Strategic Advisors Middle Market Investment Bankers

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1 The Divestiture Alternative - An Overview Presentation Bringing Efficiency to Inefficient Markets Pittsburgh Office 400 Southpointe Blvd. Plaza I, Suite 120 Canonsburg, PA (724) An Affiliate of BPU Investment Group, Inc. Member NASD, SIPC 3 PPG Place, Suite 500, Pittsburgh, PA

2 Objectives of Meeting Review the Capabilities of Review Examples of Successful Divestitures Provide an Overview of The Divestiture Alternative 2

3 Overview Middle market investment banking firm Formerly Mellon Seasoned professionals with backgrounds in investment banking, accounting, and taxation Have closed over 175 middle market transactions as an advisor Focuses east of the Mississippi but have completed national engagements Affiliated with BPU Investment Group, Inc., a registered broker/dealer and member NASD & SIPC M & A and Private Placement advisory services Strategic consulting service creates & explores all realistic alternatives Process results in selected strategies tailored to meet clients goals & objectives Acquisition, divestiture advisory & capital formation via private placements of debt & equity Services targeted toward the middle market Companies with $10MM to $350MM in sales Considering sale, acquisition, expansion, wealth diversification or transfer MBOs, LBOs, Divestitures, Recapitalizations or Restructuring Guiding Principles Committed to highest level of performance & integrity Committed to fully understanding client s goals & objectives Provide customized solutions to meet clients goals & objectives Support solutions by in-depth due diligence and analysis Senior level attention on every assignment Exceed client expectations via confidential processes & deal expertise Provide clients access to national market of lenders, investors & acquirers Accept engagements on a highly selective basis Base fees on success of engagements thereby aligning business interest to clients 3

4 Firm Overview Services and Products Focused on Serving the Middle Market Strategic Consulting Strategic Planning Developing Alternatives Selecting Solution Process Management Transaction Negotiation M&A Services Corporate Divestitures Portfolio Divestitures Strategic Mergers Management Buyouts Acquisitions Strategic Buyers Financial Buyers Corporate Finance Private Placements Senior Debt Junior & Equity Capital Recapitalization Restructurings Expansion & Acquisitions Analytical Tools Situational Analysis Valuations Financial Modeling Due Diligence Products Senior Debt Subordinated Straight Rate Equity Enhanced Combination Sale/Leasebacks Preferred and Common Stock Taxable/tax exempt vrbd s 4

5 Overview Why Client Value Proposition M&A Expertise Aware of current market trends Diverse industry experience Expert financial modeling and due diligence skills Sophisticated valuation and forecasting capabilities Assist with complex transactions & tax issues Discreet & effective deal management Access to financial and strategic buyers Committed Customer Focus Focus on understanding client s goals and objectives Consultative advisory services History of satisfied clients Fully staffed teams with strong experience Aggressive negotiators on behalf of client Committed to deliver best solution Maximizes Client Value Market Credibility & Knowledge Outstanding name and reputation Proprietary database of strategic & financial buyers Principals have over 20 years of experience Long history with private equity community Ensures competition & broad market coverage Research tools and market knowledge Proven history of success Value Driven Execution Broad market coverage Discreet and efficient process Quality memorandum Uniquely able to target buyers Minimal management disruption Competitive bidding platform Proven deal process 5

6 Firm Overview Key Principals Andrew R. Hays Co-Managing Director Prior to forming, Mr. Hays led Mellon's Group which provided M & A and private placement advisory services. Under his leadership, MSA serviced the needs of Mellon s Middle Market client base increasing deal flow and fee income by four times. Prior experience includes fifteen years at Westinghouse Financial Services as Vice President (Group Head) Asset Sales and Syndications, for the Corporate Capital Group where he was responsible for establishing and providing private placement capabilities to the group and liquidity to its $3.5 billion debt and equity portfolios. Direct involvement in the sale of over seventy investments including senior, mezzanine, equity, and limited partnership interests. Other positions at Westinghouse Financial included Vice President Corporate Finance and Vice President Marketing for the Asset Based Lending Group. M.B.A. University of Pittsburgh, Katz Graduate School of Business. B.A. Economics, Indiana University of Pennsylvania. Mr. Hays has served as the President of the Pittsburgh Chapter of the Association for Corporate Growth. Mr. Hays has also served on the Board of Directors for Mellon Financial Markets, LLC and the Pittsburgh Chapter of the Association for Corporate Growth. Series 24, 7 and 63 licensed. Andrew J. Bianco Co-Managing Director Prior to forming, Mr. Bianco was a Managing Director within the Mellon Group which provided merger & acquisition and private placement advisory services to its clients. At Mellon, he headed the Acquisition and Private Placement Group and grew fee income significantly. Furthermore, Mr. Bianco was responsible for originating and completing various acquisition, divestiture and corporate finance engagements. In addition to his technical expertise, Mr. Bianco has developed an extensive national network of lenders and investors. Other experience includes nine years at Westinghouse Financial Services and three years at Corporate Development Partners, Inc., a regional investment banking firm focused on merger & acquisition and private placement services to middle market companies. At Westinghouse Financial Services Corporate Capital Group, he was intimately involved in establishing and providing private placement capabilities to the group and liquidity to its $3.5 billion debt and equity portfolios and was directly involved in the sale of numerous investments including senior, mezzanine, equity and limited partnership interests. As a Managing Director and Principal at Corporate Development Partners, Mr. Bianco was responsible for originating and completing corporate finance engagements with middle market clients. M.S., Corporate Taxation, Robert Morris College. B.S., Accounting, Duquesne University. Series 7 and 63 licensed. 6

7 Firm Overview Key Principals Daniel R. Sarver, CPA Director Prior to joining, Mr. Sarver spent three years as a Director within the Mellon Strategic Advisory Services Group where he worked on numerous transactions. Previously, he was Manager of Business Development for a division of UPMC Health System where he was responsible for corporate development projects including M&A and joint venture initiatives. Other experience includes two years as a Senior Consultant for Deloitte & Touche LLP providing Corporate Finance Advisory services including transactional due diligence, debt placement and M&A advisory services and six years in the Finance Group of Westinghouse Electric Corporation responsible for accounting, financial analysis and planning. Mr. Sarver graduated with a B.S in Finance from Indiana University of Pennsylvania and a MBA in Finance and Accounting from the University of Pittsburgh, Katz Graduate School of Business. Mr. Sarver is a Certified Public Accountant (CPA) and a member of The Pennsylvania Institute of Certified Public Accountants. He is a General Securities Representative licensed by the NASD. David M. Eichenlaub, CPA Director Prior to joining, Mr. Eichenlaub served as Senior Vice President of Source Capital, Ltd., a regional investment banking firm serving middle market companies. He has over fifteen years of diverse experience in corporate finance, M&A, transactional due diligence, business strategy and financial analysis. Previous experience includes four years as Chief Financial Officer of Gemini Holdings, a privately held firm whose mission was to acquire, manage and grow middle market companies. Gemini maintained control over five companies in a diverse range of industries, including distribution, technology, petroleum services, equipment leasing and niche medical services. Other experience includes eight years within the Corporate Banking Division of PNC Bank, where he served as Vice President. Mr. Eichenlaub began his career as a staff accountant with Price Waterhouse. M.B.A. DePaul University Graduate School of Business. B.S.B.A. Accounting John Carroll University. Mr. Eichenlaub serves on the Board of Directors of the Pittsburgh Chapter of the Association for Corporate Growth. He is a Certified Public Accountant (CPA). Series 7 and 63 licensed. 7

8 Sample Divestiture Transaction Company: Pinnacle Electronics Business: Electronic Contract Manufacturing Services Company Financials: Sales: $38 MM EBITDA: $ 7 MM Situation: Solution: Outcome: Company was purchased in 2001 by Main Street Capital and Management Company had grown significantly over the last three years and paid down debt despite being in an industry that was hit hard by the recession Board of Directors wanted to review strategic alternatives including a divestiture, recapitalization, acquisition strategy and status quo alternative CEO desired cash out significant equity interest and exit the business Other Management wanted to remain employed & keep business in Pittsburgh SA presented to the Board of Directors an analysis of all the strategic alternatives showing value created to the owners over five years under each scenario Valued the Company at $37MM (financial) to $41MM (strategic) Based upon the analysis, Board of Directors decided to divest Prepared sale memorandum and targeted both strategic and financial buyers Sold the Company for $43MM to LaBarge, Inc., a St. Louis based public company CEO exited the Company, the business remained in Pittsburgh and existing Management remained with LaBarge, Inc. 8

9 Sample Divestiture Transaction Company: Pennsylvania Culinary Institute Business: Culinary School Financials: Sales: $27 MM EBITDA: $3.4 MM Situation: Solution: Outcome: Owner wanted a comprehensive review of the Company s financial situation SA explored a status quo scenario, a restructuring and a sale of the Company SA determined that the industry was under consolidation by two large players and that M&A activity within the industry was robust Since valuations offered by these two industry consolidators were very high, SA recommended that the owner sell the Company Normalized EBITDA to $6.2 million to adjust for one-time and non-operating expenses Determined value to be approximately $37 million Prepared memorandum, targeted potential buyers and marketed the Company Company sold for $48 million total consideration paid by one of the large players (14x book EBITDA) Owner offered a three-year consulting contract 9

10 Sample Divestiture Transactions Divestiture Sold to Career Education Corp. Divestiture Sold to Labarge, Inc. Divestiture Sold to Management Divestiture Sold to York Barbell Co. Ltd. Divestiture Sold to Birchmere Capital Divestiture Sold to Management 10

11 Laying the Groundwork for Sale Seller Preparation Position the business as early as possible, Benchmark against best practices Ensure market conditions are favorable to sellers Establish professional approach to all aspects of business Accounting policies, Information systems, Financial controls Management team & Employee benefit policies Financial Preparation Cleanse customer base and resolve any outstanding A/R issues Maximize inventory turns without sacrificing on-time delivery Maintain maintenance and carefully review discretionary capital expenditures Prepare financial statements in accordance with GAAP Develop tax strategy structure company for sale via corporate entity Identify contingent liabilities resolve, remediate or settle Operational Preparation Take steps to maximize both margins and EBITDA without sacrificing long-term performance Identify future growth opportunities, strengths, weaknesses and threats Develop plan to mitigate weaknesses and eliminate threats Establish a Strong Deal Team Evaluate Accountant, Attorney & Investment Banker for strength and M&A experience 11

12 Goals of a Well Planned Divestiture Process Establish and achieve client s goals & objectives Identify most appropriate list of potential buyers Maintain an orderly and efficient process Minimize disruption to business & key managers Maximize confidentiality Facilitate smooth closing & ownership transfer Appropriately announce transaction to all stakeholders 12

13 Importance of Planning Level of Planning High Lay Groundwork For Sale Understand Seller s Objectives Determine Valuation Market Company Due Diligence Negotiation and Execution Post Close Seller Value Objectives Are Met Value Erosion Level of Planning Low Failed Transaction 13

14 Understand & Prioritize Seller Objectives Personal Maximize sale price Retention of Control Desire to remain autonomous Diversify wealth Need for liquidity Protect employees Reward management Business Access to growth capital Expand product line Broaden geographic scope Consolidating industry Increase market leverage Solve legacy issues Mitigate threats 14

15 Determine Value Factors Impacting Value Defensibility of Earnings Growth Prospects Nature & Condition of Assets Contingent Liabilities Pension & Retirement Funding Quality & Continuation of Management Industry Trends & Competition Anti-Trust Concerns Environmental Issues Workforce Valuation Methodologies Discounted Cash Flow (DCF) Market Comparisons Leverage Testing Align Seller s Expectations With Market Realities Ensure seller s expectations are realistic Address earn outs, seller notes, etc. and risks of receipt Consider seller s after tax proceeds 15

16 Explore Divestiture Options Option Control Retention Sale Proceeds Considerations I N T E R N A L Recapitalization (Partial Sale) Yes Low Usually maintain control Provides liquidity Interim step to future sale ESOP Yes Moderate Avoids taxation on proceeds Business remains intact Financing payments are deductible MBO No Moderate Reward to management Business remains intact Possibility to stay involved E X T E R N A L Private Equity Group - Add On Private Equity Group - Platform No Moderate May need to accept stock May participate in synergies Readily available capital Potential mgt No ownership High Buyer may pay premium Potential to be involved Business acts as foothold Strategic Buyer No High Most likely highest price Most likely greatest liquidity Future involvement minimal 16

17 Structuring Considerations Tax and Legal Considerations Stock Sale Liability Issues Tax Issues Seller Buyer Seller Buyer Retains no liabilities Assumes all liabilities C Corp Capital Gain No tax deduction for Goodwill S Corp, LLC, LLP Capital Gain and/or Ordinary Income at individual level Asset Sale Retains liabilities Assumes no liabilities C Corp Double taxation (asset sale followed by Corp. liquidation) Goodwill is tax deductible 338 h (10) Election S Corp, LLC, LLP Capital Gain and/or Ordinary Income at individual level Retains no liabilities Assumes liabilities For tax purposes, treated as an Goodwill is tax asset sale deductible 338 h (10) election must be agreed upon by both seller and buyer - Narrowly Applied in Practice Non Tax Considerations Use of earn-outs and seller notes to bridge valuation gap Additional payments contingent upon post-sale operating results Comfort can be gained with seller leaving skin in the gain 17

18 Marketing Strategies Negotiated Sale (Distress) Targeted Sale with Preempt Option Targeted Sale Controlled Auction Appropriate when one acquirer is clearly best fit Appropriate when a few acquirers clearly best fit Appropriate when several parties (5-10) represent logical buyers Appropriate when many parties are logical buyers and seller wants broad market coverage Identified buyer has a demonstrated interest Identified buyer has a demonstrated interest Seller in an excellent negotiating position Seller in a good negotiating position although some shy away from an auction process Seller has limited leverage and time Seller has excellent negotiating position Formal timeframe expedites process Formal timeframe expedites process High risk of failure Accelerated formal time frame can expedite process Good chance of success Excellent chance of success Medium chance of success 18

19 Phases and Timeline Total Process 5 to 8 months Phase I Phase II Phase III Phase IV ( Week 1-6 ) Seller Preparation ( Week 7-12) Market Company to Potential Buyers (Week 12-20) Evaluate Interest in Company (Week 21-28) Complete Legal Documentation Objective Understand Seller s Objectives Understand Business Determine Valuation Range Perform Financial Due Diligence Perform Operational Due Diligence Explore Industry Identify Critical Issues Identify Prospective Buyers Complete Confidential Information Memorandum Contact Potential Buyers Strategic Buyers Financial Buyers Distribute Confidential Information Memorandum Receive Indications of Interest Provide Management Presentation and Plant Tour Negotiate Letter of Intent Buyer Due Diligence Completion of Buyer Due Diligence Negotiate & Finalize Asset Purchase & Sale Agreement Negotiate and Finalize Management Packages, if any Close Transaction Coordinate Announcements Starting Events Organizational Meeting Execute Confidentiality Agreements Approve Confidential Information Memorandum Develop list of potential buyers Receive Indications of Interest Prepare Management Presentation Provide Tour of Facilities Provide Preliminary Due Diligence Finalize Due Diligence Financial, Operational Appraisals Environmental, Tax, Insurance Contingent Liabilities Ending Event Develop Valuation Range Acceptable to Seller and Within Current Market Parameters Perform Financial and Operational Due Diligence Distribute Confidential Information Memorandum to Prospective Buyers Negotiate With Prospective Buyers Execute Letter of Intent Close the Transaction 19