# Slide 1 - Welcome To Cape Horn Strategies_ INC

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```							            Agenda
A.   Overview of Valuation
B.   Software Firms
C.   Market-based Valuation
D.   Q&A

NUMERIA
Valuation – Myth #1

FMVc≈1.10 x Incc(1+g)n x [1-(CapEx-Dep) + ΔNWC/Incc(1+g)n] x (1/yn-gn)

NUMERIA
Valuation Myth #2

X Times EBITDA
- or -
X Times Revenue

NUMERIA
Valuation Reality
Eye of the Beholder

Price vs. Value                         Fair Market Value

NUMERIA
Overview – Standard
Methods
• Income
• Comparable Firm
• Cost

NUMERIA
Income Approach
Forecast Free Cash Flow           \$10,000,000

Capitalize with Cost of Capital   \$10,000,000/0.15 = \$66,700,000

Add Terminal Value                \$10,000,000/1.15 = \$ 8,696,000

Value                                     = \$75,396,000

NUMERIA
Comparable Firm
Approach

1.   Identify Comps
2.   Analyze relationship of performance to value
3.   Derive Multiples
5.   Apply to Target Firm

NUMERIA
Comparable Firm
Approach
Mkt Cap           Price per Share          Sales                NI                                        S&P Hist
(\$1,000)         Last        1 year                (\$1,000)                    P/S              P/E         P/E

Symantec                  SYMC     \$   14,600,000   \$    20.57    \$   22.52   \$ 1,870,000       \$      370,600        7.8              39.4
Siebel Systems            SEBL     \$    4,610,000   \$     8.96    \$   10.29   \$ 1,340,000       \$      110,700        3.4              41.6
Tibco                       TIBX   \$    1,530,000   \$     7.11    \$    7.50   \$   387,200       \$       44,900        4.0              34.1
FileNet                    FILE    \$      950,430   \$    23.37    \$   27.19   \$   397,600       \$       29,400        2.4              32.3
MicroStrategy             MSTR     \$      898,700   \$    55.39    \$   48.05   \$   231,200       \$      168,330        3.9               5.3
Informatica                INFA    \$      691,730   \$     7.93    \$    7.26   \$   219,700       \$     (104,400)       3.1               -6.6
Lawson                    LWSN     \$      551,900   \$     5.57    \$    7.07   \$   363,600       \$        7,990        1.5              69.1
Ariba                     ARBA     \$      482,960   \$     7.31    \$   13.44   \$   245,800       \$      (25,200)       2.0              -19.2
PegaSystems               PEGA     \$      192,300   \$     5.33    \$    8.60   \$    96,460       \$        7,550        2.0              25.5
Captiva Systems           CPTV     \$      129,280   \$    10.44    \$   10.79   \$    68,010       \$        4,100        1.9              31.5

Total                            \$   24,637,300                             \$ 5,219,570       \$     613,970               4.7           40.1     15.1

Mean                             \$    2,463,730                             \$    521,957      \$      61,397

Median                           \$      795,215                             \$    304,700      \$      18,695               2.8           31.9

Target Co
Weighted      Private Firm        Imputed
Value = f (revenue):                                            Weighting                           Value         Discount            Value
Revenue                                \$400,000
Market Multiple                             2.8
\$    1,120,000                     75%                       \$     840,000

Value - f (net income)
Net Income                              \$65,000
Market Multiple                            31.9
\$    2,073,500                     25%                       \$     518,375
\$ 1,358,375          67%          \$    910,111

NUMERIA
Valuation Methods

Cost Method
1.   Identify component assets and liabilities of the business
2.   Estimate cost of replicating at current prices
3.   Adjust for market and competitor considerations
4.   Sum the parts

NUMERIA
Uses of Valuations

• 80% - Legal & Regulatory

• 20% - Strategic Decisions

NUMERIA
Strategic Decisions
1.   Acquisitions, Joint Ventures
2.   Divestitures (all or part)
3.   Internal Ownership Transfer
4.   Capital (IPO, private equity)
5.   Performance Measurement
6.   Strategic Plan

NUMERIA
Acquisitions & Joint
Ventures
>80% fail, most by overpaying
Overpay?
1.   Overestimating “synergies”
2.   Trying to outgrow problems
3.   Fair price, bad terms
4.   Inexperience

NUMERIA
Divestitures

A fair price is good thing
Why fair?
1.    Top Dollar Fallacy
2.    The board, investors, and Sarbox
3.    Reputation Matters

NUMERIA
Internal Ownership

Why bother?
1.  Minimize disruption in operations
2.  Ensure funding (life insurance)

NUMERIA
Raising Capital

Be Prepared
•   Investment Bankers, VCs are not your friends
•   Conflicts of interest are legion
•   Know a good deal when you see one

NUMERIA
Performance
Measurement
It’s about shareholder value, buddy

1.   Revenue, earnings, cash flow aren’t enough today
2.   Tie incentives & bonuses to increases in firm value*
3.   Prepare to be, or part of, a public company

*Only 20% from within the firm!

NUMERIA
Strategic Plans

Measure twice, cut once

1.    Nice strategy, but will it create enterprise value?
2.    Benchmark, then repeat to gauge progress
3.    Don’t be surprised at the altar

NUMERIA
Software Valuation

• Past as Prologue?
• Current Climate
• Software Hurdles

NUMERIA
Index Price

0
500
1000
1500
2000
2500
4/3/1995                                                3000

8/3/1995
12/3/1995
4/3/1996
8/3/1996
12/3/1996
4/3/1997
8/3/1997
12/3/1997
4/3/1998
8/3/1998
12/3/1998
4/3/1999
8/3/1999
12/3/1999
4/3/2000
8/3/2000
12/3/2000
4/3/2001

10 Years Ending April 2005
8/3/2001
NASDAQ - Computer Stocks

12/3/2001
4/3/2002
8/3/2002
12/3/2002
4/3/2003
8/3/2003
12/3/2003
4/3/2004
8/3/2004
12/3/2004
Series1
Past As Prologue?

NUMERIA
Past as Prologue?

Market Value Index   10 Year IRR            \$10,000 Invested
As of April 8, 2005       On April 8, 1995

NASDAQ Computer          7.62%                  \$20,842
Index (n=600+)
S&P 500                  8.58%                  \$22,777

Dow Industrials          9.18%                  \$24,067

NUMERIA
Current Climate
Firm             Market Cap    Δ12 months   Price/Sales   Price/Earnings
Symantec         \$14,600,000     - 8.7%        7.8            39.4
Siebel           \$ 4,610,000     -12.9%        3.4            41.6

Tibco            \$ 1,530,000     - 5.2%        4.0            34.1

FileNet          \$   950,430     -14.0%        2.4            32.3

MicroStrategy    \$   898,700     15.3%         3.9             5.3

Informatica      \$   691,730      9.2%         3.1             Nm

Lawson           \$   551,900     -21.2%        1.5            69.1

Ariba            \$   481,960     -45.6%        2.0             Nm

PegaSystems      \$   192,300     -38.0%        2.0            25.5

Captiva          \$   129,280     - 3.2%        1.9            31.5

Mean            \$ 2,463,730                   4.7            40.1

Median          \$   795,215                   2.8            31.9

NUMERIA
Software’S valuation
Hurdles
*Residual Value
Pricing Power
International IP Laws
Piracy Concerns
*Maturity

NUMERIA
Residual Value

•   Vapor Assets – Little to liquidate and restart
•   IP Part I – Evidence of past innovation, but the future?
•   IP Part II – Require creators to realize value?
•   Abandoned Children – VCs tend to starve all but winners

NUMERIA
Maturity

•   Act like grown up company
•   Repeatable success
•   Easy to be partner, acquired

NUMERIA
Market-based
Valuation
• Market-based Approach

NUMERIA
Approach
1.     Professional Hired
–    Investment banker, appraiser, financial advisor, consultant
Or
–    Internal M&A team, CFO

2.      Analysis Conducted

3.      Report Delivered

NUMERIA
Drawbacks
Static analysis, many assumptions, yielding one opinion
~

What if it’s wrong?
~

Other Concerns:
» Objectivity
» Independence
» Competence

NUMERIA
Market-based
Valuation
Multiple valuation experts

Independently valuing private companies

Analysts and process are objective

Outcome the clearest view of a private firm’s value

NUMERIA
NUMERIA Case Study
Initial   Final
Analyst   Valuation Valuation
1        \$26.3     \$26.9
2        \$38.8     \$30.0
3        \$65.0     \$40.0
4        \$27.0     \$30.0
5        \$17.0     \$29.0
~          ~          ~
Average     \$34.8     \$31.2
S.D.       \$18.6     \$ 5.1

NUMERIA
Summary

• Valuation is art and science; don’t be bullied or fooled

• Software values are 99% expectations; be prudent

• Market-based valuation is a powerful executive management
tool for M&A, capital raising, and other strategic decisions

NUMERIA
Contact

Peter Leitner
Managing Partner
Princeton, New Jersey

NUMERIA

```
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