Financial Strategy Group Products and Services by Niso Abuaf

20Past research suggests that direct financial distress costs due to legal, professional and administrative expenses of insolvency are approximately 3% of firm value, while indirect financial distress costs due to problems with the capital markets, customers, suppliers and competitors, range up to 25% of firm valueAcademic studies serve as a benchmark for discounts in distressed situation.

Summary of Studies of Financial DistressCONFIDENTIALDRAFTCapital Advisors11 About the Financial Strategy Group2The Financial Checkup3Quantitative Credit Ratings4Optimal Capital Structure5Liability Management6Pension & OPEBs7Optimal Cash Balance8Shareholder Payout Policy9Stock Price Effect of Corporate Actions10Foreign Exchange Exposure Management11Cost of Capital12International Cost of Capital13Conglomerate DiscountsTable of ContentsCONFIDENTIALDRAFTCapital Advisors1About the Financial Strategy GroupBexa Capital Advisors Origins2CONFIDENTIALCapital AdvisorsCONFIDENTIALDRAFTCapital Advisors3Bexa Capital AdvisorsFinancialStrategyGroupWhoDifferentiate Investment BankingWhyCorporate finance, capital raising and M&A issuesWhatInvestment Bankers, product professionals, and clientsToProvide analytical value-added servicesHowFrom pitch to closing as integral part of client teamWhenBexa Capital Advisors is a successor Firm to the Financial Strategy Groups at Salomon Brothers and Credit Suisse. Bexa is an analytical think tank, working jointly with product specialists, banking teams and clients to design solutions for a broad array of corporate finance questions.A small team of bankersCONFIDENTIALDRAFTCapital Advisors3Products and ServicesThe Financial CheckupQuantitative Debt CapacityFor AcquisitionsFor Share RepurchasesOptimal Debt / Equity MixFor Credit RatingFor Value CreationFor SentimentOptimal Cash BalanceFor LiquidityFor Strategic PurposesLiability (Strategic Risk) ManagementMaturity Profile, Fix / Float MixCurrency MixCorporate Payout PolicyShare Repurchases / DividendsValuation DrivesGrowth, Credit Rating, PayoutMacroeconomics and Corporate FinanceJobs, Inflation, Interest Rates, Sentiment and Issuance StrategiesSpecial ProjectsAsset AllocationCapital AllocationComplex Valuations (e.g. Optionalities)Conglomerate DiscountsCorporate Finance and MacroeconomicsDividend PolicyDynamic Capital Structure ArbitrageEmployee Stock OptionsHedging Foreign Exchange RiskIndex ReweightingsOptions on Bank Credit SpreadsPensions and Liability ManagementSovereign Liability ManagementSpinoffs vs. Carve-outsStock SplitsTARP Warrant AuctionsValuation in Emerging MarketsValuing Illiquid SecuritiesCONFIDENTIALDRAFTCapital Advisors4Selected Bexa PublicationsTitle/TopicTitle/TopicBulletin: 50- and 100- Year BondsReflections on the Global Economic OutlookCapital Structure in the New Normal WorldRevised Valuation Methodologies for Mergers and AcquisitionsCentury Bonds Send a Signal to the MarketShare Buybacks and Market CorrectionsConglomerate Discounts: Causes and Remedies Spin-Offs, Carve-Outs, SplitsStock Splits and Reverse SplitsCorporate Governance and Stock Price PerformanceThe 2007-2009 Financial Crisis in a Historical ContextCorporate Payout PolicyThe Case for Delevering: Theory and Empirical EvidenceDebt and Equity Issuance Strategies under Various Macroeconomic ScenariosThe Case for Long Term DebtDividends and Capital Structure at IPOThe CFO QuarterlyEmpirical Evidence on Equity Follow-On OfferingsThe Corporate Treasurers Guide to OptionsEmployee Stock OptionsThe Corporate Treasurers Guide to Using Interest Rate DerivativesExpensing Stock OptionsThe Cost of Capital in Japan and the United States: A Tale of Two MarketsFinancial Strategy in SlowdownsThe Economic Outlook: Jobs, Inflation, Interest Rates, and Investment StrategiesForeign Exchange Options: The Leading HedgeThe Effects of Monetary and Real Disturbances on the Real Exchange RateForeign Exchange: Transactions in Spot, Forwards, Swaps, Futures, and OptionsThe Executives Guide to Foreign Exchange Exposure ManagementIssuance Strategies Under an Inverted Yield CurveThe Executives Guide to International Capital BudgetingIPO Lockup Expirations: The Empirical EvidenceThe Financial Checkup: Drivers of Equity Valuation, Credit Ratings, Capital Structure, Issuing Converts: Reasons and Stock Price ReactionLiability Management, Shareholder Return Strategies, and Corporate GovernanceIssuing Corporate Put BondsThe Industry Cost of EquityIssuing Corporate Callable Bonds The Time Is RightThe International Cost of Capital The Empirical EvidenceIssuing Put Bonds Synthetically to Reduce Financing CostsThe Sovereign Issuers QuarterlyManaging Capital Structure Risk and Dynamic Capital Structure ArbitrageThe Universal Shelf The CFOs ToolboxManaging Foreign-Exchange and Commodity Risks for Private Equity FirmsValuing Average-Price OptionsPolitical Risk PremiumsValuing Employee Stock Options by Monte Carlo SimulationPurchasing Power Parity in the Long RunValuing Illiquid Equity Securities in Light of the Financial Crisis of 2007-2009WACC User's GuideCONFIDENTIALDRAFTCapital Advisors5The Financial Checkup6CONFIDENTIALCorporate Financial CheckupCapital AdvisorsCONFIDENTIALDRAFTCapital Advisors7Credit Ratings and Debt CapacityMoodys and S&P currently rate the Company as and , respectivelyAccording to the agencies, the ratings are supported by the Companys strong business profile, conservative financial philosophy, and modest financial riskOur quantitative credit rating analysis suggests that the Companys credit quality is slightly stronger than its current ratingLeverage ratios such as market value leverage and debt / EBITDA, combined with size, imply a credit quality for the CompanyQuantitatively, the Companys credit rating would decline by a full notch as a result of either a $ million debt-financed share buyback or a $ million debt-financed acquisitionBased on projections, our quantitative analysis suggests that the Companys credit rating can potentially improve by a notch by the end of 2007Optimal CapitalStructureThe Companys optimal leverage - based on the cost of capital approach - corresponds to market value leverage around range, debt / EBITDA around and a rating in the areaThe Companys current market value leverage is % and its debt / EBITDA ratio is xUsing average spreads for the last five years as an indicator of the Companys long-term cost of debt, weighted average cost of capital is minimized when market value leverage is in the % to % rangeThis corresponds to a debt / EBITDA of between x and x and a mid to low credit ratingA number of considerations may argue for a conservative leverage profileMaintaining firepower for future acquisitions, access to the A-1/P-1 commercial paper market, and peer analysis may suggest a more conservative capital structureSummary ObservationsCONFIDENTIALDRAFTCapital Advisors740

Stable economic indicators seem to indicate that the current inverted yield curve is driven by low long-term yields. As such, it is an ideal time for issuers to issue long-term debt.Economic IndicatorsCurrently, the consumer confidence index(1) is at a 3-year high and economic indicators are strongLong-term rates are currently low and may be expected to rise once the yield curve reverts to normalFor issuers, the current situation may be an ideal one in which to issue long-term debt

Current Spreads Dont Worry About the Inverted Yield CurvePast inversions of the yield curve occurred when monetary policy was very tight and short-term rates were high. There have been six recessions since 1961, and prior to each of them the yield curve inverted when the federal funds rate rose at least one full percentage point above nominal GDP growth, and 4.5 percentage points above the inflation rate.Today, the federal funds rate is well below these trigger points. By either measure - nominal GDP growth or inflation - short-term interest rates are not too high. The driving force behind the inverted yield curve is low long-term rates, which are not something to worry about.- Brian Wesbury, Chief Economist, First Trust Portfolios, January 2007

CFO Survey Shows Sustained OptimismOverall CFOs maintain a largely positive view about the economy and their companies prospects.The CFO economic optimism index for the U.S. economy increased modestly to 69.2 in the fourth quarter from 67.6 in the third quarter.In the survey, CFOs gave high marks to Federal Reserve Chairman Ben Bernanke as he approached his first anniversary in office.Half ranked his overall performance as very good to excellent.- Baruch College and FEI CFO Survey, December 2006

The Economic OutlookOver the next year or so, the economy appears likely to expand at a moderate rate, close to or modestly below the economy's long-run sustainable pace. Core inflation is expected to slow gradually from its recent level, reflecting the reduced impetus from high prices of energy and other commodities, contained inflation expectations, and perhaps further reductions in the rate of increase of shelter costs and some easing in the pressures on capital and labor resources.- Ben Bernanke, Chairman, Federal Reserve Board, November 2006

(1)University of Michigan Survey of Consumer Sentiment, January 2007.Source:Spreads data are from the Federal Reserve. Note:Light gray shaded areas indicate an inverted yield curve. Analysis incorporates 20-year Treasury data when 30-year Treasury data not available.

CONFIDENTIALDRAFTCapital Advisors4061

Foreign exchange risk is the most frequently hedged.Percentage of Sample That Hedges RiskThe 1998 Survey of Derivatives by U.S Non-Financial Firms, The Weiss Center for International Financial Research at the Wharton School of Business, University of Pennsylvania.Examples of equity risk commonly hedged include using collars as part of a share repurchase program, or using total return swaps to monetize equity positions in other companies.(2)What Sources of Risk Are Commonly Hedged?A 1998 Wharton business survey on corporate risk management revealed that foreign exchange was the most commonly managed risk by non-financial corporations(1)CONFIDENTIALDRAFTCapital Advisors6164Dollar Return vs. Risk of Emerging Market CountriesDollar Return vs. Risk of Emerging Market CountriesWe examine the monthly returns of a strategy of borrowing in US$, converting the proceeds into selected currencies, investing in the selected country, and then converting the proceeds back to US$Borrowing in US$ and investing in emerging markets seems to have positive excess returns, at the expense of significant volatility.Source:IMF, our calculation.

CONFIDENTIALDRAFTCapital Advisors6473International Cost of CapitalU.S. dollar returns on emerging market equities primarily are a function of returns on the broad U.S. equity market (e.g., the S&P 500) and on the corresponding emerging countrys U.S. dollar-denominated bonds (e.g., Bradys or Yankees)Cost of capital for an investment in an emerging economy is a combination of the cost of capital of a similar U.S.-based investment and the specified emerging countrys international borrowing costReturns on emerging country stocks which are widely followed in the U.S. Market (e.g., Telfonos de Mxico, Telefnica de Argentina and YPF) are statistically dependent on returns in the broad U.S. marketConversely, returns on emerging country stocks which may be less followed, or traded, in the U.S. market (e.g., Corimon and Banco Ganadero) are not statistically dependent on returns in the broad U.S. marketAs macroeconomic conditions in an emerging economy become more volatile, U.S. dollar returns on a specified foreign equity start becoming more statistically dependent on the specified countrys bond returnsConversely, returns on equities of relatively stable countries (e.g., Chile) are not statistically dependent on returns of the countrys corresponding U.S. dollar-denominated bonds.

CONFIDENTIALDRAFTCapital Advisors7374International Cost of Capital (Contd.)Returns on emerging market American Depository Receipts are often closely related to returns on various Brady or Yankee bonds, as well as to the S&P 500However there are a few exceptions, such as ADRs issued by countries e.g. Chile which are investment-grade rated by at least one credit-rating agencyThe evidence supports the hypothesis that if a country is macroeconomically stable, its ADRs are not affected by returns on its bonds

Sensitivities of Emerging Market ADRs to S&P 500 and Corresponding Bonds(1)(1)The regressions are based on daily data from January 1994 September 1996. CONFIDENTIALDRAFTCapital Advisors7475

Political Risk Premium SummaryWe adjust WACC for risks associated with a particular country by introducing political risk premium (PRP)The political risk premium represents the incremental return investors require for use of their funds in international investments and represents non-systematic risks such as expropriationThe political risk premium is estimated using a countrys credit rating, its Index of Economic Freedom (IEF) as well as trading data on its international bondsAs a simplification, a countrys international bonds spreads can be used as a proxy for its political risk premium. While it is a market based approach, it introduces volatility in cost of capital estimates as spreads are affected by numerous factorsFor example, for a number of countries sovereign spreads recently have been at historical lowsOne reason for this phenomena may be relatively low interest rates in the US which may force yield-hungry investors to buy emerging market bondsYet another reason may be a pick-up of the global economyThe table below represents PRP estimates:CONFIDENTIALDRAFTCapital Advisors7580Why Conglomerate?Theoretical reasoning alone cannot predict whether conglomerates create or destroy value. The question needs to be settled empirically.Greater operating efficiencyBetter access to capital with sizePolitical accessIncreased debt capacityLower average taxesLeveraging managerial talentBetter at undertaking positive NPV projects

ConsPoor operating efficiencyDifficulty in aligning management initiativesPoor head office supervisionLack of transparencyFailure to address investor segmentationLack of takeover premium in the stockCross-subsidization of poorly performing segmentsGreater likelihood of negative NPV investmentsProsCONFIDENTIALDRAFTCapital Advisors8081Spin-Offs vs. Carve-OutsSpin-OffsCarve-OutsDistribution of subsidiary stockUnderperformers are spun offSubsidiaries with large revenues and low valuations are spun offPositively correlated with the M&A marketNegatively correlated with the S&PModerate declines in operating performance post spin-off

IPO of subsidiary stockStar performers are carved outSubsidiaries with small revenues and high valuations are carved outPositively correlated with the M&A marketPositively correlated with the S&P Maximized operating performance pre carve-outTypically, underperformers are spun off; whereas jewels are carved out.CONFIDENTIALDRAFTCapital Advisors8182The Empirical EvidenceSpin-OffsCarve-OutsParent excess returns of 4% on announcementDaughter mid-term excess return of 6%Daughter long-term excess return of 25%Parent long-term mean excess return of 15%Daughter acquisition probability of 25%

Negligible excess return for parent on announcementDaughter mid-term excess return of 21%Daughter long-term excess return of 36%Parent long-term mean excess return of 14%Daughter acquisition probability of 22%Both spins and carves exhibit positive excess returns (though carves enjoy a lead) and have a high likelihood of being acquired.CONFIDENTIALDRAFTCapital Advisors8283The U.S. EvidencePure play companies tend to have higher margins.How diversified are U.S. firms?EBIT / Sales(1)(1)Median for each group.Source:Factset/Worldscope as of Q2 2005. Analysis includes a total of 3,142 US companies with total sales of at least $100 mm and listed on a major US exchange (NYSE, Nasdaq, AMEX).Note:The small sample size (General Electric, a significant outlier, Berkshire Hathaway, Leucadia and Masco) skews the analysis for companies with eight business segments.

95% of US companies have at most 4 business segmentsMost pure plays have higher EBIT margins than diversified companiesCONFIDENTIALDRAFTCapital Advisors8384Diversified companies trade at a discount of about 8% to 24% compared to their pure play peers.EV / EBITDAEV / SalesNote:Other factors such as leverage, growth, size and industry might account for these discounts. We conducted statistical studies to determine the relationship between underperformance and these factors and found that the degree of conglomeration still had a significant impact on underperformance.Graphs represent medians for each group.The small sample size (General Electric, a significant outlier, Berkshire Hathaway, Leucadia and Masco) skews the analysis for companies with eight business segments.Source:Factset/Worldscope as of Q2 2005. Analysis includes a total of 3,142 US companies with total sales of at least $100 mm and listed on a major US exchange (NYSE, Nasdaq, AMEX).

The U.S. EvidenceCONFIDENTIALDRAFTCapital Advisors8485European companies tend to be slightly more diversified than their US counterparts.How diversified are European firms?EBIT / Sales(1)(1)Median for each group.Source:Factset/Worldscope as of Q2 2005. Analysis includes a total of 2,444 European companies with total sales of at least 80 mm.

85% of European companies have at most 4 business segments Pure plays tend to have higher EBIT marginsThe European EvidenceCONFIDENTIALDRAFTCapital Advisors8586European diversified companies tend to trade at similar discounts (5%-25%) to their US counterparts.EV / EBITDAEV / SalesNote:Other factors such as leverage, growth, size and industry might account for these discounts. We conducted statistical studies to determine the relationship between underperformance and these factors and found that the degree of conglomeration still had a significant impact on underperformance.Graphs represent medians for each group.Source:Factset/Worldscope as of Q2 2005. Analysis includes a total of 2,444 European companies with total sales of at least 80 mm.

The European EvidenceCONFIDENTIALDRAFTCapital Advisors8687

Successful conglomerates tend to have a distinctive persona, or comparative advantage.Enterprise Value / EBITDA for Selected Industrial Conglomerates(1)Median of 160 US industrial companies with only one business segment.Source:Factset/Worldscope as of Q2 2005.

(1)Successful ConglomeratesCONFIDENTIALDRAFTCapital Advisors8788

The Closed-end fund discount has been a significant source of academic debate; similar to the conglomerate discount.Closed-end fund managers may face issues similar to conglomerate managers. Historical Average Discount in the UKPremium/Discount of CEFsHistorical Average Discount in the US

Median: -3.3%Mean: -1.6%Std. Dev.: 9.5%Source:Closed End Fund Forum. Analysis includes 227 closed-end funds.Source:Dimson and Minio-Paluello, The Closed-End Fund Discount, AIMR and Blackwells, 2003.

Closed-end funds trade at discounts of up to 10%.Closed-End Fund PerformanceCONFIDENTIALDRAFTCapital Advisors8893Companies appear to maximize operating performance at their subsidiaries prior to a carve-out in order to achieve the best valuation. Spun-off companies experience moderate declines in their operating performance. Source:SDC, Factset as of Q1 2006. Sample set includes 113 spin-offs from 1996 to 2005, valued at at least $75 mm at the time of spin-off, and 125 carve-out transactions from 1997 to Q2 2005, with the market value of the carve-out offer valued at least $20 mm. Note:Return on assets is computed as EBITDA / Total Assets for the given year.Return on Assets: Spin-OffsParent CompanySpin-OffReturn on Assets: Carve-OutsParent CompanyEquity Carve-Out

Spin-Offs, Carve-Outs and Operating PerformanceCONFIDENTIALDRAFTCapital Advisors9394

(1)Defined as the average excess cumulative total return, including dividends reinvested on the ex-date, over the S&P 500, starting 3 days before the announcement date for the parent company; and on the effective date of the spin-off for the spun-off company.(2)The reference period for the parent is the 6 months preceding the announcement date of the spin-off. For the spun-off company, the reference period is the 6 months following the effective date of the spin-off. Source:SDC, Factset as of Q1 2006. Sample set includes 113 spin-offs from 1996 to 2005, valued at at least $75 mm at the time of spin-off.Spin-Off: Return Following Spin-Off(1)Parent: Impact of Announcement(1)Announcement DateSpin-Off: Median Volume Traded(2)Parent: Median Volume Traded(2)Effective DateBoth the parent and the spun-off companies, on average, outperform the broader market.Impact of Spin-Offs: Stock Price Reaction and VolumeCONFIDENTIALDRAFTCapital Advisors9496

(1)Excess return is computed over the S&P 500 index, starting the day prior to the announcement date for the parent and the IPO date for the carve-out.(2)Defined as the Firm Value / EBITDA multiple starting at least 1.0x higher for the carve-out than for the parent (at the time of carve-out). Excess return is computed over the S&P 500 index, starting the day prior to announcement date for the parent and the IPO date for the carve-out.(3)The reference period for the Parent is 6 months preceding the announcement date of the carve-out. For the carved-out company, the reference period is 6 month following the effective date of the carve-out.Source:SDC, Factset as of Q1 2006. Sample set includes 29 carve-outs (6 high multiple) above $20 million, announced after January 1, 2001.Median Return for High Multiple Carve-Outs(2)Median Excess Market Return for Carve-Outs(1)Carve-Out: Median Volume Traded(3)Parent: Median Volume Traded(3)Effective DateSince 2001, equity carve-outs have outperformed the broader market.Impact of Carve-Outs: Stock Price Reaction and Volume CONFIDENTIALDRAFTCapital Advisors9697

(1)Excess return is computed over the S&P 500 index, starting the day prior to the announcement date for the parent and the IPO date for the carve-out.Source:SDC, Factset as of Q1 2006. Sample set includes 18 carve-outs with a minority stake above $20 million sold, announced after January 1, 2001, of which 6 sold 20% or less of the subsidiary.Note:The main analysis focuses on all subsidiary IPOs, but for tax reasons equity carve-outs up to 20% or for control reasons equity carve-outs less than 50% are also important subsets.Median Excess Market Return(1)for Carve-Outs: IPO of Less than 50% of SubsidiaryMedian Excess Market Return(1)for Carve-Outs: IPO of Up to 20% of SubsidiaryEquity carve-outs of minority stakes in subsidiaries have also performed strongly.Impact of Carve-Outs: Stock Price Reaction CONFIDENTIALDRAFTCapital Advisors97Maturing Companies Employ More Aggressive Capital Structures27

Our study of financial ratios and long-term growth rates for the S&P 500 index finds that higher growth sectors tend to have more conservative balance sheets, as reflected both in terms of cash flow (EBITDA metrics) and capital structure (book and market leverage metrics)Mature companies realize that their capital structures leverage their stable cash flows for greater growthHowever, a more conservative capital structure may allow the Company to pursue a more aggressive growth strategyThe companys debt / EBITDA is more conservative than that of mature companies.S&P 500 Index By Long-Term GrowthSource:Bloomberg, Factset as of March 2007. CompanyCONFIDENTIALDRAFTCapital Advisors27Liability Management28CONFIDENTIALCorporate Financial CheckupCapital AdvisorsCONFIDENTIALDRAFTCapital Advisors29

Debt Portfolio: Comparable Companies Weighted Average Maturity of Debt Among Peers (Years)Floating Rate Debt Exposure Among Peers (%)Peer analysis suggests a median floating rate exposure of around 14% and a weighted average maturity of around 3.2 years.Median: 14%Median: 3.2 YearsSource:Company filings, Bloomberg and our assumptions. Note:Analysis incorporates interest-rate swap information where available. Current maturities of long-term debt are assumed to be refinanced with similar instruments.CONFIDENTIALDRAFTCapital Advisors2930

A comparative analysis by industry and by rating suggests a floating rate exposure of around 20% to 30% of total debt and a weighted average maturity of 5 to 7 years.Debt Portfolio: Broad UniverseWeighted Average Maturity (Years)Floating Debt/ Total Debt (%)Floating Rate Exposure By IndustryFloating Rate Exposure By RatingWeighted Average Maturity By IndustryWeighted Average Maturity By RatingCONFIDENTIALDRAFTCapital Advisors3033

Flat Yield Curves: TreasuriesEmpirically, flat yield curves tend to steepen over time by the short rate falling and the longer end of the curve rising. Based on observations since 1960, the 3-month Treasury rate, on average, falls around 100 basis points while the 10-year rate rises approximately 60 basis points three years after a flat yield curve is observed.Source:Federal Reserve, Bloomberg. Monthly data from 1960 to present includes 108 observations when the difference between 3-month and 10-year rates was less than 50 basis points.We studied the empirical evolution of flat yield curves for U.S. treasury ratesFlat yield curve is defined as the 10-year rate being not more than 50 basis points away from the 3-month rateThe Treasury yield curve tends to steepen as much as 160 basis points, on average, three years after observing a flat yield curve6 Months After1 Year After3 Years AfterEvolution of Flat Treasury Curves in the U.S. (1960 Present)CONFIDENTIALDRAFTCapital Advisors3334

10-year vs. 3-month: US $Win Rate of 10-year vs. 3-month, January 1960 - March 1996Today, the 3-month Treasury yields around 4.4% while the yield curve is flat. Between 1960 and 1996 this occurred 28 times and the 10-year had a cost advantage in around 90% of the cases and an average advantage of 58 bps. Number of Occurrences (On a Monthly Basis):Percentage of 10-year Fixed Win:3-month Rate3-month RateSpreadSpreadSource:Monthly data from Federal Reserve Board. Note:10-year Fixed Win Rate is defined as the percentage of times when issuing a 10-year bond would have had lower interest cost than rolling over the 3-month Treasury.Average 10-year Advantage (bps) :3-month RateSpreadCONFIDENTIALDRAFTCapital Advisors3435

Historical Treasury SpreadsHistorical Treasury SpreadsSince 1960, there were three periods when the yield curve was consistently inverted for a period of six months or more and seven other instances when it reversed itself within six monthsOn average, the yield curve has remained inverted for approximately five months before reverting to its more typical structureCurrently, the yield curve has been inverted for seven monthsSource:Federal Reserve as of February 2007.Note:Analysis incorporates 20-year Treasury data when 30-year Treasury data not available.Historical Yield Curve Inversions

CONFIDENTIALDRAFTCapital Advisors3539

Historical Credit SpreadsHistorical Credit SpreadsCredit spreads are historically low during periods of inverted yield curve, and tend to rise in the months after the yield curve normalizesCurrently, credit spreads are at their lowest levels in the last six yearsCredit spreads tend to rise by around 70 bps after an inversion

Source:Federal Reserve as of February 2007.Note:The shaded areas represent periods when the 10-year Treasury yield is lower than the 3-month Treasury yield. Analysis incorporates 20-year Treasury data when 30-year Treasury data not available.CONFIDENTIALDRAFTCapital Advisors39Pension and OPEBs41CONFIDENTIALCorporate Financial CheckupCapital AdvisorsCONFIDENTIALDRAFTCapital Advisors42

Historical Details Regarding The Companys Pension PlanThe Company Pension Plan DetailsSource:As per 10-K for year ending December 31, 2006.Publicly available information provides a GAAP/Economic view of the Companys pension planCONFIDENTIALDRAFTCapital Advisors4243

There May be Considerable Volatility in the Value of The Companys Pension PlanWe estimate that the value of the Companys pension and OPEB plans could decline by as much as $7.2 billion within one year.95th Percentile: -$7.2 billionFrequency Distribution of Unexpected Change in Fair Market Value of Postretirement Plans ($ billions)We use Monte-Carlo simulation to estimate the year-over-year change in net value of the Companys pension liabilities and pension assets

Note:The model simulates interest rates an asset returns using historical estimates for volatility and correlation based on monthly data since 1960 for US Treasury yields, BBB corporate yields and the S&P 500 index. Analysis assumes that the Companys pension and OPEB plans have a duration of 8 years. Analysis assumes that the assets of the pension and other postretirement benefit plans are invested as per the ratios indicated in company filings.CONFIDENTIALDRAFTCapital Advisors4344

The Company must balance free cash flow volatility with its overall economic exposure to interest rates.The Company Can Add Floating Rate Exposure at the Corporate Level to Offset Pension Duration RiskChange in Economic Value(3) for Next Twelve MonthsSource: Bloomberg, Company data, IBES. Note:Floating rate exposure is calculated as a percentage of total debt. (1)Forward EPS of $2.46 as per time-weighted average of IBES mean EPS estimates for December 2007 ($2.36) and December 2008 ($2.61).(2)Assumes next twelve months expected 3 months LIBOR to be 5.15% based on average forward rates. (3)Change in Economic Value incorporates mark-to-market of postretirement obligations and swaps resulting from the change in interest ratesEPS Volatility for Next Twelve MonthsForward EPS Estimate: (1)$2.46Gross Debt:$36.4 Billion Expected 3 months LIBOR: (2)5.15% Total Cash:$5.7 Billion Tax Rate:35%Option Implied LIBOR Volatility: 16%AssumptionsSwaps from fixed to floating rate debt affect the Companys EPS and economic exposure As the Company increases its floating rate exposure, it will incur more EPS volatilityHowever, floating rate debt will help to reduce the Companys large economic exposure to interest rates from pension planIf FASB requires companies to mark to market its retirement obligations, swaps to floating could provide an accounting offset as well($ millions)($ millions)CONFIDENTIALDRAFTCapital Advisors44Optimal Cash Balance45CONFIDENTIALCorporate Financial CheckupCapital AdvisorsCONFIDENTIALDRAFTCapital Advisors46Our analysis suggests a cash balance of at least $200 million. Cash Balance SummaryLiquidity Analysis(2)Close Peers Comparison(1) $250 to $400Suggested Cash Balance($ in millions)Comments/LimitationsMethodMay not incorporate the fact that peers have different businesses/ financial situationsBenchmarkingSimulation$200 to $225Estimates the optimal cash balance from an insurance perspective. There are other reasons to hold cash which may suggest a higher cash balanceNote:Analysis does not incorporate undrawn but committed credit facilities.(1)Range refers to total liquidity (i.e. cash and revolver availability).(2)Indicated range reduces the probability of the Company running out of cash to 5%.Broad Comparison Across Sectors $250 to $400Based on a cross sector comparisonMay not fully take into account issues specific to the sectorCONFIDENTIALDRAFTCapital Advisors4647

Cash Balances of The Companys PeersAn analysis of close peers suggests a total liquidity balance of $250 to $400 million. Source:Financials are current or LTM as per companies financial reports and Factset.Note:Medians exclude the Company.Cash Balances of PeersCONFIDENTIALDRAFTCapital Advisors4748

Our regression study of the empirical drivers of cash balances (as a percentage of assets and as a percentage of sales) for S&P 500 companies (excluding financial companies) finds that:Companies with higher cash flow volatility hold higher cash balancesCompanies with higher capital expenditures and R&D commitments hold larger cash balancesLarger companies tend to hold proportionately less cashEmpirical Drivers of Cash BalancesDrivers of Cash BalancesBased on the Companys cash flow volatility, leverage and investment spending, our analysis suggests that the Company should maintain approximately $3.6 to $4.0 billion in cash.Note: Analysis assumes a cash flow volatility of 3.2% for the Company, based on historical data since 1990 as per Factset.CONFIDENTIALDRAFTCapital Advisors49Risk of Liquidity Event: OverviewThe model starts with base case projected cash flows. Then, based on the historical distribution of EBITDA / Assets for a broad range of peers, the model simulates projected cash flows using the Monte-Carlo simulation methodologyAssuming a certain level of cash balance today, the model accumulates or drains cash over time depending on the simulated cash flowsOur liquidity analysis uses a simulation model which, given the Companys free cash flow projections, estimates the probability of a liquidity event. A liquidity event is said to occur when the Companys cash balance falls below zero.Free Cash Flow ProjectionsCash AccumulationLimitationsRelies on historical cash flow patternSensitive to cash flow assumptions (e.g. acquisitions)CONFIDENTIALDRAFTCapital Advisors4950

Liquidity Analysis: ResultsNote: Analysis assumes a cash flow volatility of 2.9% based on close peers. Analysis based on free cash flow projections for the Company through 2008, as per Wall Street projections.A cash balance of $200 million to $250 million(1) would reduce the probability of requiring unforecasted external financing in the next three years to level consistent with the Companys A rating.Probability of an External Liquidity Event in the Next Three Years(1) Committed but undrawn credit facilities may serve, at least in part, as a replacement for cash.CONFIDENTIALDRAFTCapital Advisors50Shareholder Payout Policy51CONFIDENTIALCorporate Financial CheckupCapital AdvisorsCONFIDENTIALDRAFTCapital Advisors52

(1)(2)(3)(4)Shareholder Payout Policy Among The Companys PeersThe Companys dividend payout and yield is consistent with its peer median.Comparable Payout Analysis($ in millions, except per share data)Source:Factset, Bloomberg, Wall Street research, companies financial reports and our calculations. Market data are as of 03/01/2007.(1) Mean IBES estimate.(2) Based on indicated amount.(3) Last twelve months.(4) % payout is calculated using payout amount divided by IBES next years earnings.CONFIDENTIALDRAFTCapital Advisors5253

Forward EPS projection (I/B/E/S) of $3.020(1)Forward P/E of 26.5x (based on a stock price of $80.14)Long-term EPS growth projection (I/B/E/S) of 27.3%The Companys cost of equity of 10.0%Risk free rate of 4.85%(2)Equity market risk premium of 5.5%Predicted beta of 0.94(3)Annual dividend of $0.00 per shareRate of Return AnalysisAssumptionsPresent Value of a Share RepurchaseIRR Varying EPS Growth and P/EIRR Varying EPS Growth and Repurchase Price(1) Next twelve months mean IBES estimate.(2) 30-year U.S. treasury.(3) Peer median Barra predicted beta.Note: Analysis assumes an average repurchase price of $80.14.Note: Assumes forward P/E multiple of 26.5x in 5 years.Under reasonable assumptions, the Companys shares represent an attractive investment.Note:The shaded area represents the various growth and P/E scenarios under which the Companys shares would represent an attractive investment from a return on investment perspective.CONFIDENTIALDRAFTCapital Advisors53Stock Price Effect of Corporate Actions54CONFIDENTIALCorporate Financial CheckupCapital AdvisorsCONFIDENTIALDRAFTCapital Advisors55

Cumulative Excess Market Returns Over TimeOn average, it takes a stock anywhere between one month to one quarter following issuance to rebound to its pre-issue level.Source:Bloomberg, Factset and our calculations. Data exclude IPOs.Note:Excess market returns is calculated against the S&P 500 index. Analysis excludes companies whose credit rating declined by more than 3 notches within one year of the announcement and follow-ons where size of the issue is is greater than 75% of the market cap before issuance. S&P rating is the Issuer rating for the quarter prior to announcement day, as per Factset. Analysis includes 246 BBB category, 229 BB category and 117 B category follow-ons in the U.S. since 2000.Median Cumulative Excess Market Return for Follow-Ons, Jan 00 to Oct 05Cumulative Median Excess = 0%CONFIDENTIALDRAFTCapital Advisors5556

Stock Price Reaction to Convertible Bond Issuancewith Concurrent Share RepurchaseAverage Excess Stock ReturnSource:Factset.Note:Study includes convertible bond issues since 1/1/2003 (633 observations), of which part of the proceeds were used to repurchase equity in 79 cases. Returns are in excess of S&P 500.On average, both initially and over the long run, convert issues where part of the proceeds is used to buy back shares tend to exhibit better stock price performance compared to an average convertible issue.Median Excess Stock ReturnMarket Adjusted Stock Price Reaction to the Announcement of a Convertible Bond IssueCONFIDENTIALDRAFTCapital Advisors5657

Impact of Spin-Offs: Stock Price Reaction and Volume Traded(1)Defined as the average excess cumulative total return, including dividends reinvested on the ex-date, over the S&P 500, starting 3 days before the announcement date for the parent company; and on the effective date of the spin-off for the spun-off company.(2)The reference period for the parent is the 6 months preceding the announcement date of the spin-off. For the spun-off company, the reference period is the 6 months following the effective date of the spin-off. Source:SDC, Factset as of Q1 2006. Sample set includes 113 spin-offs from 1996 to 2005, valued at at least $75 mm at the time of spin-off.Spin-Off: Return Following Spin-Off(1)Parent: Impact of Announcement(1)Announcement DateSpin-Off: Median Volume Traded(2)Parent: Median Volume Traded(2)Effective DateBoth the parent and the spun-off companies, on average, outperform the broader market.CONFIDENTIALDRAFTCapital Advisors5758Optimal Price ConsiderationsMost stock splits result in a post-split stock price between $20-$40.Pre and Post-Split Stock PricesSince 2000Note: Includes forward splits with market capitalizations greater than $100 million since 2000.Source:FactSet and Bloomberg.

CONFIDENTIALDRAFTCapital Advisors58Foreign Exchange Exposure Management59CONFIDENTIALCorporate Financial CheckupCapital AdvisorsCONFIDENTIALDRAFTCapital Advisors60IBM Japan - Functional CurrencyTwo Opposing Accounting StrategiesIBMs StrategyMercks StrategyIBM Europe - Functional CurrencyIBM US - $ Functional CurrencyConsolidateMerck Europe - $ Functional CurrencyMerck Japan - $ Functional CurrencyMerck US -$ Functional CurrencyConsolidateCONFIDENTIALDRAFTCapital Advisors6062What Do Most Companies Hedge?85% of corporations hedge anticipated transactions under 1 year, whereas 57% hedge anticipated transactions over 1 yearFew hedge translation riskMost companies hedge transaction risk more regularly than translation or economic risk.(1) The 1998 Survey of Derivatives by U.S Non-Financial Firms, The Weiss Center for International Financial Research at the Wharton School of Business, University of Pennsylvania.

(1)CONFIDENTIALDRAFTCapital Advisors6263Partial Hedging is PrevalentCorporations tend to partially hedge their exposures. The majority of corporations hedge less than 25% of their perceived exposure, regardless of its sourceThe more easily identifiable the risk, the higher proportion is hedgedFor example, an average of only 7% of economic risk and competitive exposure is hedged

(1) The 1998 Survey of Derivatives by U.S Non-Financial Firms, The Weiss Center for International Financial Research at the Wharton School of Business, University of Pennsylvania.(1)

CONFIDENTIALDRAFTCapital Advisors6365Purchasing Power Parity: The Empirical EvidenceSource: IMF. PPP reflects the initial exchange rate multiplied by the relative price levels. For instance, the PPP implied FX level for the Mexican Peso is the initial actual exchange rate (Peso/$ in 1955) multiplied by (Mexico price level/ US price level).Purchasing Power Parity seems to hold particularly for high-inflationary economies.Chile, 1950 - 2004Mexico, 1955 - 2004Argentina, 1950 - 2004Brazil, 1950 - 2004

CONFIDENTIALDRAFTCapital Advisors6566Purchasing Power Parity: The Empirical EvidenceSource: IMF. PPP reflects the initial exchange rate multiplied by the relative price levels. For instance, the PPP implied FX level for the Mexican Peso is the initial actual exchange rate (Peso/$ in 1955) multiplied by (Mexico price level/ US price level).Purchasing Power Parity seems to hold particularly for high-inflationary economies.India, 1950 - 2004Israel, 1950 - 2004Colombia, 1950 - 2004Turkey, 1955 - 2004

CONFIDENTIALDRAFTCapital Advisors66Cost of Capital67CONFIDENTIALCorporate Financial CheckupCapital AdvisorsCONFIDENTIALDRAFTCapital Advisors68

Steel Industry Unlevered BetasWe recommend using the three-year historical industry median beta plus or minus one standard deviation. Please note that the five year historical betas are below the recommended range. As such, bankers may need to use their judgment to adjust betas based on their own assessment of industry conditions.One-Year Historical BetaThree-Year Historical BetaFive-Year Historical BetaBarra BetaRecommended Midpoint Estimate: 2.02. Recommended Range: 1.73 2.30.Note:The historical beta graphs display the recommended beta estimate and a range of one standard deviation around it. The historical beta graphs also display the beta of each peer along with a two standard deviation range around them. The two standard deviation range around the Barra betas of peers is based on the median observations three-year standard deviation. The one standard deviation range around the Barra industry median beta is based on the standard deviation of the median observation.CONFIDENTIALDRAFTCapital Advisors6869

Technology Industry Unlevered BetasBetas in this industry appear to be robust. We recommend using the three-year historical industry median beta plus or minus one standard deviation. One-Year Historical BetaThree-Year Historical BetaFive-Year Historical BetaBarra BetaRecommended Midpoint Estimate: 1.43. Recommended Range: 1.21 1.64.Note:The historical beta graphs display the recommended beta estimate and a range of one standard deviation around it. The historical beta graphs also display the beta of each peer along with a two standard deviation range around them. The two standard deviation range around the Barra betas of peers is based on the median observations three-year standard deviation. The one standard deviation range around the Barra industry median beta is based on the standard deviation of the median observation.CONFIDENTIALDRAFTCapital Advisors6970

Pharmaceuticals Industry Unlevered BetasBetas in this industry appear to be robust. We recommend using the three-year historical industry median beta plus or minus one standard deviation. One-Year Historical BetaThree-Year Historical BetaFive-Year Historical BetaBarra BetaRecommended Midpoint Estimate: 0.72. Recommended Range: 0.58 0.86.Note:The historical beta graphs display the recommended beta estimate and a range of one standard deviation around it. The historical beta graphs also display the beta of each peer along with a two standard deviation range around them. The two standard deviation range around the Barra betas of peers is based on the median observations three-year standard deviation. The one standard deviation range around the Barra industry median beta is based on the standard deviation of the median observation.CONFIDENTIALDRAFTCapital Advisors7071Recommended Industry Beta RangesThe smallest beta range across the industries studied is Energy with a range of 0.54 to 0.72, while the largest is Solar Energy with a range of 1.18 to 2.31.Summary of Beta Ranges

CONFIDENTIALDRAFTCapital Advisors71International Cost of Capital72CONFIDENTIALCorporate Financial CheckupCapital AdvisorsCONFIDENTIALDRAFTCapital Advisors76

Current Spreads vs. Sovereign Credit RatingsThere is a strong statistical relationship between countries credit ratings and their bond spreads.Spread (bps, ln scale)=6.16 0.15 x Sovereign Credit Rating(1)

R-Squared=85%Values which are less than or equal to the 10th percentileValues which are greater than or equal to the 90th percentileNote:The yellow trend line is the fitted line for the regression.(1)Sovereign credit rating is expressed as a number ranging from 18 (AAA) to 1 (CCC).CONFIDENTIALDRAFTCapital Advisors7677

Current Spreads vs. Index of Economic FreedomThere is a statistical relationship between countries Index of Economic Freedom and their bond spreads.Spread (bps, ln scale)= 7.20 0.04 x Index of Econ Freedom(1)

R-Squared=30%Values which are less than or equal to the 10th percentileValues which are greater than or equal to the 90th percentileNote:Index of Economic Freedom is jointly published by Heritage Foundation and the Wall Street Journal. Spread data are vs. US Treasury.Note:The yellow trend line is the fitted line for the regression.(1)Index of Economic Freedom is expressed as a number ranging from 0 to 100, where 100 represents the maximum freedom.CONFIDENTIALDRAFTCapital Advisors7778

Statistical Determinants of Political RiskA countrys Index of Economic Freedom and credit rating are strong statistical drivers of our political risk premium estimates.Note: The yellow trend line is the fitted line for the regression. Analysis based on February 2007 data.PRP (ln scale)= 5.824 0.008 x Index 0.164 x Credit Rating(0.337) (0.007) (0.016)

R-Squared=85%A countrys Index of Economic Freedom and credit rating are strong statistical drivers of our political risk premium estimatesCountries with more economic freedom and higher ratings have lower political riskCONFIDENTIALDRAFTCapital Advisors78Conglomerate Discounts79CONFIDENTIALCorporate Financial CheckupCapital AdvisorsCONFIDENTIALDRAFTCapital Advisors89While spin-offs are positively correlated with general corporate M&A activity, stronger equity market conditions seem to result in a preference for M&A over spin-offs.Total M&A Activity and Spin-Offs: Announced Transactions(1)(1)Based on SDC data since 1990.Source:SDC, Factset.

Market TrendsCONFIDENTIALDRAFTCapital Advisors8990Carve-outs are more frequent during periods of better equity and M&A market conditions.Total M&A Activity and Equity Carve-Outs: Announced Transactions(1)(1)Sample set includes 113 spin-offs from 1996 to 2005, valued at at least $75 mm at the time of spin-off and 125 carve-out transactions from 1997 to Q2 2005, with the market value of the carve-out offer valued at at least $20 mm.Source:SDC, Factset.

Market TrendsCONFIDENTIALDRAFTCapital Advisors9091

Spun-Off CompanyParent Company of Spin-OffCarved-Out SubsidiaryParent Company of Carve-OutHistorically, equity carve-outs are used in all industries, but are especially popular in the technology sector, while spin-offs are more evenly distributed. Source:SDC, Factset as of Q1 2006. Note:Sample set includes 125 carve-outs from 1997 to Q2 2005, with the market value of the carve-out offer valued at at least $20 mm, and 113 spin-offs from 1996 to 2005 valued at at least $75 mm at the time of spin-off.

Industry Distribution of Spin-Offs and Carve-OutsCONFIDENTIALDRAFTCapital Advisors9192

Carve-Outs TodaySpin-Offs Today(1)(1)Parent retained a minority stake of above 10%.(2)Chart shows percentage of subsidiaries acquired or repurchased among all spin-offs or carve-outs.Source:SDC, Bloomberg.Note:Sample set includes 113 spin-offs from 1996 to 2005, valued at at least $75 mm at the time of spin-off and 125 carve-out transactions from 1997 to Q2 2005, with the market value of the carve-out offer valued at least $20 mm.A majority of both spin-offs and carve-outs tend to operate successfully and have a high likelihood of being acquired.Acquisitions and Repurchases of Spun-Off/Carved-Out Subsidiaries(2)

Post Transaction ActivityCONFIDENTIALDRAFTCapital Advisors9295Spin-Off (Spin-Off Value Over $1 Billion)Parent (Spin-Off Value Over $1 Billion)Parent CompanyNote:Excess return is computed over the S&P 500 index.Source:SDC, Factset as of Q1 2006. Sample set includes 113 spin-offs from 1996 to 2005, valued at at least $75 mm at the time of spin-off, out of which 42 were valued at over $1 billion.Regardless of size, spin-offs are followed by the emergence of a population of winners and losers.Spin-Off

Return Distributions for Spin-OffsCONFIDENTIALDRAFTCapital Advisors95Display

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Return Cash to ShareholdersIncrease CapexRebuild Balance SheetReturn Cash to ShareholdersIncrease CapexRebuild Balance SheetPercent Saying

Graph DataReturn Cash to ShareholdersIncrease CapexRebuild Balance SheetJun-0233.015.043.091.0Jul-0230.017.046.093.0Aug-0233.014.050.097.0Sep-0233.013.051.097.0Oct-0234.010.053.097.0Nov-0225.012.058.095.0Dec-0231.511.055.097.5Jan-0330.013.053.596.5Feb-0328.517.052.598.0Mar-0329.013.053.095.0Apr-0333.017.046.096.0May-0328.518.050.096.5Jun-0321.018.556.095.5Jul-0320.025.052.097.0Aug-0321.025.550.096.5Sep-0320.037.540.598.0Oct-0319.536.040.596.0Nov-0317.046.033.596.5Dec-0325.040.031.596.5Jan-0424.041.528.594.0Feb-0421.036.529.086.5Mar-0423.042.523.088.5Apr-0430.039.521.090.5May-0433.041.024.098.0Jun-0431.542.023.096.5Jul-0433.540.024.097.5Aug-0441.031.026.098.0Sep-0446.030.021.097.0Oct-0446.026.024.096.0Nov-0445.032.020.097.0Dec-0446.034.018.098.0Jan-0548.036.012.096.0Feb-0549.033.014.096.0Mar-0547.036.014.097.0Apr-0544.036.014.094.0May-0549.030.017.096.0Jun-0546.034.013.093.0Jul-0544.039.012.095.0Aug-0542.038.013.093.0Sep-0544.042.09.095.0Oct-0543.043.09.095.0Nov-0537.049.010.096.0Dec-0534.055.09.098.0Jan-0635.054.07.096.0Feb-0635.053.08.096.0Mar-0632.053.09.094.0Apr-0636.050.09.095.0May-0636.049.010.095.0Jun-0635.047.013.095.0Jul-0641.038.012.091.0Aug-0644.036.013.093.0Sep-0643.038.012.093.0Oct-0648.037.08.093.0Nov-0643.037.013.093.0Dec-0644.040.08.092.0Jan-0753.037.05.095.0Feb-0746.038.08.092.0Mar-0749.035.011.095.0Apr-0746.038.010.094.0May-0742.039.013.094.0

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Chart2.592.462.322.071.951.491.241.24

DataPrimary Axis - Data arranged in ColumnsFinancial Flexibility2.59Credit Ratings2.46Earnings & Cash Flow Volatility2.32Tax Advantage of Debt2.07Transaction Cost of Issuing Debt1.95Comparables Leverage1.49Vendors / Suppliers Worry about Financial Stability1.24Bankruptcy Cost / Financial Distress Cost1.24

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Chart0.0434782609AA+0.04347826090.04347826090.06521739130.13043478260.04347826090.10869565220.32608695650.13043478260.02173913040.0217391304BB-B+0.0217391304B-CCC+CCC

S&P Ratings

DataPrimary Axis - Data arranged in ColumnsAAA4.3%AA+AA4.3%AA-4.3%A+6.5%A13.0%A-4.3%BBB+10.9%BBB32.6%BBB-13.0%BB+2.2%BB2.2%BB-B+B2.2%B-CCC+CCC

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Chart0.01385681290.00461893760.03002309470.03002309470.08314087760.16397228640.10623556580.14549653580.17090069280.08314087760.05080831410.05542725170.02771362590.01847575060.0161662818B-CCC+CCC

S&P Ratings

DataPrimary Axis - Data arranged in ColumnsAAA1.4%AA+0.5%AA3.0%AA-3.0%A+8.3%A16.4%A-10.6%BBB+14.5%BBB17.1%BBB-8.3%BB+5.1%BB5.5%BB-2.8%B+1.8%B1.6%B-CCC+CCC

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Chart0.050.030.110.080.110.170.10.090.10.040.030.020.020.030.010.00100

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DataPrimary Axis - Data arranged in ColumnsAAA5.0%AA+3.0%AA11.0%AA-8.0%A+11.0%A17.0%A-10.0%BBB+9.0%BBB10.0%BBB-4.0%BB+3.0%BB2.0%BB-2.0%B+3.0%B1.0%B-0.1%CCC+0.0%CCC0.0%

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Chart0.010.0020.0120.0140.0370.0620.0470.070.090.0790.0420.080.1080.1580.1080.0450.0260.0090.0010.001

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DataPrimary Axis - Data arranged in ColumnsAAA1.00%AA+0.20%AA1.20%AA-1.40%A+3.70%A6.20%A-4.70%BBB+7.00%BBB9.00%BBB-7.90%BB+4.20%BB8.00%BB-10.80%B+15.80%B10.80%B-4.50%CCC+2.60%CCC0.90%CCC-0.10%CC0.10%

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waccMarket Value Leverage (%)

all incoeff11.025.0250.025.0power4.0LevcoecodwaccbebdbaTax ShieldDistress CostsLoss of Strategic ValueCP AccessInvestor 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Optimal PointwaccMarket Value GearingReturn (%)

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427.!*.!%.+".##

Chart0.29295003422.0835044492.29869596852.69968521092.78986995213.00342231353.45516769344.136197495.58772636556.408489697713.597419923717.0953731783

&R&8&F - &D - &T&L&7Credit Suisse First Boston

Graph DataPEPCCOI0.3GISSVVS2.1CPBTWW2.3KFTITCD2.7TSNXOHO2.8PGCLEC3.0ESCH3.5TWTC4.1GLBC5.6LVLT6.4DVW13.6KEQIX17.1aaaaaaaaaaaaaa

ExamplesBar ChartIndustryVolumeInsurance$1,312.0Entertainment$1,035.0Health Care$953.0Energy$653.0Retail$576.0Technology$432.0Chemicals$325.0Bar-Floating ChartCategoryMinimumMaximumCategory 128Category 2410Category 3612Category 4814Category 51016Column ChartRatingA RatedBBB RatedBB RatedB RatedNet Sales2,435.01,735.01,345.0807.0Book Equity1,247.0645.0201.0301.0Total Assets1,756.01,645.01,345.0724.0Column Line Combination ChartDateRevenueEBIT Margin1992$15.517.0%1993$16.819.0%1994$23.523.0%1995$27.821.0%1996$35.819.0%1997$43.723.0%1998$55.827.0%1999$60.828.0%Column Stacked ChartIndustryIPOSECCVTCommunications$1,315.0$1,195.0$555.0Technology$1,135.0$1,100.0$815.0REITs$798.0$744.0$585.0Health Care$775.0$715.0$575.0International$715.0$615.0$555.0Energy$645.0$541.0$200.0Insurance$425.0$321.0$45.0Retail$321.0$222.0$35.0Line ChartIndustryGross MarginEBIT MarginInsurance52%22.0%Entertainment55%24.0%Health Care56%25.0%Energy55%24.0%Market Share ChartIndustryVolumeIndustryVolumeMarket ShareInsurance$1,312.0Insurance$1,312.012%Entertainment$1,035.0Entertainment$1,035.015%Health Care$953.0Health Care$953.011%Energy$653.0Energy$653.08%Retail$576.0Retail$576.08%Technology$432.0Technology$432.08%Chemicals$325.0Chemicals$325.09%Pie ChartDivisionAmountBroadcasting$6.5Cable$5.5Consumer$7.8Film$1.7Publishing$3.3Theme Parks$5.5Video / Music$3.8Ranking ChartInvestment BankVolumeInvestment BankVolumeMarket ShareCSFB$10,768.0CSFB$10,768.017%Merrill Lynch$6,732.0Merrill Lynch$6,732.011%Goldman, Sachs$6,381.0Goldman, Sachs$6,381.010%Bear, Stearns$5,075.0Bear, Stearns$5,075.08%Morgan Stanley$4,676.0Morgan Stanley$4,676.08%Valuation ChartValuation MethodologyLowHighPublicComparableCompanies$9.5$11.5ComparablePremiums$10.5$11.8M&AComparableTransactions$9.8$13.5DCFBaseCase$10.8$14.5DCFUpsideCase$12.0$16.0XY Scatter Line ChartDateGross MarginEBIT Margin3/31/9452%22.0%6/30/9455%24.0%9/30/9456%25.0%12/31/9455%24.0%3/31/9551%20.0%6/30/9552%22.0%9/30/9556%25.0%12/31/9553%21.0%3/31/9649%17.0%6/30/9647%18.0%9/30/9648%17.0%12/31/9644%15.0%3/31/9746%17.0%6/30/9748%19.0%XY Scatter Plot ChartCompanyP/E MultipleEPS GrowthMicrotest46.0x55%Webdata40.0x41%Utilifix36.0x39%Kingsoft31.0x37%Cobra24.0x28%Samachi18.0x20%Cascom16.0x15%

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__FDSCACHE__This sheet contains Factset binary data for use with this workbook's =FDS codes. Modifying the worksheet's contents may damage the workbook's =FDS functionality.

427.!*.!%.+".##

Chart000000.03565166570.24511494250.2817423540.36172406680.92791071911

&R&8&F - &D - &T&L&7Credit Suisse First Boston

Graph DataKFTESCH0.0%PBGEQIX0.0%CAGGLBC0.0%PASSVVS0.0%TSNCCOI0.0%CCEDVW3.6%LVLT24.5%TWW28.2%TWTC36.2%ITCD92.8%XOHO100.0%GISCLEC100.0%14%

ExamplesBar ChartIndustryVolumeInsurance$1,312.0Entertainment$1,035.0Health Care$953.0Energy$653.0Retail$576.0Technology$432.0Chemicals$325.0Bar-Floating ChartCategoryMinimumMaximumCategory 128Category 2410Category 3612Category 4814Category 51016Column ChartRatingA RatedBBB RatedBB RatedB RatedNet Sales2,435.01,735.01,345.0807.0Book Equity1,247.0645.0201.0301.0Total Assets1,756.01,645.01,345.0724.0Column Line Combination ChartDateRevenueEBIT Margin1992$15.517.0%1993$16.819.0%1994$23.523.0%1995$27.821.0%1996$35.819.0%1997$43.723.0%1998$55.827.0%1999$60.828.0%Column Stacked ChartIndustryIPOSECCVTCommunications$1,315.0$1,195.0$555.0Technology$1,135.0$1,100.0$815.0REITs$798.0$744.0$585.0Health Care$775.0$715.0$575.0International$715.0$615.0$555.0Energy$645.0$541.0$200.0Insurance$425.0$321.0$45.0Retail$321.0$222.0$35.0Line ChartIndustryGross MarginEBIT MarginInsurance52%22.0%Entertainment55%24.0%Health Care56%25.0%Energy55%24.0%Market Share ChartIndustryVolumeIndustryVolumeMarket ShareInsurance$1,312.0Insurance$1,312.012%Entertainment$1,035.0Entertainment$1,035.015%Health Care$953.0Health Care$953.011%Energy$653.0Energy$653.08%Retail$576.0Retail$576.08%Technology$432.0Technology$432.08%Chemicals$325.0Chemicals$325.09%Pie ChartDivisionAmountBroadcasting$6.5Cable$5.5Consumer$7.8Film$1.7Publishing$3.3Theme Parks$5.5Video / Music$3.8Ranking ChartInvestment BankVolumeInvestment BankVolumeMarket ShareCSFB$10,768.0CSFB$10,768.017%Merrill Lynch$6,732.0Merrill Lynch$6,732.011%Goldman, Sachs$6,381.0Goldman, Sachs$6,381.010%Bear, Stearns$5,075.0Bear, Stearns$5,075.08%Morgan Stanley$4,676.0Morgan Stanley$4,676.08%Valuation ChartValuation MethodologyLowHighPublicComparableCompanies$9.5$11.5ComparablePremiums$10.5$11.8M&AComparableTransactions$9.8$13.5DCFBaseCase$10.8$14.5DCFUpsideCase$12.0$16.0XY Scatter Line ChartDateGross MarginEBIT Margin3/31/9452%22.0%6/30/9455%24.0%9/30/9456%25.0%12/31/9455%24.0%3/31/9551%20.0%6/30/9552%22.0%9/30/9556%25.0%12/31/9553%21.0%3/31/9649%17.0%6/30/9647%18.0%9/30/9648%17.0%12/31/9644%15.0%3/31/9746%17.0%6/30/9748%19.0%XY Scatter Plot ChartCompanyP/E MultipleEPS GrowthMicrotest46.0x55%Webdata40.0x41%Utilifix36.0x39%Kingsoft31.0x37%Cobra24.0x28%Samachi18.0x20%Cascom16.0x15%

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data for chartsData for Chart 1 Figure 3Percent of Derivatives Users Active in that ClassCentralizedDecentralized with Centralized CoordinationDecentralized96%4%EQUITY34%COMMODITY56%67%21%12.0INTEREST RATES76%FX83%94%5%1%89%9%2%Data for Chart 2 Figure 4Data for Chart 3 Figure 5HighLowFrequentlySometimesReaction by Analysts/Investors0.38Arbitrage Rates Across Currencies0.050.3518.0%Hedge Repatriations0.3246.0%Hedge Translation0.140.23SEC Disclosure Requirement0.27Hedge Competitive Exposure0.110.280.21Hedge Anticipated Transactions >1 yr.0.120.45Hedge Anticipated Transactions 1 yr.78%11%4%6%16%Economic/Competitive Exposure90%6%2%3%7%Translation of Foreign Accounts84%6%3%8%12%Repatriations50%14%5%31%40%Percentages taken of all responding firms that indicated that the exposure was applicable to them.

&RK:(Prestech)Excel\Pfizer Meeting.xls

Table 5Percentage of Hedging at Various MaturitiesDerivative MaturityProportion of responding firms indicating the percentage of their total foreign currency derivatives with various original maturities0.01-25%26-50%51-75%76-100%1 day 90 days18%23%26%13%21%91 180 days23%44%26%3%4%181 days 1 year31%41%22%3%3%1 year 3 years63%26%7%0%5%More than 3 years88%9%1%0%2%

&Rk:(Prestech)Excel\Pfizer Meeting.xls

Chart0.540.350.240.40.460.390.120.450.110.280.140.230.320.460.050.35

&R&8&F - &D - &T&L&7Credit Suisse First BostonHedge On B/S CommitmentsHedge Off B/S CommitmentsHedge Anticipated Transaction < 1 yr.Hedge Anticipated Transaction > 1 yr.Hedge Competitive ExposureHedge TranslationHedge RepatriationsArbitrage Rates Across Currencies54%35%24%40%46%39%12%45%11%28%14%23%32%46%5%35%FrequentlySometimes

Graph DataTitleFrequentlySometimesHedge On B/S Commitments54%35%Hedge Off B/S Commitments24%40%Hedge Anticipated Transaction < 1 yr.46%39%Hedge Anticipated Transaction > 1 yr.12%45%Hedge Competitive Exposure11%28%Hedge Translation14%23%Hedge Repatriations32%46%Arbitrage Rates Across Currencies5%35%

ExamplesBar ChartIndustryVolumeInsurance$1,312.0Entertainment$1,035.0Health Care$953.0Energy$653.0Retail$576.0Technology$432.0Chemicals$325.0Bar-Floating ChartCategoryMinimumMaximumCategory 128Category 2410Category 3612Category 4814Category 51016Column ChartRatingA RatedBBB RatedBB RatedB RatedNet Sales2,435.01,735.01,345.0807.0Book Equity1,247.0645.0201.0301.0Total Assets1,756.01,645.01,345.0724.0Column Line Combination ChartDateRevenueEBIT Margin1992$15.517.0%1993$16.819.0%1994$23.523.0%1995$27.821.0%1996$35.819.0%1997$43.723.0%1998$55.827.0%1999$60.828.0%Column Stacked ChartIndustryIPOSECCVTCommunications$1,315.0$1,195.0$555.0Technology$1,135.0$1,100.0$815.0REITs$798.0$744.0$585.0Health Care$775.0$715.0$575.0International$715.0$615.0$555.0Energy$645.0$541.0$200.0Insurance$425.0$321.0$45.0Retail$321.0$222.0$35.0Line ChartIndustryGross MarginEBIT MarginInsurance52%22.0%Entertainment55%24.0%Health Care56%25.0%Energy55%24.0%Market Share ChartIndustryVolumeIndustryVolumeMarket ShareLabels (optional)Insurance$1,312.0Insurance$1,312.012%Entertainment$1,035.0Entertainment$1,035.015%Health Care$953.0Health Care$953.011%Energy$653.0Energy$653.08%Retail$576.0Retail$576.08%Technology$432.0Technology$432.08%Chemicals$325.0Chemicals$325.09%Pie ChartDivisionAmountBroadcasting$6.5Cable$5.5Consumer$7.8Film$1.7Publishing$3.3Theme Parks$5.5Video / Music$3.8Ranking ChartInvestment BankVolumeInvestment BankVolumeMarket ShareLabels (optional)CSFB$10,768.0CSFB$10,768.017%Merrill Lynch$6,732.0Merrill Lynch$6,732.011%Goldman, Sachs$6,381.0Goldman, Sachs$6,381.010%Bear, Stearns$5,075.0Bear, Stearns$5,075.08%Morgan Stanley$4,676.0Morgan Stanley$4,676.08%Valuation ChartValuation MethodologyLowHighPublicComparableCompanies$9.5$11.5ComparablePremiums$10.5$11.8M&AComparableTransactions$9.8$13.5DCFBaseCase$10.8$14.5DCFUpsideCase$12.0$16.0XY Scatter Line ChartDateGross MarginEBIT Margin3/31/9452%22.0%6/30/9455%24.0%9/30/9456%25.0%12/31/9455%24.0%3/31/9551%20.0%6/30/9552%22.0%9/30/9556%25.0%12/31/9553%21.0%3/31/9649%17.0%6/30/9647%18.0%9/30/9648%17.0%12/31/9644%15.0%3/31/9746%17.0%6/30/9748%19.0%XY Scatter Plot ChartCompanyP/E MultipleEPS GrowthMicrotest46.0x55%Webdata40.0x41%Utilifix36.0x39%Kingsoft31.0x37%Cobra24.0x28%Samachi18.0x20%Cascom16.0x15%

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