Goldman Stanley, Inc.
Project Aardvark
Presentation to the Board of Directors
January 29, 2010
Goldman Stanley
Confidential Draft
Table Of Contents
Executive Summary
3
Aardvark Valuation
5
Potential Acquisitions
11
Process Recommendations
16
Appendix
19
Goldman Stanley
Executive Summary
Goldman Stanley
Executive Summary
•
As of January 29, 2010, Aardvark’s share price and valuation are at all-time highs,
having more than doubled since early 2009
•
As Aardvark’s stock price has soared in value, it has also generated over $35B in
cash & cash-equivalents
•
As Aardvark’s cash balance grows, it is likely to face shareholder pressure to reinvest the cash in its business and to make significant acquisitions
•
Given Aardvark’s strong currency and cash balance, it could easily make several
“tuck-in” acquisitions – or larger-scale acquisitions to acquire customers
•
Such a strategy would allow Aardvark to capture more of the smartphone, laptop, and
desktop markets, and significantly improve its software offerings
•
Given Aardvark’s cash position, such acquisitions could be made with 100% cash –
or in the case of a larger deal, stock could also be used
Goldman Stanley
Aardvark Valuation
Goldman Stanley
Valuation Summary
•
Aardvark’s current share price of $192.61 far exceeds the value implied by
comparable public companies
•
Recent comparable transactions show higher implied valuation ranges due to flurry of
consolidation and hardware M&A activity over 2009
•
Discounted Cash Flow Analysis under base-case assumptions shows implied
valuation on-par with Aardvark’s current share price, implying that share price is
justified
•
All valuation analysis is based on “base-case” financial projections in line with Wall
Street analyst expectations
•
Given Aardvark’s cash balance and high valuation multiples vs. similar public
companies, few competitors are well-positioned to make substantial acquisitions
Goldman Stanley
Aardvark Valuation Summary
Public Company Comparables
2009 EV / Revenue:
2010E EV / Revenue:
2009 EV / EBITDA:
2010E EV / EBITDA:
2009 P / E:
2010E P / E:
Min to 25th
Precedent Transactions
25th to Median
Median to 75th
Trailing EV / Revenue:
75th to Max
Forward EV / Revenue:
Trailing EV / EBITDA:
Forward EV / EBITDA:
Discounted Cash Flow Analysis
11-15% Discount Rate, 5-9x Terminal Multiple:
$0.00
Goldman Stanley
$100.00
$200.00
$300.00
$400.00
$500.00
$600.00
$700.00
Aardvark Comparable Public Companies
Comparable Public Companies – Operating Metrics
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
(5.0%)
(10.0%)
39%
31%
29%
25%
22%
18%
2010E Revenue Growth
14%
8%
8% 7%
2009A EBITDA Margin
4%
(6%)
Comparable Public Companies – Valuation Multiples
14.0 x
11.5 x
12.0 x
10.6 x
10.0 x
8.0 x
6.0 x
4.0 x
2.0 x
0.0 x
Goldman Stanley
7.6 x
10.7 x
8.6 x
8.4 x
7.3 x
6.8 x
4.4 x
3.7 x
5.1 x
5.5 x
2009 EBITDA Multiple
2010E EBITDA Multiple
Aardvark Precedent Transactions
Aardvark - Comparable M&A Transactions
Operating Metrics
Equity
Acquirer Name
Hewlett-Packard Company
Cisco Systems, Inc.
Emerson Electric Co.
EMC Corporation
Oracle Corporation
Brocade Communication Systems, Inc.
Target Name
Date
Value
3Com
11/11/2009 $ 3,180
Starent Networks 10/13/2009
2,777
Avocent
10/6/2009
1,114
Data Domain
7/8/2009
2,362
Sun Microsystems 4/20/2009
7,075
Foundry Networks 7/21/2008
2,899
Maximum
75th Percentile
Median
25th Percentile
Minimum
Goldman Stanley
$
$
Enterprise
Trailing
Forward
Value
Revenue Revenue
$ 2,714 $ 1,265 $ 1,223
2,386
288
320
1,147
611
542
2,085
301
375
5,392
13,256
12,462
2,063
621
633
7,075 $
3,110
2,838 $
2,466
1,114
Valuation Multiples
EV /
EV /
Forward Trailing
Trailing
Forward
EV /
Trailing
EBITDA(1)
$
152
154
105
53
623
156
EBITDA(1)
$
110
110
93
64
559
125
Revenue Revenue EBITDA(1)
2.1 x
2.2 x
17.8 x
8.3 x
7.5 x
15.5 x
1.9 x
2.1 x
10.9 x
6.9 x
5.6 x
39.7 x
0.4 x
0.4 x
8.7 x
3.3 x
3.3 x
13.2 x
5,392 $ 13,256 $ 12,462 $
2,632
1,104
1,075
2,235 $
616 $
587 $
2,068
378
417
1,147
288
320
623 $
155
153 $
117
53
559
121
110
97
64
8.3 x
6.0 x
2.7 x
1.9 x
0.4 x
7.5 x
5.0 x
2.7 x
2.1 x
0.4 x
39.7 x
17.3 x
14.4 x
11.5 x
8.7 x
Aardvark Discounted Cash Flow Analysis
DCF Assumptions:
Aardvark - Cash Flow Projections
FY 2010E FY 2011E FY 2012E FY 2013E FY 2014E
Discount Rate:
Revenue:
EBITDA:
Operating Income:
$53,631 $ 62,749 $ 69,651 $ 75,919 $ 81,234
$16,480 $ 19,282 $ 21,403 $ 23,329 $ 24,962
$14,635 $ 17,133 $ 19,030 $ 20,761 $ 22,218
Less: Taxes
($4,391)
($5,140)
($5,709)
($6,228)
($6,665)
Plus: Depreciation
Plus: Amortization
Plus: Stock-Based Compensation
$918
$40
$888
$1,073
$37
$1,038
$1,192
$28
$1,153
$1,299
$13
$1,256
$1,390
$10
$1,344
Less: Increase in Working Capital:
Less: Capital Expenditures
$2,136
($1,430)
$1,815
($1,673)
$1,374
($1,857)
$1,248
($2,024)
$1,058
($2,166)
Unlevered Free Cash Flow
Present Value of Free Cash Flow
$12,795 $ 14,284 $ 15,211 $ 16,324 $ 17,189
$12,064 $ 11,971 $ 11,332 $ 10,811 $ 10,119
Terminal EBITDA
Multiple
Aardvark - Net Present Value Sensitivity - Terminal EBITDA Multiples
Discount Rate
$ 204.96 10.0%
11.0%
12.0%
13.0%
14.0%
4.0 x $ 170.39 $ 165.99 $ 161.81 $ 157.83 $ 154.03
5.0 x $ 187.23 $ 182.09 $ 177.20 $ 172.54 $ 168.11
6.0 x $ 204.06 $ 198.18 $ 192.59 $ 187.26 $ 182.19
7.0 x $ 220.90 $ 214.27 $ 207.97 $ 201.98 $ 196.28
8.0 x $ 237.74 $ 230.37 $ 223.36 $ 216.70 $ 210.36
9.0 x $ 254.58 $ 246.46 $ 238.75 $ 231.42 $ 224.44
Goldman Stanley
15.0%
$ 150.40
$ 163.88
$ 177.37
$ 190.85
$ 204.33
$ 217.81
16.0%
$ 146.95
$ 159.86
$ 172.77
$ 185.68
$ 198.59
$ 211.50
Terminal EBITDA Multiple:
12.5%
7.0 x
Model Uses “Base Case” Financial
Projections
Mid-Year Convention Used For PV
Of Cash Flows
Potential Acquisitions
Goldman Stanley
Potential Acquisitions
•
Given Aardvark’s large cash balance, it could make a wide variety of acquisitions –
ranging from small “tuck-in” deals to acquire technology and IP to larger deals driven
by customer or market share acquisition
•
Tier 1 Potential Acquisitions
– “Tier 1” acquisition candidates are worth over $1 billion and would significantly
boost Aardvark’s market share or result in substantial revenue or cost synergies
– Leading candidates include ARM, for its chipset technology and integration with
Aardvark’s existing products, and Research in Motion – to capture additional
share in the corporate smartphone market
•
Tier 2 Potential Acquisitions
– “Tier 2” acquisition candidates are worth less than $1 billion and would enhance
Aardvark’s core technology and fill in gaps in existing products
– Potential acquisitions include specialized chipset and semiconductor companies
as well as Web 2.0, social media, and mobile software companies
Goldman Stanley
Potential Acquisition Candidates
Tier 1 Acquisition Candidates
Tier 2 Acquisition Candidates
Goldman Stanley
Company Profile: ARM
ARM Holdings
Headquarters:
Employees:
Founded:
Cambridge, UK
1700
1990
Financial Information:
$250.00
Share Price
$200.00
$150.00
$100.00
$50.00
$0.00
$2.5B
$204M
$490M
$7.85
$531M
$10.97
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Volume (MM)
Market Cap:
Cash:
2009 Revenue:
2009 EPS:
2010E Revenue:
2010E EPS:
Goldman Stanley
ARM Holdings is a supplier of semiconductor
intellectual property and components of digital
electronic products. It designs and licenses
intellectual property rather than manufacturing and
selling semiconductor chips, and it licenses its IP to
a wide network of hardware, mobile, and
networking companies. It also provides tools to
optimize system-on-chip designs.
Management Team:
Warren East
Tudor Brown
Graham Budd
Mike Muller
Tim Score
John Cornish
Ian Drew
Antonio Viana
CEO
President
COO
CTO
CFO
EVP, Systems
EVP, Marketing
EVP, Sales
Products:
Key Partners:
•Processors – ARM provides 32-bit embedded
microprocessors based on a common architecture
that delivers high-performance, power efficiency,
and reduced system cost.
•System IP – Serves as the connection between
processors, memory, and peripherals to ensure
optimum performance.
•Multimedia – ARM provides graphics processors
that enable embedded graphics, audio, and video
applications.
•Physical IP – Provides SoC integrated circuits
and logic, embedded memory, and interface IP.
•Tools – ARM subsidiaries provide compilers,
debuggers, simulators, and other optimization tools
for a wide variety of chip and processor families.
Electronic Arts, LSI Logic,
Microsoft, National Semiconductor,
Nokia, NVIDIA, Rambus, Real
Networks, Samsung, and Toshiba.
Company Profile: Research In Motion
Research In Motion
Headquarters:
Employees:
Founded:
Waterloo, ON
12,000
1984
Financial Information:
$100.00
$90.00
$80.00
$70.00
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
$0.00
Products:
$36B
$2.5B
$13B
$3.70
$17B
$5.03
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Volume (MM)
Share Price
Market Cap:
Cash:
2009 Revenue:
2009 EPS:
2010E Revenue:
2010E EPS:
Research In Motion designs the BlackBerry
smartphone and creates solutions for the worldwide
mobile communications market, including a variety
of software for the BlackBerry device. In addition to
its line of BlackBerry devices, the company also
provides enterprise server software to support
businesses using the device.
Goldman Stanley
•BlackBerry Pearl 3G – Provides Trackpad and
dedicated media keys as well as SureType
technology and 3G network support.
•BlackBerry Bold – Provides extended battery life
as well as GPS, Wi-Fi, and 3G network support.
•BlackBerry Curve 8500 – Includes Trackpad and
dedicated media keys, easy media sharing, and 2.0
MP camera.
•BlackBerry Tour 9630 – Provides GPS,
worldwide compatibility, and 3.2 MP camera.
•BlackBerry Storm – Features Wi-Fi, SurePress
technology, and 3G network support.
•BlackBerry Curve 8900 – Features thin,
lightweight design as well as GPS and Wi-Fi
support and 3.2 MP camera.
Management Team:
Jim Balsillie
Mike Lazaridis
Don Morrison
Robin Bienfait
Brian Bidulka
David Yach
Co-CEO
Co-CEO
COO
CIO
CFO
CTO
Key Partners:
AT&T, Brightstar, Digital China,
GPXS, Hewlett-Packard, IBM,
Skype, Sprint, Tata Indicom, TMobile, Verizon, Virgin, and
Vodafone,
Process Recommendations
Goldman Stanley
Key Recommendations
•
We recommend engaging in targeted discussions with the Tier 1 acquisition
candidates and assessing their receptiveness to M&A discussions
•
At the same time, Goldman Stanley will reach out to Tier 2 candidates and introduce
Aardvark as a potential acquirer
•
M&A process with Tier 1 candidates will take significantly longer due to the scale of
the companies, so we recommend conducting both processes simultaneously
•
Depending on responses from Tier 1 and Tier 2 candidates, Goldman Stanley and
Aardvark may do additional research to determine other potential acquisitions and
then approach them
Targeted Buy-Side M&A
Broad Buy-Side M&A
Fewer than 5 parties
contacted
Ranges from 10 to hundreds
of companies
6 months to 1 year
Time required is highly
variable
Close-ended
Iterative process
Higher success probability
Lower success probability
Goldman Stanley
Process Recommendation
Specialized Negotiations
With One Party
Highly Targeted
Process
Targeted
Discussions +
Broader Search
Broad M&A Process
Broad
Marketing
RECOMMENDED
• Combination of targeted
discussions plus broader
search conducted in
background maximizes
success probability and
minimizes disruption to
Aardvark
• Additional parties
contacted depend on
responsiveness of Tier 1
and Tier 2 companies
• Interested parties would
sign NDAs and then
proceed into due diligence
and valuation discussions
with Aardvark
Goldman Stanley
Appendix
Goldman Stanley
Aardvark Projected Income Statement
Income Statement
FY 2007
Revenue:
Cost of Goods Sold:
Gross Profit:
Operating Expenses:
Research & Development:
Selling, General & Administrative:
Total Operating Expenses:
FY 2008
FY 2009
FY 2010E
FY 2011E
FY 2012E
FY 2013E
FY 2014E
$24,578
$16,282
$8,296
$37,491
$24,049
$13,442
$42,905
$25,324
$17,581
$53,631
$31,655
$21,976
$62,749
$37,037
$25,712
$69,651
$41,111
$28,540
$75,919
$44,811
$31,109
$81,234
$47,948
$33,286
$596
$2,724
$3,320
$759
$3,345
$4,103
$830
$3,566
$4,397
$1,038
$4,458
$5,496
$1,214
$5,216
$6,430
$1,348
$5,789
$7,137
$1,469
$6,311
$7,780
$1,572
$6,752
$8,324
$327
$0
$242
$496
$0
$516
$734
$0
$710
$918
$40
$888
$1,073
$37
$1,038
$1,192
$28
$1,153
$1,299
$13
$1,256
$1,390
$10
$1,344
Operating Income:
Interest Income:
Interest Expense:
Other Income & Expense:
Pre-Tax Income:
Income Tax Provision:
$4,407
$647
$0
($48)
$5,006
$1,511
$8,327
$653
$0
($33)
$8,947
$2,828
$11,740
$407
$0
($81)
$12,066
$3,831
$14,635
$424
($45)
$0
$15,014
$4,504
$17,133
$568
($90)
$0
$17,610
$5,283
$19,030
$1,443
($90)
$0
$20,383
$6,115
$20,761
$1,780
($90)
$0
$22,450
$6,735
$22,218
$3,223
($90)
$0
$25,351
$7,605
Net Income:
$3,495
$6,119
$8,235
$10,510
$12,327
$14,268
$15,715
$17,746
Earnings Per Share (EPS):
Diluted Shares Outstanding:
$3.93
889,292
$6.78
902,139
$9.08
907,005
$4,649
$4,976
$4,735
$8,843
$9,339
$8,505
$24.17
Depreciation & Amortization of PP&E:
Amortization of Intangibles:
Stock-Based Compensation:
EBIT:
EBITDA:
Levered Free Cash Flow:
Book Value Per Share (BV):
Goldman Stanley
$12,450
$13,184
$10,311
$34.56
$11.59
907,005
$15,523
$16,480
$13,061
$47.17
$13.59
907,005
$18,171
$19,282
$14,618
$61.94
$15.73
907,005
$20,183
$21,403
$16,158
$78.98
$17.33
907,005
$22,017
$23,329
$17,507
$97.70
$19.56
907,005
$23,562
$24,962
$19,382
$118.76
Aardvark Comparable Public Companies
Operating Statistics
Capitalization
Share
Equity
Enterprise
Projected
(2)
Revenue
EBITDA
EPS
Revenue
(1)
(3)
Company Name
Hewlett-Packard Company
Dell Inc.
Cisco Systems, Inc.
Intel Corporation
Motorola, Inc.
Price
Value
Value
2009
2010E
2009
2010E
2009
2010E
Growth
$ 47.07 $ 114,779 $ 124,430 $ 114,552 $ 124,179 $ 16,433 $ 18,186 $
3.14 $
3.87
8.4%
12.90
25,241
15,080
51,430
55,380
3,426
4,129
0.79
1.18
7.7%
22.47
131,739
106,671
34,807
41,163
10,076
12,774
0.97
1.38
18.3%
19.40
107,224
92,786
32,784
39,941
12,708
18,332
0.41
1.17
21.8%
6.15
14,239
10,665
23,457
22,056
926
1,927
(1.70)
0.14
(6.0%)
Maximum
75th Percentile
Median
25th Percentile
Minimum
$ 47.07 $ 131,739 $ 124,430 $ 114,552 $ 124,179 $ 16,433 $ 18,332 $
22.47
114,779
106,671
51,430
55,380
12,708
18,186
$ 19.40 $ 107,224 $ 92,786 $ 34,807 $ 41,163 $ 10,076 $ 12,774 $
12.90
25,241
15,080
32,784
39,941
3,426
4,129
6.15
14,239
10,665
23,457
22,056
926
1,927
3.14 $
0.97
0.79 $
0.41
(1.70)
3.87
1.38
1.18
1.17
0.14
Aardvark
$ 192.06 $ 176,796 $ 141,401
$9.08 $
11.59
Valuation Statistics
Capitalization
Share
Equity
Enterprise
(1)
$42,905 $ 53,631
$13,184
$16,480
Enterprise Value /
Enterprise Value /
Revenue
EBITDA(2)
P / E Multiple
Company Name
Hewlett-Packard Company
Dell Inc.
Cisco Systems, Inc.
Intel Corporation
Motorola, Inc.
Price
Value
Value
$ 47.07 $ 114,779 $ 124,430
12.90
25,241
15,080
22.47
131,739
106,671
19.40
107,224
92,786
6.15
14,239
10,665
2009
1.1 x
0.3 x
3.1 x
2.8 x
0.5 x
2010E
1.0 x
0.3 x
2.6 x
2.3 x
0.5 x
2009
7.6 x
4.4 x
10.6 x
7.3 x
11.5 x
2010E
6.8 x
3.7 x
8.4 x
5.1 x
5.5 x
2009
15.0 x
16.4 x
23.1 x
47.2 x
NM
2010E
12.2 x
10.9 x
16.3 x
16.6 x
44.6 x
Maximum
75th Percentile
Median
25th Percentile
Minimum
$ 47.07 $ 131,739 $ 124,430
22.47
114,779
106,671
$ 19.40 $ 107,224 $ 92,786
12.90
25,241
15,080
6.15
14,239
10,665
3.1 x
2.8 x
1.1 x
0.5 x
0.3 x
2.6 x
2.3 x
1.0 x
0.5 x
0.3 x
11.5 x
10.6 x
7.6 x
7.3 x
4.4 x
8.4 x
6.8 x
5.5 x
5.1 x
3.7 x
47.2 x
29.1 x
19.7 x
16.1 x
15.0 x
44.6 x
16.6 x
16.3 x
12.2 x
10.9 x
Aardvark
$ 192.06 $ 176,796 $ 141,401
3.3 x
2.6 x
10.7 x
8.6 x
21.2 x
16.6 x
Goldman Stanley
EBITDA Margin(2)
2009
14.3%
6.7%
28.9%
38.8%
3.9%
2010E
14.6%
7.5%
31.0%
45.9%
8.7%
21.8%
18.3%
8.4%
7.7%
(6.0%)
38.8%
28.9%
14.3%
6.7%
3.9%
45.9%
31.0%
14.6%
8.7%
7.5%
25.0%
30.7%
30.7%
Aardvark DCF Analysis – WACC Calculation
Discount Rate Calculation - Assumptions
Risk-Free Rate:
Equity Risk Premium:
Interest Rate on Debt:
4.38%
7.00%
9.00%
Comparable Companies - Unlevered Beta Calculation
Levered
Equity
Unlevered
Name
Beta
Debt
Value
Tax Rate
Beta
Hewlett-Packard Company
1.04 $ 15,830 $ 114,779
20.0%
0.94
Dell Inc.
1.31
3,793
25,241
27.0%
1.18
Cisco Systems, Inc.
1.23
10,273
131,739
22.0%
1.16
Intel Corporation
1.17
2,224
107,224
33.0%
1.15
Motorola, Inc.
1.87
3,925
14,239
34.0%
1.58
Median
1.23
Aardvark
1.57
1.16
Aardvark - Levered Beta & WACC Calculation
Unlevered
Beta
Debt
Aardvark
1.16
Equity
Value
$0 $ 176,796
Tax Rate
Levered
Beta
30%
1.16
Cost of Equity Based on Comparables:
Cost of Equity Based on Historical Beta:
12.50%
15.37%
WACC
12.50%
Goldman Stanley