 13.8% 14.3% 14.8% 13.2% 13.6% 14.1% 14.6% 15.0% 13.4% 13.9% 14.3% 14.8% 15.3% 13.6% 14.1% 14.6% 15.0% 15.5% 13.8% 14.3% 14.8% 15.2% 15.7% WACC WACC ####### 32