44510432 JP Morgan Valuation Training Materials (1)

OCTOBER 2004

S T R I C TL Y

P R I V A T E

AN D

C O N F I D E N T I A L

INTRODUCTION TO VALUATION METHODS USED IN INVESTMENT BANKING

B A N KI N G I N T R O D U C TI O N

T O

VAL U ATI O N

M E TH OD S

U S E D

I N

I N V E S T M E N T

CONFIDENTIAL, FOR TRAINING PURPOSES ONLY

This presentation was prepared exclusively for the benefit and internal use of the JPMorgan client to whom it is directly addressed and delivered (including such client’s subsidiaries, the “Company”) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by JPMorgan. Neither this presentation nor any of its contents may be used for any other purpose without the prior written consent of JPMorgan. The information in this presentation may be based upon any management forecasts provided to us and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any other entity. JPMorgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or accounting effects of consummating a transaction. Notwithstanding the foregoing (but subject to any applicable federal or state securities laws), JPMorgan and the Company may disclose to any and all persons, without limitation, the tax treatment and tax structure of any transaction contemplated hereby and all materials (including opinions or other tax analyses) relating thereto, so long as such disclosure is not made prior to the earlier of (x) public announcement of discussions relating to the transaction or of the transaction itself and (y) the execution of an agreement to enter into the transaction. JPMorgan’s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or offering to change a rating or price target, to a subject company as consideration or inducement for the receipt of business or for compensation. JPMorgan also prohibits its research analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to benefit investors. JPMorgan is a marketing name for investment banking businesses of J.P. Morgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by J.P. Morgan Securities Inc. and its banking affiliates. JPMorgan deal team members may be employees of any of the foregoing entities.

MICHIGAN BUSINESS SCHOOL

B A N KI N G I N V E S T M E N T I N U S E D M E TH OD S

Valuation overview

1

Discounted cash flow

8

Publicly traded comparable company analysis

17

Comparable transactions analysis

23

LBO analysis

28

Additional valuation materials

36

I N T R O D U C TI O N

T O

VAL U ATI O N

Agenda

MICHIGAN BUSINESS SCHOOL

1

Applications

Acquisitions Acquisitions How much should we How much should we pay to buy the pay to buy the company? company?

Divestitures Divestitures How much should we How much should we sell our sell our company/division for? company/division for?

Research Research

Fairness Fairnessopinions opinions

Should Shouldour ourclients clientsbuy, buy, sell sellororhold holdpositions positionsinina a given givensecurity? security?

IsIsthe theprice priceoffered offeredfor for company/division company/divisionfair fair (from (froma afinancial financialpoint pointofof view)? view)?

VALUATI O N

O V E R VI EW

Valuation Hostiledefense defense Hostile

Public Publicequity equityofferings offerings

ourcompany company IsIsour undervalued/ undervalued/ vulnerabletotoa araider? raider? vulnerable

For Forhow howmuch muchshould shouldwe we sell sellour ourcompany/division company/division ininthe thepublic publicmarket? market?

New business New business presentations presentations Various applications Various applications

Debt offerings Debt offerings What is the underlying What is the underlying value of the business/ value of the business/ assets against which assets against which debt is being issued? debt is being issued?

MICHIGAN BUSINESS SCHOOL

2

Valuation methodologies Valuation methodologies

Discounted cash flow analysis „ “Intrinsic”

value of business

VALUATI O N

O V E R VI EW

„ Present value

of projected free cash flows to all providers of capital

Publicly traded comparable companies analysis „ “Public market

valuation” „ Value based on

market trading multiples of comparable companies „ How does a

firm’s financial performance match to market value?

Comparable acquisitions analysis „ “Public market

valuation” „ Value based on

multiples for comparable companies in sale transactions „ Includes

control premium

Leveraged buyout/recap analysis „ Value based on

debt repayment and return on investment „ Value to a

financial/LBO buyer

Other

„ Liquidation analysis „ Break-up analysis „ Historical trading

performance „ Private company

valuation „ Expected IPO

valuation „ Premiums paid

analysis

MICHIGAN BUSINESS SCHOOL

3

Approach to valuation

VALUATI O N

O V E R VI EW

In In arriving arriving at at a a preliminary preliminary valuation valuation for for its its clients, clients, JPMorgan JPMorgan utilizes utilizes several several methodologies methodologies that that are are consistent with industry practices consistent with industry practices

(1) Discounted cash flow Analyzes the present value of a company’s free cash flow

(2) Publicly traded comparable companies Utilizes market trading multiples from publicly traded companies to derive value

(3) Comparable acquisition transactions Utilizes data from M&A transactions involving similar companies

(4) Leveraged buy out Used to determine range of potential value for a company based on maximum leverage capacity

MICHIGAN BUSINESS SCHOOL

4

Equity value versus enterprise value

Enterprise value

=

Market value of all capital invested in a business1 (often referred to as “transaction value”) The value of the total enterprise: market value of equity + net debt

Equity value

=

Market value of the shareholders’ equity (often referred to as “offer value”) The market value of a company’s equity (shares outstanding x current stock price)

Equity value

=

Enterprise value - net debt2

O V E R VI EW

Assets

Enterprise value

Enterprise value

Net debt

Equity value 1 2

VALUATI O N

Liabilities and shareholders’ equity

Assume book value of debt approximates market value of debt Net debt equals total debt + minority interest + capitalized leases + short-term debt - cash and cash equivalents

MICHIGAN BUSINESS SCHOOL

5

Equity value versus enterprise value (cont’d) Equity Equity value value or or offer offer value value

Enterprise Enterprise value value or or transaction transaction value value

„ Value for owners of business

„ Value available to all providers of capital

„ Multiples of

„ Multiples of „ Sales

„ After tax cash flow

„ EBITDA

„ Book value

„ EBIT

VALUATI O N

O V E R VI EW

„ Net income

MICHIGAN BUSINESS SCHOOL

6

Application example: Valuation summary Implied Implied share share price price

$64.60 $60.00

$54.70

$55.50

$50.50 50.00

$60.00

$55.00 $45.00

$50.40 $47.10

40.00 $34.75

$37.30

$38.00 Current stock price = $34.20

$37.60 30.00

20.00

VALUATI O N

O V E R VI EW

$19.25 10.00

52-week trading range

7.0x—9.0x 2004E EBITDA

Analyst price target

Public market comparables 2 1 2 3

1.6x LTM sales 9.8x LTM EBITDA 13.3x LTM EBIT Precedent comparable transactions

7.0x—9.0x With synergies 2008E EBITDA of $1,500mm 3 8.0%—11.0% discount rate DCF analysis

7.0x—9.0x 25% IRR LTM EBITDA LBO

Share prices are based on 157.6 million diluted shares outstanding Forecasts are based on JPMorgan research Synergies assumed to be 6.0% of sales, capitalized at 8.0x

MICHIGAN BUSINESS SCHOOL

7

B A N KI N G I N V E S T M E N T I N U S E D M E TH OD S

Valuation overview

1

Discounted cash flow

8

Publicly traded comparable company analysis

17

Comparable transactions analysis

23

LBO analysis

28

Additional valuation materials

36

I N T R O D U C TI O N

T O

VAL U ATI O N

Agenda

MICHIGAN BUSINESS SCHOOL

8

DCF analysis: the process

Projections

Step Step 11

Project the operating results and free cash flows of a business over the forecast period. The typical forecast period is 10 years. However, the range can vary from five to 20 years depending on the profitability horizon.

Discount rate

Step Step 22

Use the weighted average cost of capital (WACC) to determine the appropriate discount rate range.

Terminal value

Step Step 33

Estimate the value of the business at the end of the forecast period.

Step Step 44

D I S C O UN T E D

C A S H

F L OW

Present value

Determine a range of values for the enterprise by discounting the projected free cash flows and terminal value to the present.

Adjustments

Step Step 55

Adjust your valuation for all assets and liabilities not accounted for in cash flow projections.

MICHIGAN BUSINESS SCHOOL

9

The first step in DCF analysis is projection of unlevered free cash flows „ Calculation of unlevered free cash flow begins with financial projections „ Comprehensive projections (i.e., fully-integrated income statement, balance

sheet and statement of cash flows) typically provide all the necessary elements „ Quality of DCF analysis is a function of the quality of projections „ Often required to “fill in the gaps” „ Confirm and validate key assumptions underlying projections „ Sensitize variables that drive projections „ Sources of projections include „ Target company’s management „ Acquiring company’s management „ Research analysts

D I S C O UN T E D

C A S H

F L OW

„ Bankers

MICHIGAN BUSINESS SCHOOL

10

Free cash flow is cash available to creditors and owners after taxes and reinvestment „ Unlevered free cash flows can be forecast from a firm’s financial projections, even if

those projections include the effects of debt „ Start your calculation with EBIT (earnings before interest and taxes)

EBIT (from the income statement) Plus: Non-tax-deductible goodwill amortization Less: Taxes (at the marginal tax rate) Equals: Tax-effected EBITA Plus: Deferred taxes1 Plus: Depreciation and any tax-deductible amortization F L OW

Less: Capital expenditures Plus/(less): Decrease/(increase) in net working investment

D I S C O UN T E D

C A S H

Equals: Unlevered free cash flow

1

Although beyond the scope of our current discussions, you should only include actual cash taxes paid in the DCF. Depending on the firm and industry, you may want to adjust for the non-cash (or deferred) portion of a firm’s tax provision. The tax footnote in the financial statements will give you a good idea of whether this is a meaningful issue for your analysis

MICHIGAN BUSINESS SCHOOL

11

Projections Stand-alone Stand-alone projections projections for for Company Company X X ($ ($ millions) millions) Fiscal year ending December 31, 2001

2002

2003

2004E

2005E

2006E

2007E

2008E

$400.0

$440.0

$484.0

$532.4

$585.6

$644.2

$708.6

$779.5

EBITDA

80.0

88.0

96.8

106.5

117.1

128.8

141.7

155.9

Less: Depreciation

12.0

13.2

14.5

16.0

17.6

19.3

21.3

23.4

EBITA

68.0

74.8

82.3

90.5

99.6

109.5

120.5

132.5

Less: Taxes at marginal rate

27.2

29.9

32.9

36.2

39.8

43.8

48.2

53.0

$40.8

$44.9

$49.4

$54.3

$59.7

$65.7

$72.3

$79.5

16.0

17.6

19.3

21.3

23.4

—

—

—

—

—

Less: Capital expenditures

20.0

22.0

24.2

26.6

29.3

Less: Incr./(decr.) in working capital

10.0

8.5

7.0

5.5

4.0

Unlevered free cash flow

40.3

46.8

53.8

61.4

69.6

Adjustment for deal date

(40.3)

—

—

—

—

Unlevered FCF to acquirer

$0.0

$46.8

$53.8

$61.4

$69.6

Memo: Discounting factor

0.0

0.5

1.5

2.5

3.5

$0.0

$44.6

$46.7

$48.4

$49.9

Net sales

Tax-effected EBITA Plus: Depreciation

D I S C O UN T E D

C A S H

F L OW

Plus: Deferred taxes

Discounted value of unlevered FCF Discounted value of FCF 2004P—2008P Key assumptions: Deal/valuation date = 12/31/04 Marginal tax rate = 40% Discount rate = 10%

$189.6

JPMorgan convention is to use the “mid-year” convention—which assumes cash flows happen midway during the year

MICHIGAN BUSINESS SCHOOL

12

Weighted average cost of capital (WACC) formula „ Most firms use a combination of debt and equity to fund their operations. The overall cost of

capital is the weighted average of the cost of debt and the cost of equity WACC =

rd * (Total debt) + re * (Total equity) (Total cap) (Total cap)

More accurately stated the formula is: WACC =

rd * [D *(1-T)] + re * E D+E D+E

D I S C O UN T E D

C A S H

F L OW

E = market value of equity D = market value of debt T = marginal tax rate re = return on equity (from CAPM) rd = return on debt (assumed to be weighted average cost of debt¹) „ Because interest is tax deductible, the true cost of debt is the after tax rate due to the ability

of interest expense to shield taxes. The tax rate used should be the marginal tax rate for each specific company

¹ In order to be more accurate, the analyst should try to estimate the current market cost of debt by looking at the market cost of debt of comparable companies (with similar credit ratings)

MICHIGAN BUSINESS SCHOOL

13

Terminal values: The exit multiple method In the EBITDA exit multiple method, a multiple is applied to the final year’s EBITDA to determine a terminal value in the final year. This terminal value is discounted to the present and added to the PV of the cash flows A

+

Discounted

F L OW

Firm value

at 2008P EBITDA multiple of 6.0x 7.0x 8.0x

Terminal value as percent

at 2008P EBITDA multiple of 6.0x 7.0x 8.0x

of total firm value 6.0x 7.0x

8.0x

$196.8

$687.5

$802.1

$916.7

$884.4

$999.0

$1,113.6

78%

80%

82%

193.1

662.6

773.1

883.5

855.8

966.2

1,076.7

77

80

82

10%

189.6

638.9

745.4

851.8

828.4

934.9

1,041.4

77

80

82

11%

186.1

616.2

718.9

821.6

802.3

904.9

1,007.6

77

79

82

12%

182.7

594.5

693.5

792.6

777.2

876.3

975.3

76

79

81

Discount rate 8%

C A S H

C

9%

-

D I S C O UN T E D

=

Discounted terminal value

FCF 2004–2008

Discount rate 8%

B

D

=

Net debt

E Equity value at 2008P EBITDA multiple of

12/31/04 $100.0

6.0x

7.0x

8.0x

$784.4

$899.0

9%

100.0

755.8

866.2

10%

100.0

728.4

11%

100.0

12%

100.0

Equity value per share1

Implied perpetuity growth rate

at 2008P EBITDA multiple of

at 2008P EBITDA multiple of 6.0x 7.0x 8.0x

$1,013.6

6.0X $19.17

7.0X $21.97

8.0X $24.77

0.2%

1.3%

2.1%

976.7

18.47

21.17

23.87

1.1

2.2

3.0

834.9

941.4

17.80

20.41

23.01

2.0

3.1

3.9

702.3

804.9

907.6

17.16

19.67

22.18

2.9

4.0

4.8

677.2

776.3

875.3

16.55

18.97

21.39

3.8

4.9

5.8

A review of the terminal value and implied perpetuity is useful to help understand the drivers of the DCF value Note: DCF value as of 12/31/04 based on mid-year convention 1 Based on 40.0 million basic shares outstanding and 2.0 million options with a weighted exercise price of $8.13 calculated using the treasury method

MICHIGAN BUSINESS SCHOOL

14

Terminal values: The perpetuity method In the perpetuity method the final year cash flow is used to determine the terminal value of the cash flows A

+

Discounted FCF

F L OW C A S H

=

C

Discounted terminal value

Firm value

at perpetuity growth rate of

at perpetuity growth rate of

Terminal value as percent of total firm value

Discount rate 8%

2004–2008 $196.8

2.5% $991.0

3.0% $1,095.4

3.5% $1,223.0

2.5% $1,187.8

3.0% $1,292.2

3.5% $1,419.8

2.5% 83%

3.0% 85%

3.5% 86%

9%

193.1

811.9

883.8

968.9

1,005.0

1,077.0

1,162.0

81

82

83

10%

189.6

681.5

733.7

794.0

871.1

923.3

983.6

78

79

81

11%

186.1

582.6

622.0

666.7

768.7

808.1

852.8

76

77

78

12%

182.7

505.1

535.8

570.1

687.9

718.5

752.8

73

75

76

-

D I S C O UN T E D

B

D

=

Net debt

E Equity value

Equity value per share1

Implied EBITDA exit multiple

at perpetuity growth rate of

at perpetuity growth rate of

at perpetuity growth rate of

Discount rate 8%

12/31/04 $100.0

2.5% $1,087.8

3.0% $1,192.2

3.5% $1,319.8

2.5% $26.59

3.0% $29.14

3.5% $32.26

2.5% 8.6x

3.0% 9.6x

3.5% 10.7x

9%

100.0

905.0

977.0

1,062.0

22.12

23.88

25.96

7.4

8.0

8.8

10%

100.0

771.1

823.3

883.6

18.84

20.12

21.59

6.4

6.9

7.5

11%

100.0

668.7

708.1

752.8

16.34

17.31

18.40

5.7

6.1

6.5

12%

100.0

587.9

618.5

652.8

14.37

15.12

15.95

5.1

5.4

5.8

The PV of a growing perpetuity in year 5 is: FCF * (1+g) (r - g) Thus, this PV 5 years forward must then be discounted back to the valuation date Note: DCF value as of 12/31/04 based on mid-year convention 1 Based on 40.0 million basic shares outstanding and 2.0 million options with a weighted exercise price of $8.13 calculated using the treasury method

MICHIGAN BUSINESS SCHOOL

15

Concluding DCF remarks „ DCF analysis is a key valuation methodology „ Three key variables „ Projections/relevant and incremental cash flows (unlevered free cash flow) „ Weighted average cost of capital (discount rate) „ Residual value at end of the projection period (terminal value) „ Remember „ Validate and test projection assumptions „ Determine appropriate cash flow stream „ Utilize appropriate cost of capital approach „ Carefully consider all variables in the calculation of the discount rate „ Thoughtfully consider terminal value methodology

D I S C O UN T E D

C A S H

F L OW

„ Sensitize appropriately (base projection variables, synergies, discount rates,

terminal values, etc.) „ Footnote assumptions in detail „ Think about other value enhancers and detractors

— NOLs — Options, warrants, etc.

Check it with a calculator! MICHIGAN BUSINESS SCHOOL

16

B A N KI N G I N V E S T M E N T I N U S E D M E TH OD S

Valuation overview

1

Discounted cash flow

8

Publicly traded comparable company analysis

17

Comparable transactions analysis

23

LBO analysis

28

Additional valuation materials

36

I N T R O D U C TI O N

T O

VAL U ATI O N

Agenda

MICHIGAN BUSINESS SCHOOL

17

Overview „ Comparable company analysis values a company by reference to other publicly-

P U BLIC LY

T RAD E D

C O M P ARA B L E

C OM P ANY

ANALY SI S

traded companies with similar operating and financial characteristics. It compares the public company value with operating statistics to calculate the valuation multiple „ Comparable companies values do not incorporate the “control” premiums reflected

in comparable acquisitions. Depending on market conditions, the comparable companies' multiples may or may not be higher than comparable acquisitions’ multiples „ The trick to comparable company analysis is to find good comparables „ The bad news: no two companies are really comparable „ The good news: it doesn't matter, because everybody else (equity research

analysts, traders, arbs, etc.) has to deal with the same problem „ Once you have chosen the comparable companies, calculate the implied value of

your company by multiplying the company’s historical and projected sales, EBIT, EBITDA, net income, book value and other key operating statistics by the respective comparable company multiples

MICHIGAN BUSINESS SCHOOL

18

Identifying the right peer group

„ The key to compiling a trading comparables analysis is to identify companies that are considered comparable

and that closely resemble the composition and function of the Company you are evaluating „ SIC code search

P U BLIC LY

T RAD E D

C O M P ARA B L E

C OM P ANY

ANALY SI S

„ Research reports „ 10K „ To find comparable companies, look for companies with similar characteristics to those of the business being

valued Operational

Financial

„ Industry

„ Size

„ Product

„ Leverage

„ Markets

„ Margins

„ Distribution channels

„ Growth prospects

„ Customers

„ Shareholder base

„ Seasonality „ Cyclicality

MICHIGAN BUSINESS SCHOOL

19

Choosing the right metric „ Even with standard metrics, certain multiples are more relevant for some industries than others „ For many industries, FV/EBITDA multiples are the most common trading metric (e.g.

Industrials, Transportation, Distribution, etc.)

P U BLIC LY

T RAD E D

C O M P ARA B L E

C OM P ANY

ANALY SI S

„ For other industries, P/E multiples are more widely followed (Pharmaceuticals, Restaurants,

Biotech, etc.) „ Reading analyst reports will help you understand the metrics analysts use to value the sector

and the industry „ Certain sectors have unique metrics Telecommunications

Natural resources

„ Enterprise value to

„ Enterprise value to — Pretax Sec10 — EBITDAX — Reserves — Production

— — — — — —

Run rate revenue (LQA) 2000 to 2002 revenue Net PPE (Latest 10-Q) Route miles (Latest 10-Q) Fiber miles (Latest 10-Q) Access lines (Latest 10-Q and 1-year forward)

Retail/Real estate

„ Enterprise value — Square footage — EBITDAR

„ Equity value — Discretionary cash flow

MICHIGAN BUSINESS SCHOOL

20

Managed care trading comparables $ $ millions, millions, except except for for per per share share data data Company

FV/EBITDA4

P/E5

Share price1

% of 52-wk. high

Equity value2

Firm value3

2004E

2005E

2004E

2005E

LTGR5 2004E PEG

$111.05

94.0%

$17,926

$19,164

8.9x

7.8x

15.6x

13.6x

15.0%

Aetna

87.40

91.9%

14,598

16,211

8.7x

7.8x

12.9x

11.3x

15.0%

0.86x

ANALY SI S

Anthem

87.35

92.0%

12,264

13,927

7.4x

6.8x

14.0x

12.2x

15.0%

0.94x

Cigna

65.22

92.5%

9,273

10,773

C OM P ANY

Large capitalization WellPoint

PacifiCare

7.4x

11.3x

10.2x

10.0%

1.13x

92.6%

8.2x

7.5x

13.5x

11.8x

13.8%

0.99x

Median

92.2%

8.2x

7.6x

13.5x

11.7x

15.0%

0.99x

Oxford

C O M P ARA B L E T RAD E D

7.7x

Mean Mid c apitalization $53.62

88.1%

$4,561

$4,965

7.8x

7.3x

12.0x

10.9x

12.0%

1.00x

38.25

89.5%

3,752

4,372

7.4x

6.5x

12.5x

10.5x

13.0%

0.96x

Coventry

42.63

90.2%

3,979

4,149

8.9x

7.7x

13.1x

11.4x

15.0%

0.87x

Humana

18.10

75.4%

2,973

3,616

6.8x

6.1x

11.1x

10.1x

13.5%

0.82x

Health Net

26.05

72.8%

3,028

3,427

5.4x

4.8x

9.3x

8.1x

13.5%

0.69x

WellChoice

36.75

94.5%

3,079

3,128

7.3x

6.4x

13.1x

11.5x

15.0%

0.88x

Mean

85.1%

7.3x

6.5x

11.9x

10.4x

13.7%

0.87x

Median

88.8%

7.3x

6.5x

12.3x

10.7x

13.5%

0.87x

8.0x

7.7x

13.3x

11.8x

15.0%

0.89x

Small c apitalization Sierra American Medical Security

1 2

4 5

$35.98 25.74

92.7%

$1,322

$1,324

92.3%

397

427

7.1x

6.5x

12.0x

11.0x

15.0%

0.80x

Median

92.5%

7.5x

7.1x

12.6x

11.4x

15.0%

0.84x

Blended mean

90.3%

7.6x

6.9x

12.7x

11.2x

14.2%

0.90x

Blended median

92.4%

7.6x

7.1x

13.0x

11.4x

15.0%

0.88x

11.2x

9.9x

17.4x

15.0x

17.0%

1.02x

UnitedHealth Group

3

P U BLIC LY

1.04x

$65.41

95.5%

$43,979

$46,379

As of 4/16/04 Based on diluted shares outstanding using the treasury stock method Calculated using equity value plus debt Based on equity analyst research reports; includes investment income Based on I/B/E/S

MICHIGAN BUSINESS SCHOOL

21

Concluding remarks on comparable companies „ Trading comps are an important valuation metric for a number of reasons „ Benchmark of how the equity market is valuing the company stand alone and relative to its peers „ Every CEO knows his own multiples and those of his peers

P U BLIC LY

T RAD E D

C O M P ARA B L E

C OM P ANY

ANALY SI S

„ Key steps for comps „ Choose the right comparable companies and valuation metrics to focus on „ Spread the comps correctly „ Use the comps to determine a valuation range „ Getting the comps correct „ Ensure you have correctly captured the equity and net debt components

— Diluted shares (includes options using the treasury method and convertibles if in the money) — Net debt includes preferreds, out of the money converts, capital leases, etc. „ Ensure your income statement projections are uniform across your comps

— Adjust for extraordinary items and one time charges — Calendarize so that projections reflect the same time periods — Check analyst projections to make sure they are treating all expense components the same across the comps (e.g., amortization of intangibles) „ Determining a value range „ Thoughtfully consider the multiple range—using the mean/median is not thoughtful „ Calculate the value correctly (Firm value versus Equity value issue)

MICHIGAN BUSINESS SCHOOL

22

B A N KI N G I N V E S T M E N T I N U S E D M E TH OD S

Valuation overview

1

Discounted cash flow

8

Publicly traded comparable company analysis

17

Comparable transactions analysis

23

LBO analysis

28

Additional valuation materials

36

I N T R O D U C TI O N

T O

VAL U ATI O N

Agenda

MICHIGAN BUSINESS SCHOOL

23

Overview of comparable transactions analysis „ Comparable transactions analysis values a company by reference to other private market sales of

similar businesses. „ The trick is to find the right comparable transactions and to ferret out the information required to

do the math. As in comparable companies analysis, look for acquisitions of companies in similar industry spaces, with comparable operational and financial characteristics „ Recent transactions are a more accurate reflection of the values buyers are currently willing to

pay than acquisitions completed in the further in the past because market fundamentals are subject to dramatic change over the periods of time „ Establish relative values of various component businesses i.e., break-up analysis)

C O MP AR ABL E

T RA N SAC T I O N S

ANALY S I S

„ Multiples should be based on the latest public financial information available to the acquiror at the

time of the acquisition „ Develop understanding of M&A activity in industry „ Relative activity „ Who is buying? „ What are they buying (market share, technology, etc.)? „ How much are buyers paying? „ Deal technicals (e.g., termination fees, lock-up options, etc.)

MICHIGAN BUSINESS SCHOOL

24

Overview of comparable transactions analysis (cont’d) „ Comparable transaction analysis contains information about selected

acquisition transactions in the same industry as the company being evaluated or in similar situations, e.g. LBO, hostile, reverse acquisitions „ Purpose is similar to that of public comparables analysis except that by

C O MP AR ABL E

T RA N SAC T I O N S

ANALY S I S

looking at prior acquisitions, insight can be gained as to the premium paid to gain control (i.e., control premium) of the target company, valuation multiples, social issues, and technical transaction elements „ In addition, “private market” values sometimes differ from public market

values „ Measure private market value, including control value, strategic

benefits and synergies

MICHIGAN BUSINESS SCHOOL

25

Selected precedent managed care transactions

Acquiror/ target

4/26/04

UnitedHealth /Oxford

$4,999

Anthem/ WellPoint

17,529

ANALY S I S

10/27/03

T RA N SAC T I O N S

7.8%4

Date announced

10/27/03

C O MP AR ABL E

Transaction value ($mm)

10-day premium paid (offer/ average)

6/3/03

4/29/02

11/21/01

10/18/01

UnitedHealth /MAMSI WellPoint/ Cobalt

2,695

930

Anthem/ Trigon

4,326

WellPoint/ CareFirst

1,300

WellPoint/ RightCHOICE

1,358

LTM 1-year forward¹ Transaction value/ LTM EBITDA

13.3x

8.7x

20.4

10.6x

13.8

12.1x

24.7

19.8x

NA

11.3x

45.1

11.6x

LTM EBIT / adjusted members2

$3,714

13.1x

10.6x

16.0

Equity value/ net income

Transaction value/ adjusted members2

19.0x

Long term growth rate3

$417

$1,792

11.5%

$152

15.0%

15.9x 17.2x

$2,254

15.2x 16.5x

$1,813

13.7x 33.7x

$202

16.0%

$125

$2,828

20.0%

$125

15.0%

20.8x 26.1x

$1,506

$51

NA

23.3x 22.6x

$698

$106

NA

20.2x LTM/1-year forward

Mean5

11.9%

9.7x

15.3x/14.2x

$2,984

$310

13.8%

Offer6

43.8%

9.8x

16.1x/13.8x

$1,724

$154

10.0%

Forward estimates based on equity research at the time of the transaction Adjusted members calculated using 100% of risk members and 20% of non-risk members, as of most recent filing prior to announcement 3 I/B/E/S long term growth rate prior to announcement 4 Premium paid to the 10-day average stock price prior to the news of the rumored Wellchoice/Oxford transaction was 18.9% 5 Based on highlighted transactions 6 LTM EBITDA based on Company financials as of 6/30/04 1 2

MICHIGAN BUSINESS SCHOOL

26

Calculating the LTM (latest twelve months)

Most recent period

+

Fiscal year

–

Period ending one year prior to most recent

C O MP AR ABL E

T RA N SAC T I O N S

ANALY S I S

QT-1

QT

Q1

Q2

Q3

Q4

Q1

Q2

Annual

Example: Example: Terra Terra Industries Industries LTM LTM = = 6/30/04 6/30/04

Annual (12/03) Total revenue

$2,292.2

+

Six months 10-Q (6/04) $1,480.4

–

Six months 10-Q (6/03) $1,447.0

=

LTM (6/04) $2,325.6

Note: If the third quarter Form 10-Q is being used, revenues for nine months should be used when calculating LTM results, not three months

MICHIGAN BUSINESS SCHOOL

27

B A N KI N G I N V E S T M E N T I N U S E D M E TH OD S

Valuation overview

1

Discounted cash flow

8

Publicly traded comparable company analysis

17

Comparable transactions analysis

23

LBO analysis

28

Additional valuation materials

36

I N T R O D U C TI O N

T O

VAL U ATI O N

Agenda

MICHIGAN BUSINESS SCHOOL

28

LBO analysis provides another perspective on M&A transactions „ A leveraged buyout is an acquisition transaction in which much of the purchase price is funded with

debt; usually done by financial sponsors „ This type of capital structure provides the ability to “leverage” returns on a relatively small equity

investment, as cash flows generated during the investment period are used to pay down debt „ Financial sponsors profit by exiting three to five years after the transaction „ Sell the target to another buyer „ Take the target public „ Recapitalize the target „ Assumptions regarding the investment transaction, the exit and the period between the acquisition

and the exit are critical to determining an appropriate capital structure and potential returns to equity „ M&A clients include both financial sponsors and strategic players „ Financial sponsors typically pursue M&A transactions with different perspectives and objectives

(e.g., a shorter investment horizon) „ Strategic buyers sometimes behave like financial investors (i.e., acquiring with the expectation of selling in several years) „ Financial sponsors generally analyze a transaction using LBO methodologies in the first instance

(and DCF, comparable companies/transactions analyses thereafter)

L B O

AN A L Y S I S

„ LBO valuation may be useful from a competitive point of view, as strategic players vie with

financial sponsors for the same assets

MICHIGAN BUSINESS SCHOOL

29

The process of LBO analysis

Projections Projections

Terminal Terminal value value

Pro Pro forma forma capitalization capitalization

L B O

AN A L Y S I S

IRR IRR

Adjustments Adjustments

Develop an integrated model of the business that projects EBITDA and cash available for debt repayment over the investment horizon (typically three to five years) Estimate the multiple at which the sponsor can be expected to exit the investment at the end of the investment period

Determine a transaction structure and a pro forma capital structure that result in realistic financial coverage

Calculate returns (IRR) to the equity sponsor

Tweak the transaction/capital structure as needed to achieve harmony (if possible) between IRR, leverage and valuation

MICHIGAN BUSINESS SCHOOL

30

The initial steps in an LBO analysis are identical to those in a DCF analysis „ The same financial projections developed for a DCF analysis can be used to build a

basic LBO model „ Free cash flows are expected to be used to service debt, with positive flows to

equity typically coming at exit „ Amount and predictability of free cash flows dictate whether a company is an

attractive or viable LBO target „ Cash flows are not discounted „ Terminal value drives valuation, and is calculated on the basis of multiples „ Multiple of exit-year EBITDA is generally used to bound the valuation of the

L B O

AN A L Y S I S

enterprise in any possible exit scenario

MICHIGAN BUSINESS SCHOOL

31

Pro forma capitalization and transaction structure are set forth in “sources and uses” „ Sources should show the entire pro forma capitalization of the company, including „ New debt „ New equity „ Rolled-over debt and equity „ Uses of funds should address all parts of the target’s existing capital structure, as

well as transaction-related leakage „ Refinancing existing debt „ Transaction expenses „ Equity purchase price „ Debt and equity to be rolled-over „ Sources must equal uses „ Any debt or equity that is rolled-over shows up under both sources and uses „ Always depict every part of the capitalization, whether it changes pro forma or

L B O

AN A L Y S I S

not

MICHIGAN BUSINESS SCHOOL

32

LBO models are driven by the characteristics of the sources of capital for the transaction Components Components of of capital capital

Senior Seniordebt debt

Sample inputs

„ Revolving „ Term

„ 30%–50% of total

capital „ LIBOR + 200-400 „ 5–8

Sample inputs „ Discount notes

„ 25%–35% of total

capital „ T + 350–650 „ 7–10 years

Mezzanine Mezzaninesecurities securities „ Sub. debt (conv.) „ Preferred stock „ PIK

Typically supplied by an investment or commercial bank Usually secured/most restrictive covenants Amortizing 5- to 8-year tenor First in line at liquidation Lowest coupon

years

Subordinated Subordinateddebt debt „ Senior/sub notes

„ „ „ „ „

Sample inputs „ 0%–35% total capital „ High teens/low 20s „ 7–10+ years

„ Typically supplied by an investment or commercial bank or a mezzanine „ „ „ „

fund Riskier debt/typically unsecured Primarily bullet structures Typical tenor is 10-year High coupon

„ Typically supplied by an investment or commercial bank or a mezzanine

fund (often sponsor-affiliated) „ Multiple forms: Convertible debt, exchangeable debt, convertible preferred

stock, PIK securities and warrants „ Expected IRR in the 15—20% range

L B O

AN A L Y S I S

„ Warrants

Common Commonequity equity Sample inputs „ 20%–40% of total capital „ 20%-30% IRR

„ „ „ „

Typically supplied by a financial sponsor Highest risk/cost of capital Sometimes “stapled” to high-yield paper to attract broader investor group Minimum annual returns >20%

„ 5–7 year horizon

MICHIGAN BUSINESS SCHOOL

33

Sample LBO valuation analysis $ $ millions millions Exit multiple

6.5x

2008 projected EBITDA Implied 2008 firm value

Plus: 2008 cash

7.0x

7.5x

$556

$556

$556

3,613

$3,891

$4,169

36

$36

$36

Less: 2008 total debt

(1,154)

(1,154)

(1,154)

Implied 2008 total equity value

$2,496

$2,774

$3,052

Implied 2008 sponsor equity value1

$2,371

$2,635

$2,899

25%

30%

35%

25%

30%

35%

25%

30%

35%

$869

$728

$614

$965

$809

$683

$1,062

$890

$751

(@ 5.0x LTM EBITDA)

$1,550

$1,550

$1,550

$1,550

$1,550

$1,550

$1,550

$1,550

$1,550

Implied firm value2

$2,419

$2,278

$2,164

$2,515

$2,359

$2,233

$2,612

$2,440

$2,301

8.0x

7.5x

7.1x

8.3x

7.8x

7.4x

8.7x

8.1x

7.6x

Required return Implied max. equity contribution

Plus: Maximum transaction debt

Implied LTM EBITDA multiple Value sensitivity analysis

Maximum leverage3

25% returns

30% returns

35% returns

Exit multiple

Exit multiple

Exit multiple

6.5x

7.0x

7.5x

6.5x

7.0x

7.5x

6.5x

7.0x

7.5x

4.50x

$2,336

$2,433

$2,530

$2,185

$2,266

$2,347

$2,062

$2,131

$2,199

4.75x

2,378

2,475

2,571

2,232

2,313

2,394

2,114

2,182

2,250

5.00x

2,419

2,515

2,612

2,278

2,359

2,440

2,164

2,233

2,301

Assumes management promote of 5% Valuation as at 12/31/01 3 Leverage based on bank/bond case 1

L B O

AN A L Y S I S

2

MICHIGAN BUSINESS SCHOOL

34

IRR drivers $ $ millions millions No operating improvement/ No arbitrage

Operating improvement/ No arbitrage

Operating improvement and arbitrage

EBITDA exit multiple

7.0x

7.0x

8.0x

EBITDA at exit

$100

$128

$128

Firm value at exit

700

896

1,024

Debt (after paydown of $75 per yr.)

125

125

125

Equity value at exit

575

771

899

23.5%

31.0%

35.1%

At purchase EBITDA purchase multiple

7.0x

EBITDA on purchase date

$100

Firm value at purchase date

$700

Debt at purchase (5x EBITDA)

500

Equity value invested

200

IRR (5-year exit)

L B O

AN A L Y S I S

Three important factors drive IRRs: 1) De-levering 2) Operating improvement, and 3) Multiple expansion (arbitrage)

MICHIGAN BUSINESS SCHOOL

35

B A N KI N G I N V E S T M E N T I N U S E D M E TH OD S

Valuation overview

1

Discounted cash flow

8

Publicly traded comparable company analysis

17

Comparable transactions analysis

23

LBO analysis

28

Additional valuation materials

36

I N T R O D U C TI O N

T O

VAL U ATI O N

Agenda

MICHIGAN BUSINESS SCHOOL

36

Several other types of analysis are common in M&A transactions „ Pro forma analysis—what is the impact on the company of this merger/acquisition? „ Earnings impact (accretion/dilution) „ Growth impact „ Multiple impact „ Premiums paid analysis—how does the premium to be paid compare with prior

transactions? „ Analysis at various prices (AVP)—At different prices what are the implied premiums

ADDITI O N AL

VALUA TI O N

MAT E RIA LS

and multiples? „ Contribution analysis (stock for stock deals) „ Shareholders of each company receive shares in the merged entity—contribution

analysis looks at what each company gives versus what it gets „ Shares traded analysis „ Attempts to establish cost basis in shares „ Interloper analysis „ On the buyside, tactically it is important to determine which other companies

may be interested in the target „ Once other potential bidders have been identified it is important to analyze their

capacity to pay and the pro forma impact on their earnings

MICHIGAN BUSINESS SCHOOL

37

Purpose of pro forma analysis „ Evaluate the impact of a merger or acquisition on the income statement and

balance sheet of a potential buyer „ Pro forma analysis is used to determine „ Pricing capacity of Acquirer to pay for Target based on certain key measures „ Optimal form of consideration (cash, stock, other securities, combination) „ Key measures „ Dilution in earnings per share „ Pretax synergies required to break even „ Interest coverage „ Post-transaction ownership

ADDITI O N AL

VALUA TI O N

MAT E RIA LS

„ Leverage/capitalization

MICHIGAN BUSINESS SCHOOL

38

Accretion/(dilution) Proforma Proforma calculation calculation

Acquiror standalone EPS Acquiror NI Target NI

ADDITI O N AL

VALUA TI O N

MAT E RIA LS

Combined NI Transaction adjustments: Amortization of identifiable intangibles Incremental interest expense from transaction debt Foregone interest income on cash Amortization of transaction fees Tax rate differential Total transaction adjustments Pro forma net income Total shares outstanding Pro forma EPS

xxx xx xx XX

A (xx) (xx) (xx) (xx) (xx) (XX) B

A—B xxx xxx

MICHIGAN BUSINESS SCHOOL

39

EPS accretion/dilution summary $ $ millions, millions, except except per per share share data data EPS1 Current price

P/E

9/27/04

% 52-wk high

2004E

2005E

2004E

Target

$22.67

99.3%

$2.18

$2.43

10.4x

9.3x

Acquiror

$57.99

97.9%

$5.87

$6.70

9.9x

8.7x

2005E

$ $ millions, millions, except except per per share share data data

ADDITI O N AL

VALUA TI O N

MAT E RIA LS

Premium to Target Implied offer price per share Implied exchange ratio2 Implied transaction value3 Implied Acquiror ownership Target 2004E transaction P/E Target 2005E transaction P/E

0% $22.67 0.39x $373 89.7% 10.4x 9.3x

20% $27.20 0.47x $446 87.9% 12.5x 11.2x

25% $28.34 0.49x $465 87.5% 13.0x 11.7x

30% $29.47 0.51x $483 87.1% 13.5x 12.1x

100% stock 2004E $—EPS 2004E %—EPS Add’l pre-tax synergies to break even

($0.08) (1.3%) $5.8

($0.24) (4.0%) $18.4

($0.27) (4.7%) $21.5

($0.31) (5.3%) $24.6

2005E $—EPS 2005E %—EPS Add’l pre-tax synergies to break even

($0.13) (1.9%) $9.7

($0.30) (4.5%) $23.8

($0.35) (5.2%) $27.4

($0.39) (5.8%) $30.9

Pro Pro Pro Pro

$735.5 2,586.5 1.3x 28.4%

$735.6 2,660.0 1.4x 27.7%

$735.7 2,678.4 1.4x 27.5%

$735.7 2,696.8 1.4x 27.3%

75% stock/ 25% cash 2004E $—EPS 2004E %—EPS Add’l pre-tax synergies to break even

$0.03 0.6% NM

($0.11) (1.9%) $8.3

($0.15) (2.5%) $11.0

($0.18) (3.1%) $13.7

2005E $—EPS 2005E %—EPS Add’l pre-tax synergies to break even

$0.03 0.4% NM

($0.13) (2.0%) $9.9

($0.17) (2.5%) $12.9

($0.21) (3.1%) $15.9

$820.5 2,586.6 1.5x 31.7%

$839.0 2,660.1 1.5x 31.5%

$843.6 2,678.5 1.5x 31.5%

$848.2 2,696.9 1.6x 31.5%

Pro Pro Pro Pro

forma forma forma forma

forma forma forma forma

debt capitalization debt/pro forma 2003E EBITDA debt/pro forma total cap

debt capitalization debt/pro forma 2003E EBITDA debt/pro forma total cap

Note: Target estimates based on equity research, expect EPS, which is based on I/B/E/S; Acquiror estimates based on JPMorgan equity research; Assumes transaction date of 12/31/03, tax rate of 37.0%, 10.0% of excess purchase price allocated to non-goodwill intangibles and amortized over 10 years, transaction expenses of 0.20% and financing fees of 0.10% for illustrative purposes; Assumes interest expense of 6.5%, existing Target debt is refinanced at this rate 1 Based on I/B/E/S 2 Exchange ratio calculated as offer price per share over Acquiror price of $57.99 3 Includes assumption of $33.3 million in Target debt

MICHIGAN BUSINESS SCHOOL

40

Bootstrapping

„ Potentially increasing your P/E by acquiring a company with a lower P/E and “bootstrapping”

Acquiror’s P/E P/E multiple Stock price EPS Shares outstanding

Finance club (FC)

Consulting club (CC)

20x

10x

$20.00

$10.00

1.00

1.00

1

1

Earnings Shares outstanding EPS Stock Price

2.00 1.5 $1.33 $26.66

Accretive, assuming multiple stays the same

ADDITI O N AL

VALUA TI O N

MAT E RIA LS

„ FC acquires CC for stock. It takes 1/2 of FC stock to acquire CC

MICHIGAN BUSINESS SCHOOL

41

Premiums paid analysis for US targets 1 1 day day prior prior to to announcement announcement (median (median %; %; 2004YTD) 2004YTD)

1 1 month month prior prior to to announcement announcement (median (median %; %; 2004YTD) 2004YTD)

Median: 20%

24%

Median: 23%

30%

24%

22%

22%

$0.5-$1bn

$1-$5bn

$5-$10bn

$10bn+

32

4

5

25%

15% 10%

$0.5-$1bn

ADDITI O N AL

VALUA TI O N

MAT E RIA LS

# of transactions 27

$1-$5bn

$5-$10bn

$10bn+

32

4

5

# of transactions 27

1 1 day day prior prior to to announcement: announcement: $0.5bn+ $0.5bn+

1 1 month month prior prior to to announcement: announcement: $0.5bn+ $0.5bn+ 1

Stock

Stock

Cash

40%

27% 26%

27%

32%

29% 20%

1999

2000

2001

18%

2002

25% 19%

2003

38% 31% 34%

28%

30%

20%

22%

13%

15%

2004YTD

1999

1

52%

44% 36%

27%

Cash

2000

2001

2002

2003

25%

2004YTD

Source: Thomson Financial Note: Includes all transactions with US targets (friendly and hostile) from 1/1/99 to 7/31/04 1 Cash transaction if cash is greater than 40%

MICHIGAN BUSINESS SCHOOL

42

Analysis at various prices $ $ millions, millions, except except per per share share data data Current Price per share

$23.39

Offer $30.00

$32.75

$33.00

$34.00

$35.00

$36.00

28.3%

40.0%

41.1%

45.4%

49.6%

53.9%

Implied premium/(discount) to: Current price (9/10/04)

$23.39

52-week high

$27.76

(15.7%)

8.1%

18.0%

18.9%

22.5%

26.1%

29.7%

One month prior average price

$22.60

3.5%

32.8%

44.9%

46.0%

50.5%

54.9%

59.3%

Three month prior average price

$24.61

(5.0%)

21.9%

33.1%

34.1%

38.1%

42.2%

46.3%

Six month prior average price

$25.20

(7.2%)

19.0%

30.0%

31.0%

34.9%

38.9%

42.9%

One year prior average price

$23.83

(1.9%)

25.9%

37.4%

38.5%

42.7%

46.8%

51.0%

MAT E RIA LS

Implied equity value1

$377

$483

$527

$531

$547

$564

$580

Add: Total debt2

30

30

30

30

30

30

30

Implied firm value

$407

$513

$558

$562

$578

$594

$610

Operating Implied firm value multiples

VALUA TI O N ADDITI O N AL

-

Metrics3

LTM revenue2

$740

0.55x

0.69x

0.75x

0.76x

0.78x

0.80x

0.82x

2004E revenue

$744

0.55x

0.69

0.75

0.75

0.78

0.80

0.82

2005E revenue

$799

0.51x

0.64

0.70

0.70

0.72

0.74

0.76

LTM EBITDA2

$57

7.2x

9.0x

9.8x

9.9x

10.2x

10.4x

10.7x

2004E EBITDA

$58

7.1x

8.9

9.7

9.7

10.0

10.3

10.6

2005E EBITDA

$62

6.6x

8.3

9.0

9.1

9.3

9.6

9.9

LTM EPS2

$2.04

11.5x

14.7x

16.1x

16.2x

16.7x

17.2x

17.6x

2004E EPS

$2.15

10.9x

14.0

15.2

15.4

15.8

16.3

16.8

2005E EPS

$2.37

9.9x

12.7

13.8

13.9

14.3

14.8

15.2

Implied P/E multiples

Based on 16.1mm fully diluted shares outstanding as of 9/5/04 provided by management 2 As of 6/30/04 3 Based on management estimates 1

MICHIGAN BUSINESS SCHOOL

43

Contribution analysis

Contribution

ADDITI O N AL

VALUA TI O N

MAT E RIA LS

London

Total ($mm)

Umbrella

Revenue - 2004E

14.1%

85.9%

$40,940

Revenue - 2005E

13.7%

86.3%

$46,126

EBITDA - 2004E

14.0%

86.0%

$4,868

EBITDA - 2005E

13.7%

86.3%

$5,542

Net income - 2004E

14.1%

85.9%

$2,850

Net income - 2005E

13.8%

86.2%

$3,195

Current equity value Transaction equity value

8.9%

91.1%

$48,695

10.1%

89.9%

$49,360

Note: Estimates for London and Umbrella based on projections prepared by Umbrella management; analysis excludes transaction adjustments

MICHIGAN BUSINESS SCHOOL

44

Shares traded analysis One-month One-month

Three-month Three-month Avg. daily trading vol (’000s) Total shares traded (’000s) Peak daily volume (’000s) VWAP High price Low price

53 1,167 180 $22.51 $23.38 $22.07

Avg. daily trading vol (’000s) Total shares traded (’000s) Peak daily volume (’000s) VWAP High price Low price

45%

53 3,320 180 $24.60 $27.25 $22.07

44%

29% 14%

6% $22.00—22.25

ADDITI O N AL

VALUA TI O N

MAT E RIA LS

Cum:

6%

$22.25—22.50 $22.50—22.75 $22.75—23.00

29%

35%

80%

94%

25%

$25.00—26.50 75%

$26.50—28.00 100%

7%

$23.25—23.50 100%

Six-month Six-month

$22.00—23.50 Cum: 44%

$23.50—25.00 51%

1 1 year year Avg. daily trading vol (’000s) Total shares traded (’000s) Peak daily volume (’000s) VWAP High price Low price

21%

24%

24%

27%

56 7,132 266 $25.17 $27.76 $22.07

Avg. daily trading vol (’000s) Total shares traded (’000s) Peak daily volume (’000s) VWAP High price Low price

61 15,420 266 $23.57 $27.76 $19.75

42%

28%

25% 8%

$22.00—23.50 Cum: 21%

$23.50—25.00 45%

$25.00—26.50 72%

$26.50—28.00 100%

Cum:

$19—21 8%

$21—23 50%

$23—25 75%

18%

$25—27 93%

7%

$27—29 100%

Note: As of 9/10/04 Source: Tradeline

MICHIGAN BUSINESS SCHOOL

45

Interloper analysis Potential acquirors 2003 cash EPS

Thermo-Electron

Waters

$2.53

$1.19

$1.60

(0.07)

0.01

(0.11)

(0.02)

(0.08)

(5.0)%

1.3%

(4.1)%

(1.6)%

(4.8)%

15.0

NA

9.5

6.2

20.4

19%

NA

12%

8%

26%

$1.66

$1.35

$3.26

$1.41

$2.00

Accretion/dilution - $

0.04

0.08

0.13

0.06

(0.01)

Accretion/dilution - %

2.4%

6.0%

4.3%

4.2%

(0.4)%

NA

NA

NA

NA

2.0

NA

NA

NA

NA

2%

2004 cash EPS

Incremental pretax synergies to break even % of target S,G&A MAT E RIA LS

Mettler-Toledo

$1.07

Accretion/dilution - % % of target S,G&A

Ownership PBSC

21%

11%

24%

13%

16%

Acquiror

79%

89%

76%

87%

84%

2003 Break even price

$6.45

$9.41

$7.06

$7.48

$5.94

2004 Break even price

$9.44

$12.96

$9.89

$11.08

$8.24

1

VALUA TI O N

Applied BioSystems

$1.36

Accretion/dilution - $ Incremental pretax synergies to break even

ADDITI O N AL

Apogent

2

Based on Pedro offer of 0.311 shares per Pablo share, implying a price per share of $8.46 based on Pedro closing price of $27.19 on 7/12/03 Assumes synergies of $30 million with 50% realized in 2003

MICHIGAN BUSINESS SCHOOL

46

Valuation references „ Valuation—Measuring and Managing the Value of Companies,

Copeland, Koller and Murrin „ Introduction to Business Analysis and Valuation,

Palepu, Bernard, & Healey „ Mergers & Acquisitions,

Marren Stewart

ADDITI O N AL

VALUA TI O N

MAT E RIA LS

„ The Quest for Value,

MICHIGAN BUSINESS SCHOOL

47