The Current Technology M&A and Capital Market

Environment

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NEW YORK

SILICON VALLEY

BOSTON

LONDON

BROADVIEW INTERNATIONAL

A DIVISION OF JEFFERIES & COMPANY, INC

Prepared for TeleSoft Partners Annual Venture Capital EcoSystem Meeting

Robert Abbe, Managing Director Broadview International

October 29, 2004

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The Changing Landscape For Emerging Growth Technology Companies

IT Companies Must Adapt Their Exit Strategies To The New Environment

2004 forecast IT spending up 3.9%…but a $2.1 trillion

market1

NASDAQ up slightly over last twelve months

IPO market thawed but “bar” remains very high

M&A continues to rebound…sector specific

Regulatory / structural changes driving rationalization of

US public companies

1 Source: Gartner Dataquest Global Market Sizing – January 2004

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Despite a stable equity market and lots of liquidity, relatively few companies have been able to go public

Disconnect between what Wall Street says it can do and what it can do (resulting in a growing backlog)

Technology IPO Market Trends($ Billions)

As of September 24, 2004. Source: Jefferies Broadview capital markets. Technology defined per SDC Platinum high technology industry classification

Technology IPO Backlog Has Grown Dramatically

Amount Filed

Amount Offered

0

5

10

15

20

25

Jan '03 Apr '03 Jul '03 Oct '03 Jan '04 Apr '04 Jul '04

LTM IPO Issuances by Subsector1

Software23%

IT & Network Services15%

Semiconductors21%

Network Infrastructure10%

Computing Equipment4%

Other27%

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QUARTERLY IPO ISSUANCES IPO PRICING VS. FILING RANGE

QUARTERLY FOLLOW-ON ISSUANCES FOLLOW-ON PRICING VS. FILING RANGE

US IPO v. Follow-On Technology Market Stats

As of October 18, 2004 Source: Jefferies Broadview capital market. Technology defined per SDC Platinum high technology industry classification

Below Filing Range Within Filing Range Above Filing Range

0%

20%

40%

60%

80%

100%

Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Aug-04

Below Filing Range Above Filing Range

0%

20%

40%

60%

80%

100%

Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Aug-04

- -

2

7

10

4

21

3

9

12

-

5

10

15

20

25

Q3 '02 Q4 '02 Q1 '03 Q2 '03 Q3 '03 Q4 '03 Q1 '04 Q2 '04 Q3 '04 Q4 '04

Num

ber

of D

eals

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

Am

ount Raised (m

illions)

7

16

29 30

43

21

14

244

-

5

10

15

20

25

30

35

40

45

50

Q3 '02 Q4 '02 Q1 '03 Q2 '03 Q3 '03 Q4 '03 Q1 '04 Q2 '04 Q3 '04 Q4 '04

Nu

mbe

r o

f Dea

ls

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

Am

ount R

aise

d ($m

illions)

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The “Bar” for Tech IPOs Remains High in 2004, But The Quality And Performance Is Suspect

2003 2004

% of Companies with Revenue < $25MM 11% 14%

% of Companies Unprofitable 11% 11%

% of Companies Trading Below IPO 53% 68%

Q3-Q4 2003 vs. 2004 YTD1 IPO Performance

Q3-Q4 2003 Median Performance $85,000 $72,493 36.3% 6 4.5% 0.4%

2004 YTD Median Performance $86,000 $87,357 55.7% 5 7.5% 2.2%

OfferingAmount

TTMRevenue

TTMRevenueGrowth

Quarters ofProfitability

EBITMargin

% ChangeFrom IPO1

TTM

1 As of 09/17/04. Source: Broadview’s IPO Database / Hoover’s IPO Central / Capital IQ

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The Current IT M&A EnvironmentHas Returned To 1996 Levels

M&A Activity 1992 – Q3 2004 Number Of TransactionsNorth America - IT, Media, Communications

Source: Broadview's Global Mergers & Acquisitions database

741.7

33.1 36.8 48.175.9

126.9139.6

369.0

544.3

195.7

95.774.3

116.3

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Q3 2004

$0

$100

$200

$300

$400

$500

$600

$700

$800Number of Deals

Total Consideration ($B)

583

831920

1,593

2,079

2,8442,994

3,763 3,801

2,343 2,327

1,901

1621

2,156

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The Number Of Transactions Above $50 Million Remains Stable

Source: Broadview’s Global Mergers and Acquisitions Database. Data includes announced North American transactions with transaction value greater than $50MM.

1 Data compiled based on deals where the value was known.

19

3025 24 19

32

2014 16

14 19

32

26 2320

33

2223

10

14

15

19

1415

2021

20

2316 21

10

11 8

17

8

5 7

76

3

6

9

11

105

1611 12

169

9 77 7 6 9

5

1113 14

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

>$500MM

$250MM - $500MM

$100MM - $250MM

$50MM - $100MM

North American M&A Transactions >$50MM

78 74 68 57 40 51 53 42 44 43 55 66 71 62

2001 2002 2003 2004

60

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39 of These Companies Were

Venture Capital-Backed

10 of These Companies Were

Venture Capital-Backed

15 of These Companies Were

Venture Capital-Backed

50 of These Companies Were

Venture Capital-Backed

The Venture Capital Industry Has Seen A Reduction In Higher Value Private Company Exits but some recovery in 2004

Source: Broadview's Global Mergers & Acquisitions database. North American private seller transactions.

Middle Market Transactions Will

Drive Venture Capital Returns In The

Current Environment

2000 2002 H1 2004

>$20MM 563 172 138 97

>$50MM 397 84 80 51

>$150MM 193 30 23 14

2003

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Public Company Rationalization Continues to Be a Major Driver of Technology M&A

1 Source: NASDAQ2 Source: CapitalIQ3 Source: Thomson Financial First Call

Number Of NASDAQ Listed Public Companies1

Mar 2000 – Sep 2004

(35%)(1,838)

5,000

DEC 2000

3,800

DEC 2001

3,500

DEC 2002

CHANGE’00-’04

3,300

DEC 2003

Trading Values

<Cash

<$100m

<$250m

# Companies 2

41

1,136

1,882

1%

34%

56%

% of Total

5,181

MAR 2000

3,343

SEP 2004

56% of NASDAQ Listed Public Companies Have No Research

Coverage3

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Late Stage Private Equity and Buyout Market is an Increasingly Important Factor

Secular Changes

Large private equity capital pools focused on technology

Hedge funds entering the private market

Acceptance of sponsors selling companies to other sponsors

Historically low borrowing costs

Sarbanes-Oxley and lack of research and trading support hollowing out low end of public market

Reduced required rate of return / IRR driving pricing higher

Sponsors more comfortable about ultimate exit as other sponsors provide safety net

Companies valued between $100 and $300m have an attractive alternative to an IPO

Implications

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The Quest For Growth In EARNINGS Is Driving Even “Strategic” M&A

Higher gross margins

Leveraging sales/channel costs

Responding to customers rationalizing vendors

Access to new/larger markets

Make vs. Buy (avoiding P&L hit)

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STAGE VALUE/ PROOF

Most Buyers Are Seeking Acquisitions At A Later Stage Of Company Development

Technical Feasibility

Product Functionality

Customer Acceptance

Business Model Works

Economic Model Works

Scalability Proven

5

6

Product is possible to do

Product does what it is supposed to do

Customers care

Customers are willing to pay a rational economic price

Company can be profitable

Increasingly profitable growthis possible

Size O

f Ad

dressab

le Market D

rives Valu

ation

BusinessAcquisition

3

4

ProductAcquisition

1

2

TechnologyAcquisition

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The M&A Environment: The Challenges

Proven business model (not just technology) a requirement for most buyers

Few Buyers can stomach dilution, pursue early stages companies (Cisco, Symantec, etc.)

Bias towards partnership versus M&A

Mid-cap buyers only beginning to consider M&A again

Valuation disconnect and preference structures

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The M&A Environment: The Good News

Convergence, open standards are driving renewed focus on growth verses consolidation (in some segments)

Positive Wall Street reaction to recent M&A– Computer Associates / Netegrity

– Verisign / Jamba

– Juniper / Netscreen

Many large and mid caps substantially reduced R&D as they right sized their businesses

Customers seek complete solutions from fewer vendors

Lines between software and hardware are blurring – Many software companies open to selling standards based appliances

– Systems companies increasingly look like software and services companies

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The Resulting “New Rules of the Road”

Restructure liquidation preferences NOW

Target IRR on the first $75MM of enterprise value … the best deals will use <$20MM total investment

VCs

Drive to profitability first

Develop visibility and partnerships with marketplace gorillas

Don’t fight industry rationalization … like fighting the rising/falling tide

Young Company

CEOs

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August 2004$160,000,000

has been acquired byhas divested its XGS enterprise

technology platform and the associated software licenses to

June 2004

$28,000,000

Hewlett-Packard Company

July 2004$242,000,000

has been acquired by

April 2004$20,000,000

OMR Systems Corporation andOMR Systems International, Ltd.

to

has divested

September 2003

has sold substantially all ofits operating assets to

ConfidentialJanuary 2004

has been acquired by

April 2004

has been acquired by

€475,000,000June 2004

has been acquired by

$497,000,000

ConfidentialFebruary 2003

has sold its virtualmachine assets to

$120,000,000March 2003

has been acquired byhas been acquired by

$150,000,000April 2003

$122,000,000May 2003

has been acquired by

ConfidentialAugust 2003

has been acquired by

Recent M&A Activity Reflects Access To Today’s Dominant Technology Firms

September 2004$123,000,000

has been acquired by

Pending$445,000,000

has agreed to be acquired by