Mergers and Acquisitions

The Deal Process From

An Investment Banker’s Perspective
 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.

2
Transaction Overview

3
 The Sale Process – An Overview
Setting Preparing Marketing Selecting Negotiating
The For The The The
Stage Sale Company Buyer Transaction

•Understand •Determine preliminary •Enter the market •Presentation of mgmt. •Coordinate detailed buyer
seller’s objectives range of value due diligence
•Solicit proposals •Negotiate letters of intent
•Assemble the team •Prepare Confidential •Negotiate purchase
•Evaluate proposals •Select Purchaser
Information Memorandum and sale agreement
•Perform initial
and related materials
due diligence •Close transaction
•Finalize contact strategy

2 Weeks 4 Weeks 4 Weeks 4 Weeks 6 Weeks

Timeline

4
 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
Auction
involves contacting a limited
involves contacting a large
group of pre-qualified buyers in order
number of acquirers and establishing
to promote competition. Confidentiality
strict deadlines for
is preserved and business interruption
responses.
is limited.

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 The Sale Process - Setting The Stage

Setting Preparing Marketing Selecting Negotiating

The For The The The
Stage Sale Company Buyer Transaction

Understand Seller’s Assemble The Team Perform Initial Due Diligence

Objectives

•Key members of management •Collect historical and projected financial

•Protect confidentiality
•Accountant information
•Maximize price
•Legal counsel •Obtain marketing information, product
•Obtain most favorable terms brochures and other Company publications
•Investment Banking Professionals
•Minimize business disruption •Talk with key members of management
•Treat employees fairly •Tour facilities
•Close transaction quickly

•Maintain management or
operational control

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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.

Consolidators
Utilities
International Companies
Service Companies
Financial 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 to

needed 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
300 30

250 25

200 20

$ millions (EBITDA)
$ millions (sales)

Sales
150 15
EBITDA

100 10

50 5

0 0
1992 1993 1994 1995 1996

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 Financial Performance

Long term debt levels have declined as cash flow has

allowed M+A Candidate to pay down debt.
1.8
$ Millions
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1992 1993 1994 1995 1996

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 Do Your Homework and Prepare

Setting Preparing Marketing Selecting Negotiating

The For The The The
Stage Sale Company Buyer Transaction

Determine Preliminary Prepare Confidential Information Finalize Contact Strategy

Range of Value Memorandum and Related Materials

•Review final buyers list

•Assess Company valuation from strategic •Formulate investment “story”
and financial perspectives •Prepare Confidentiality and
•Assist Company in preparing projections
Non-Disclosure Agreement
•Identify value drivers
•Prepare Summary Description of the
•Develop format for presentations to
•Identify key industry factors that might Company (“Teaser”)
prospective buyers (“Management
affect value
•Write detailed Confidential Information Presentation”)
Memorandum and review with
management

•Compile and prioritize list of potential

buyers

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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

Methodologies
Investment 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% 241
Market Multiple 20% 272
Transaction Multiple 20% 262

Preliminary Value
Indication $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 Multiples
Investment 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 Multiple
ACR 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 Candidate Resulting
Comps 1996 Results 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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 Transaction Multiple

$ millions)
Avg. of Candidate Resulting
Comps 1996 Results 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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 Transaction Multiple
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 9.78 133
York, a manufacturer of refrigeration and HVAC equipment, acquired
all of the outstanding capital stock of Evcon Holdings, a related
company, from Beacon Capital for $133 million in cash and the
assumption 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 and
Series A convertible voting preferred stock of Kysor, a related
refrigeration systems manufacturer, for $4

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

Thermo King Sep-97 0.15 996 2.57 180 14.22 NA 2560

Ingersoll-Rand acquired Thermo King, a unit of Westinghouse
Electric 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 Flow
Project Frost
DISCOUNTED CASH FLOW APPROACH (1)
VALUATION DATE: DECEMBER 31, 1996
(DOLLARS IN MILLIONS)

Historical (2) Terminal

31-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% $378
Cost 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% 69
Selling Expenses 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0
General & 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% 0

Interest Expense 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0
Non-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% 35
Income 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 35
Add:
Less:
Adjusted Pre-Tax Income 26 10.0% 26 9.0% 28 9.1% 30 9.1% 31 9.1% 33 9.1% 35
Taxes @ 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% 21
Adjusted Debt-Free Net Income 16 6.1% 16 5.5% 17 5.5% 18 5.4% 18 5.3% 20 5.5% 21
Add: 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) 1.0000

Present Value Periods (months) 0.0
Present 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 21 150
Add: Non-Operating Asset 0

Business Enterprise Value ("BEV") 241

Rounded BEV $241

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 Understand The Potential Buyers
Strategic Financial
•Shareholders will probably receive cash for value of equity
investment
•Potential to be most complete exit strategy-
Shareholders receive full value
•Management and/or current shareholders could have
opportunity to invest in the new company, providing
•Potential for highest value if synergies exist (e.g. cost savings
from more efficient purchasing and administrative functions) PRO opportunity for additional economic gain.

•Financial buyers may be most likely to favor existing

•Buyer may add management depth and expertise
management and provide strong additions in key areas

•Confidentiality is easier to control

•Maximum value may not be achieved if geographical/site

•Financial buyers will maximize leverage which may impede
overlap is significant
operating flexibility
•May limit opportunity for strategic synergies
•Value may also be impaired by limitations on future
•Financial buyers may not bring industry expertise, with the
expansion due to buyer’s existing operations
exception of those with similar existing investments
•Buyer may prefer own management team CON •If seller maintains interest, new company may not have
management control
•Requirement to obtain financing can delay closing
•Confidentiality may be difficult to control

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 Buyer Profiles
Utilities
Many 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/Wholesalers
The 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 Buyers
The 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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After The Homework Is Done, Then The Sale Process Begins

Setting Preparing Marketing Selecting Negotiating

The For The The The
Stage Sale Company Buyer Transaction

Enter The Market Solicit Proposals Evaluate Proposals

•Make initial phone contacts •Respond to initial questions of •Receive preliminary indication of
potential acquirers interest and value
•Execute Confidentiality Agreements
with interested parties •Provide additional materials •Review various proposals and
compare terms
•Distribute “Summary Description” and •Identify key transaction points
evaluate interest
•Incorporate feedback into process
•Conduct follow-up conversations and
distribute Confidential Information
Memorandum

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 Now You Determine The Best Buyer
Setting Preparing Marketing Selecting Negotiating
The For The The The
Stage Sale Company Buyer Transaction

Presentation of Mgmt. Negotiate Letters of Intent Select Purchaser

•Prepare mgmt. presentation •Analyze / review proposed letters of intent •Evaluate final letter of intent
•Package additional information •Select final round bidders •Make recommendations
for data room/supplemental •Negotiate key terms with bidders •Select Purchaser
package •Request and receive final letters of intent
•Invite selected buyers
•Tour facility
•Manage follow-up information
requests

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 Then You Negotiate and Close The Deal

Setting Preparing Marketing Selecting Negotiating

The For The The The
Stage Sale Company Buyer Transaction

Coordinate Detailed Buyer Due Diligence Negotiate Purchase & Sale Agreement Close Transaction

•Coordinate last minute

•Provide information to buyer and •Determine negotiating strategy and information requests
buyer’s team roles of deal team members
•Negotiate final terms
•Answer questions •Participate in all negotiating sessions
•Close the transaction
as per approved strategy
•Supervise outside advisors including
counsel and accountant •Act as a liaison between the principals

•Review all drafts for conformity to

the agreed upon “deal”

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