m&a deal process

Mergers and Acquisitions

The Deal Process From

An Investment Banker’s Perspective

2

Agenda

Discuss some of the important aspects of an M+A transaction from the perspective of a Seller, using an actual “mid market” transaction. The information and data is from an Investment Banker’s presentation that was used to educate a client about the process involved in selling his business and some of the key issues to consider before, during and after the transaction.

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Transaction Overview

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The Transaction

The Sale Process – An Overview

•Understand seller’s objectives

•Assemble the team

•Perform initial due diligence

•Coordinate detailed buyer due diligence

•Negotiate purchase and sale agreement

•Close transaction

•Determine preliminary range of value

•Prepare Confidential Information Memorandum and related materials

•Finalize contact strategy

•Presentation of mgmt.

•Negotiate letters of intent

•Select Purchaser

•Enter the market

•Solicit proposals

•Evaluate proposals

2 Weeks 4 Weeks 4 Weeks 4 Weeks 6 Weeks

Timeline

ForSale

The Company

The Buyer

Setting Preparing Marketing Selecting NegotiatingThe Stage

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Alternative Approaches

The principal sale process alternatives include:

Negotiated sale involves contacting one buyer at a

time in order of anticipated interest, until a transaction is completed.

Prioritized Auction involves contacting a limited

group of pre-qualified buyers in order to promote competition. Confidentiality

is preserved and business interruption is limited.

Auctioninvolves contacting a large

number of acquirers and establishing strict deadlines for

responses.

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The Transaction

Understand Seller’sObjectives

•Protect confidentiality

•Maximize price

•Obtain most favorable terms

•Minimize business disruption

•Treat employees fairly

•Close transaction quickly

•Maintain management or operational control

Assemble The Team

•Key members of management

•Accountant

•Legal counsel

•Investment Banking Professionals

Perform Initial Due Diligence

•Collect historical and projected financial

information

•Obtain marketing information, product

brochures and other Company publications

•Talk with key members of management

•Tour facilities

ForSale

The Company

The Buyer


The Sale Process - Setting The Stage

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Setting The Stage – First Step

The first and most important step of any M+A transaction is understanding the business. The following few slides set forth just a few of the issues important to this client’s business. All businesses are different, and the more time spent at this stage, the higher the likelihood of a favorable outcome.

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Know The Company’s History

M+A Candidate is a significant player in the wholesale HVAC equipment distribution industry.

Recent Acquisitions

Revenues increased from $128 million in 1992 to $259 million in 1996.

EBITDA has increased from $11 million in 1992 to $24 million in 1996.

Interested in liquidity options

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Know The Industry

The industry is experiencing a large push toward consolidation and there are many groups looking to acquire HVAC related companies.

ConsolidatorsUtilitiesInternational CompaniesService CompaniesFinancial Buyers

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Know The Important Value Drivers

History of strong financial performance

Exclusive agreement with ABC Corp

Established distribution network

Respected industry reputation

Compounded annual sales growth rate in excess of 19%

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Anticipate Critical Due Diligence Issues

Exposure to seasonal or economic cycles and current position in cycle.

Historical sales performance

Details and exclusivity of ABC Corp agreement

Ability to reach sales growth projections and access toneeded capital

Competitor’s resources and strategic positioning

Management team experience, depth and breadth

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Study Financial Performance

Historic Sales increases have flowed through to Operating Cash Flow

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1992 1993 1994 1995 1996

$ m

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$ m

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Sales

EBITDA

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Financial Performance

Long term debt levels have declined as cash flow has allowed M+A Candidate to pay down debt.

1992 1993 1994 1995 19960.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8$ Millions

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The Transaction

Do Your Homework and Prepare

Determine PreliminaryRange of Value

•Assess Company valuation from strategic

and financial perspectives

•Identify value drivers

•Identify key industry factors that might

affect value

Prepare Confidential Information Memorandum and Related Materials

•Formulate investment “story”

•Assist Company in preparing projections

•Prepare Summary Description of the

Company (“Teaser”)

•Write detailed Confidential Information

Memorandum and review with

management

•Compile and prioritize list of potential

buyers

Finalize Contact Strategy

•Review final buyers list

•Prepare Confidentiality and

Non-Disclosure Agreement

•Develop format for presentations to

prospective buyers (“Management

Presentation”)

ForSale

The Company

The Buyer


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Do Your Research

What do we think the business is worth and why?

How will others value the business and why?

Who are the likely buyers?

What are the value drivers in the business, and which are most important to different buyers?

What issues will we have to address?

How good are our answers?

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Know The Different Ways The Business Might Be Valued

MethodologiesInvestment Bank utilizes approaches generally considered to be most meaningful for purposes of establishing value expectations. Each of these approaches can be incorporated into the valuation analysis which will determine a reasonable starting point for selling price expectations.

Leveraged Buyout (“LBO”) - Determines if the Company’s targeted selling price can support sufficient debt and continue to produce returns required by Financial Buyers

Market Multiples - Identify comparable publicly-traded companies to establish the Company’s freely traded value in the public marketplace. Market multiple methodology may not be representative of achievable values due to the dynamics of the public markets and inconsistencies between the subject company and the comparable companies.

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Value Assessment

Methodologies (continued)

Discounted Cash Flow (“DCF”) - Establishes the fair value of the Company based upon the value of cash flows generated by the Company over its life. The valuation technique also identifies ‘value drivers’ which support the Company’s future cash flows and represents the “floor price” which a Financial Buyer, without the benefit of strategic advantages, should be willing to offer.

Transaction Multiples - Identifies recent multiples paid for companies in the industry. These values may not be indicative of achievable values due to the lack of availability of public data for comparable companies. While individual transaction circumstances often vary greatly, this can be a useful indicator of the current market acquisition climate.

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Preliminary Valuation Summary

Methodology Weights Preliminary Value Indication ($millions)

LBO/Financial Buyer 30% 194

Discounted Cash Flow 30% 241Market Multiple 20% 272Transaction Multiple 20% 262

Preliminary ValueIndication $237 million

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How An LBO/Financial Buyer Might Value The Business

Investment Bank reviewed M+A Candidate’ results from 1992 through 1996 and utilized conservative assumptions to determine a capital structure that a financial buyer might apply to the Company in order to provide acceptable returns to all capital providers.

This structure and the related returns are depicted on the following page. They were calculated using a financial model similar to most financial buyers.

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LBO/Financial Buyer

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Market MultiplesInvestment Bank reviewed the operating, financial and market performance of nine publicly held companies involved in the distribution of HVAC, plumbing, and building equipment.

Though none of these companies are an exact fit with M+A Candidate, we believe that this analysis is appropriate due to similarities between the customer segments and distribution capabilities of related product lines. However, we have discounted this approach to account for the dynamics of the public markets and the lack of a suitable number of “direct fit” comparables.

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Market MultipleACR Group - Distributes and wholesales HVAC and refrigeration equipment to contractors and dealers as well as others.

Consolidator, Inc. - Distributes HVAC and refrigeration equipment, also provides temporary staffing services.

Pameco Corp. - Distributes HVAC equipment, also offers consulting services

Kevco, Inc. - Wholesale distributor of building and plumbing products

KSW, Inc. - Distributes and installs ventilation equipment

Noland Co. - Distributes mechanical equipment and supplies including plumbing, HVAC and refrigeration supplies.

Waxman Industries - Distributor of plumbing, hardware and electrical products.

Wilmar Industries - Distributor of repair and maintenance products to the housing and building markets, including plumbing, hardware and related products.

ASAHI / America, Inc. - Distributor and manufacturer of valves and piping systems

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Market Multiple

($ millions) Avg. of Comps

Candidate 1996 Results

Resulting Value

Revenue 0.8 259.0 207

EBIT 14.0 23.4 328

EBITDA 11.3 24.1 272

NI (Taxes @ 40%) 19.3 14.5 280

Average Market Multiple Value: $272

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Transaction Multiple

Although the industry is experiencing a period of rapid consolidation, the majority of the companies being acquired are small, private entities. For this reason, public transaction multiples are not available for many transactions.

Investment Bank has reviewed all of the transactions where public data were available and determined that four were suitable for this analysis, although a reduced overall valuation weighting is believed appropriate. Each company was also individually weighted based on comparability with M+A Candidate and the results are shown on the following page.

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$ millions) Avg. of Comps

Candidate 1996 Results

Resulting Value

Revenue 1.0 259.0 259

EBIT 12.8 23.4 300

EBITDA 9.4 24.1 227

Average Transaction Multiple Value: $262

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Valuation Summary

Acquiree Acq. Date Weights Target Revs Multiple EBIT Multiple EBITDA Multiple Trans Value(millions) (millions)

York International Feb-95 0.35 180.9 0.74 10.6 12.55 13.6 9.78 133York, a manufacturer of refrigeration and HVAC equipment, acquiredall of the outstanding capital stock of Evcon Holdings, a relatedcompany, from Beacon Capital for $133 million in cash and theassumption of debt. The transaction had bee

Kysor International Feb-97 0.35 379.2 0.95 21.6 16.63 30.7 11.7 359.2

Scotsman Industries, a manufacturer of refrigeration products,completed its tender offer for all of the outstanding common stock andSeries A convertible voting preferred stock of Kysor, a relatedrefrigeration systems manufacturer, for $4

Contractors Heating Supply Co. May-97 0.15 20.2 0.3 1.9 3.16 2.8 2.14 6ACR Group, a wholesaler of HVAC equipment, acquired ContractorsHeating Supply, another wholesaler, for $6 million.

Thermo King Sep-97 0.15 996 2.57 180 14.22 NA 2560Ingersoll-Rand acquired Thermo King, a unit of WestinghouseElectric which wholesales HVAC and refrigeration equipment, for$2.56 billion in stock and assumed liabilities.

Averages: 1.02 12.82 9.41

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Discounted Cash Flow

Investment Bank applied the discounted cash flow model to determine a “base price” that a strategic buyer would pay, without accounting for synergies.

This process involves using a weighted average cost of capital as estimated from comparable public companies and accounting for additional risk premiums in accordance with the Capital Asset Pricing Model.

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Discounted Cash FlowProject Frost

DISCOUNTED CASH FLOW APPROACH (1)VALUATION DATE: DECEMBER 31, 1996

(DOLLARS IN MILLIONS)

Historical (2) Terminal31-Dec-96 31-Dec-97 31-Dec-98 31-Dec-99 31-Dec-00 31-Dec-01 Year

Net Sales $259 100.0% $282 100.0% $305 100.0% $326 100.0% $346 100.0% $363 100.0% $378Cost of Sales 212 81.8% 231 81.8% 250 81.8% 267 81.8% 283 81.8% 297 81.8% 309

GROSS PROFIT 47 18.2% 51 18.2% 55 18.2% 59 18.2% 63 18.2% 66 18.2% 69Selling Expenses 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0General & Administrative Expenses 23 8.9% 25 8.9% 27 8.9% 29 8.9% 31 8.9% 32 8.9% 34

Operating Income Before Depreciation 24 9.3% 26 9.3% 28 9.3% 30 9.3% 32 9.3% 34 9.3% 35

Depreciation & Amortization 1 0.3% 1 0.2% 1 0.2% 1 0.2% 1 0.2% 1 0.2% 0Interest Expense 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0Non-Operating Expense (Income) (2) -0.9% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0

PRETAX INCOME 26 10.0% 26 9.0% 28 9.1% 30 9.1% 31 9.1% 33 9.1% 35Income Taxes @ 40.0% 10 4.0% 10 3.6% 11 3.6% 12 3.6% 13 3.6% 13 3.6% 14

NET INCOME (LOSS) $15 6.0% $15 5.4% $17 5.4% $18 5.4% $19 5.5% $20 5.5% $21

Effective Tax Rate 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0%After-Tax Interest Expense 0 0 0 0 0 0 0

Pre-Tax Income 26 26 28 30 31 33 35Add: Less:

Adjusted Pre-Tax Income 26 10.0% 26 9.0% 28 9.1% 30 9.1% 31 9.1% 33 9.1% 35Taxes @ Effective Rate 10 10 11 12 13 13 14

ADJUSTED NET INCOME (LOSS) 16 6.1% 16 5.5% 17 5.5% 18 5.4% 18 5.3% 20 5.5% 21Adjusted Debt-Free Net Income 16 6.1% 16 5.5% 17 5.5% 18 5.4% 18 5.3% 20 5.5% 21Add: Depreciation & Amortization 1 0.3% 1 0.2% 1 0.2% 1 0.2% 1 0.2% 1 0.2%Less: Capital Expenditures (Amount) 0.0% 0.0% 0.0% 0.0% 0.0%Change in WC (Increase)/Decrease (3) 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0%

Net Debt-Free Cash Flow (NDFCF) 16 5.7% 17 5.7% 18 5.6% 19 5.5% 21 5.7%Capitalized Value 150

First Period Adjustment (4) 1.0000Present Value Periods (months) 0.0Present Value Factor @ 14.0% (5) 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000

PV of NDFCF & Capitalized Value 16 17 18 19 21 150Add: Non-Operating Asset 0

Business Enterprise Value ("BEV") 241

Rounded BEV $241

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Understand The Potential Buyers

•Potential to be most complete exit strategy- Shareholders receive full value

•Potential for highest value if synergies exist (e.g. cost savings from more efficient purchasing and administrative functions)

•Buyer may add management depth and expertise

Strategic Financial

PRO

CON

•Maximum value may not be achieved if geographical/site overlap is significant

•Value may also be impaired by limitations on future expansion due to buyer’s existing operations

•Buyer may prefer own management team

•Confidentiality may be difficult to control

•Shareholders will probably receive cash for value of equity investment

•Management and/or current shareholders could have opportunity to invest in the new company, providing opportunity for additional economic gain.

•Financial buyers may be most likely to favor existing management and provide strong additions in key areas

•Confidentiality is easier to control

•Financial buyers will maximize leverage which may impede operating flexibility•May limit opportunity for strategic synergies•Financial buyers may not bring industry expertise, with the exception of those with similar existing investments•If seller maintains interest, new company may not have management control•Requirement to obtain financing can delay closing

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Buyer Profiles

UtilitiesMany utilities are looking for new ways to compete in view of the impending

deregulation. HVAC aligns well with the services that they provide their customer base and will continue to increase in importance as utilities explore more value added services that they can offer customers. Investment Bank includes over 300 utilities among its customer base, these relationships will prove quite valuable in the sale process.

Distributors/WholesalersThe HVAC industry is ripe for consolidation in each segment from manufacturing

through distribution, installation and servicing. It is a very large industry and is very fragmented comprised of approximately 40,000 small-to-medium sized companies.

Financial BuyersThe above dynamics combined with the relative stability of the service portion of the

industry make the HVAC industry an attractive candidate for roll-ups or other consolidation plays, resulting in estimated cost savings of 5 to 10%. Additionally, the strong cash flows and profitability of many entities can make a strong case for inclusion into a financial buyer’s portfolio.

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ABC Corp

$5 billion subsidiary of XYZ Corp

Recently formed a joint venture with a Philippine air conditioning concern, Concepcion Industries.

ABC Corp is actively seeking strategic partnerships, and distributes through both company owned and external wholesalers, similar to M+A Candidate.

The majority of ABC Corp’s current growth is happening abroad, however, expansion domestically is a given.

ABC Corp’s other manufacturing divisions are also experiencing international growth at this time and acquisitions in several areas are slated for the future.

Investment Bank performed a dilution analysis. This analysis determined the price that XYZ Corp could pay for M+A Candidate without the acquisition being dilutive (based on M+A Candidate’ 1996 results). The reliability of these results may be lessened because the analysis looked into XYZ Corp as a whole, and did not separate ABC Corp from their other divisions

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Consolidator, Inc.

$635 million distributor of HVAC & refrig. equipment.

Consolidator has been very active in the consolidation of HVAC distributors. Recent acquisitions include: Baker Distributing Company, William Wurzbach Company, Kissiah Distributing Company, Reese Supply, Inc., Comfort Products and Central Plains (both ABC Corp distributors), Coastline Distribution as well as other Inter-City Products subsidiaries, Rheem Manufacturing Company, Central Air Conditioning Distributors, Inc., Three States Supply Co., Coastal Supply Company, Nevada Supply Co., and soon to be completed - Air Supply, Inc, and A/C Parts and Equipment Co.

Of additional interest, the Company closed a $260 acquisition facility provided by NationsBanc in August of 1997.

The Company is in the process of selling off its non-core business units including its manufacturing and temporary staffing units.

Consolidator has been pursuing their acquisition strategy since 1989 and plan to continue amassing size and and distribution capabilities.

Consolidator was recently granted rights to distribute three new product lines from the following three companies: International Comfort Products, American Standard Companies, Inc. and Carrier Corporation.

Investment Bank has performed a dilution analysis for Consolidator. This analysis determines the price that Consolidator could pay for M+A Candidate without the acquisition being dilutive (based on M+A Candidate’ 1996 results).

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The Transaction

Enter The Market

•Make initial phone contacts

•Execute Confidentiality Agreements

with interested parties

•Distribute “Summary Description” and

evaluate interest

•Conduct follow-up conversations and

distribute Confidential Information

Memorandum

Solicit Proposals

•Respond to initial questions of

potential acquirers

•Provide additional materials

•Identify key transaction points

•Incorporate feedback into process

Evaluate Proposals

•Receive preliminary indication of

interest and value

•Review various proposals and

compare terms

ForSale

The Company

The Buyer


After The Homework Is Done, Then The Sale Process Begins

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ForSale

The Company

The Buyer


The Transaction

Presentation of Mgmt.

•Prepare mgmt. presentation

•Package additional information

for data room/supplemental

package

•Invite selected buyers

•Tour facility

•Manage follow-up information

requests

Negotiate Letters of Intent

•Analyze / review proposed letters of intent

•Select final round bidders

•Negotiate key terms with bidders

•Request and receive final letters of intent

Select Purchaser

•Evaluate final letter of intent

•Make recommendations

•Select Purchaser

Now You Determine The Best Buyer

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The Transaction

Then You Negotiate and Close The Deal

Coordinate Detailed Buyer Due Diligence

•Provide information to buyer and

buyer’s team

•Answer questions

•Supervise outside advisors including

counsel and accountant

ForSale

The Company

The Buyer


Negotiate Purchase & Sale Agreement

•Determine negotiating strategy and

roles of deal team members

•Participate in all negotiating sessions

as per approved strategy

•Act as a liaison between the principals

•Review all drafts for conformity to

the agreed upon “deal”

Close Transaction

•Coordinate last minute

information requests

•Negotiate final terms

•Close the transaction

m&a deal process

Documents