Embed Size (px)
Citation preview
FUTURE PLANNING & DISCOVERY PROCESS
FOR
TOPNOTCH TECHNOLOGIES
PREPARED BY FINAL FOUR ADVISORS, LLC.
Hamir Jake
Mike Manoj 1
TABLE OF CO
NTEN
TSINTRODUCTION
EXECUTIVE SUMMARY
BACKGROUND INFORMATION
FINANCIALS
MANAGEMENT STRUCTURE
COMPENSATION STRUCTURE
SYNERGIES
EXHIBITS
3
4
5
7
15
19
21
24
2
INTRO
DU
CTION
HAMIR MAHAJAN
• M.B.A. - Xavier University• UBS – Sr. Investment Analyst• Final Four Advisors - Partner
3
EXECUTIVE SU
MM
ARY
•Valuation •DCF: 165 MN•M&A: 199 MN•Control premium: 198 MN
•Change in Management Structure•Add ESOP•Internal promotions•New positions
•Synergies•Increased market share
EXECUTIVE SUMMARY
4
BACKGRO
UN
D IN
FORM
ATION
Selection Criteria
•Similarity in Product lines•Topnotch Technologies – information assurance, computer network defense, systems engineering, managed enterprise-wide IT services and solutions
•Clients •Topnotch Technologies – Primarily Government•Client groups – Commercial, Government, or International
CRITERIA FOR SELECTING COMPARABLE COMPANIES
5
BACKGRO
UN
D IN
FORM
ATION
Primary Clients Products Usage
Topnotch Technologies Government IT Security and Enterprise Technology - information assurance, computer network defense, systems engineering, managed enterprise-wide IT services and solutions
Baseline
ICF International Inc. Commercial/Government/International
IT Solutions - management, technology, and policy consulting and implementation services
TT Valuation
The KEYW Holding Corp. Government Development & Integration - SW/HW/engineering development, integration services, IT security
TT Valuation
ManTech International Corp. Commercial/Government/International
IT Security technologies and solutions
TT Valuation
SAIC, Inc. Select Commercial/Government/International
IT/Technology Services – security, outsourcing, management, R&D, space, science
Merged Firm Valuation
COMPARABLE COMPANIES
6
FINAN
CIALSVALUATION METHODS
7
FINAN
CIALS
•Growth Rate: 3%•WACC: 13%•Levered Beta: 1.14•Cost of Debt: 1.2%•Cost of Equity: 11.8%•Total Present Value: $165 MN
DISCOUNTED CASH FLOWS
8
FINAN
CIALS•EBITDA : 9.99x Adjusted EBITDA
•Comparable transactions•Potential cost savings
M & A METHOD
9
Avg. Times EBITDA 9.99
Adjusted EBITDA 19.94
Enterprise Value $199
FINAN
CIALSCONTROL PREMIUM
• Average control premium paid : 20 %
•$ 33 MN OVER THE VALUATION
10
Aerospace, Defense, and Government Companies
2009 22.60% 2
2008 27.10% 10
2007 9.30% 8
FINAN
CIALS
32%
35%
13%
20%
Blue Sky's Current Offer (in Millions)
Cash
Unsecured non-amortizing seller notes
Additional Cash Consideration
Common Stock of Blue Sky International
CURRENT OFFER
11
FINAN
CIALSTRUE VALUE OF OFFER
12
FINAN
CIALSCOUNTER OFFER
13
FINAN
CIALSTRUE VALUE OF COUNTER OFFER
14
MAN
AGEM
ENT STRU
CTURE
HUMAN CAPITAL• Robert King, Led Topnotch to 23.6% revenue growth • VP’s integral part of Topnotch’s growth
KNOWLEDGE• Government Services experts• R&D and evaluation service experts
RELATIONSHIPS• DoD• NASA • SSA• FAA
TOPNOTCH “SOFT” RESOURCES
15
MAN
AGEM
ENT STRU
CTURE
PRE-ACQUISITION ORGANIZATION CHART
MICHAEL BROWNCEO
BOARD OF DIRECTORS
VP Operations VP Finance VP Technology
VP Technology
Topnotch Technologies
ROBERT KINGCEO
VP Operations VP Finance
BOARD OF DIRECTORS
Bluesky International
16
MAN
AGEM
ENT STRU
CTURE
POST-ACQUISITION ORGANIZATION CHART
Senior Vice President IS SBU
CFO
VPOperations
VP Finance
VP Technology
MICHAEL BROWN
CEO Bluesky Int.
Bluesky International -
COO
Senior Vice President
VPOperations
VP Technology
BOARD OF DIRECTORS(Bluesky & Topnotch
Technologies)
NEW POSITION
INTERNAL PROMOTION
ROBERT KING
RetiredSYNERGY REALIZED
17
MAN
AGEM
ENT STRU
CTURE
TALENT RETENTION
•Topnotch’s “Soft” resources CRITICAL to performance & value
•Goal: Retain ALL current management
•Tools needed •Retention bonus•Relocation bonus•ESOP•Control Stock
•Realize Synergies to offset cost
18
COM
PENSATIO
N STRU
CTURE
PRE-ACQUISITION ORGANIZATION CHART
MICAHEL BROWNCEO
BOARD OF DIRECTORS
VP Operations VP Finance VP Technology
VP Technology11.67% Ownership
Topnotch Technologies
ROBERT KINGCEO – 65% Ownership
VP Operations11.67% Ownership
VP Finance11.67% Ownership
BOARD OF DIRECTORS
Bluesky International
19
COM
PENSATIO
N STRU
CTURE
POST-ACQUISITION ORGANIZATION CHART
Senior Vice PresidentESOP (5%)
CFOESOP (5%)
VP OperationsESOP (5%)
VP FinanceESOP (5%)
VP TechnologyESOP (5%)
MICHAEL BROWN
CEO Bluesky Int.
Bluesky International
COOESOP (5%)
Senior Vice PresidentESOP (5%)
VPOperations
VP TechnologyESOP (5%)
BOARD OF DIRECTORS(Bluesky & Topnotch
Technologies)
NEW POSITION
ESOP & Control Shares
ROBERT KING
RetiredSYNERGY REALIZED
20
SYNERG
IESSYNERGY CREATION•Integration of existing services and solutions•Enhanced relationships with customers due to:
•Larger number of offerings•Single provider•Becoming a top-tier provider for additional services•More connections in customer organizations (BI contacts + TT contacts)
•Increased concentration of resources near clients•TT resources to Silver Spring, MD
•DoD•SSA•FAA
•BI resources to Irving, MD•NASA – aircraft system engineering, space launch and operations support
•Not all resources need to move , IT resources can work remotely
21
SYNERG
IES
Offerings DoD NASA SSA FAA Public Companies
Topnotch Technologies
Information Assurance X X X X XComputer Network Defense X X X X XSystems Engineering X X XManaged Enterprise-wide IT services and solutions
X X X X X
Cyber-security X X X X XBluesky International
Research, Development, and Evaluation Services
X X X X
Program Management X X X X XAircraft Systems Engineering X X X XSpace Launch and Operations Support
X
Equipment Maintenance Management
X X X X
Current Business Activities
Future Business Opportunities
22
MARKET SYNERGIES
SYNERG
IESPOTENTIAL CHALLENGES TO BE ADDRESSED•Loss of human assets due to:
•Relocation•Dislike of new organization
•Business direction•New management•Change of priority within the organization (most favored group no longer favored, etc.)
•Loss of relationships•Contacts within the company leaving
•Loss of knowledge•Human assets leaving without sufficient knowledge transfer
23
QUESTIONS
24
EXHIBITS
25
EXHIBITS
Exhibit 1-Various Information
Offer
Cash 65,000,000$ 10 yr subordinated unsecured non-amortizing seller note in aggregate principal amount 70,000,000$ 6.5%Additional cash consideration based on company performance after acquisition 25,000,000$ Shares of BSI common stock 40,000,000$ 4.5 million shares
TNT Background
2008 to 2010 CAGR 23.6%Projected 2011 revenue $400,000,000
Other information
TNT OwnershipCEO and Family 65%Other management 35%
CEO Compensation 3,000,000.00$ Appropriate based on industry practices 500,000.00$
Jet 3,600,000.00$ Comparable Travel Costs 500,000.00$
TNT building lease 3,000,000.00$ Comparable lease 960,000.00$
TNT Legal Expenses in 2010 (one-time expense) 1,500,000.00$
New cyber-security division EBITDA adjustment suggested by mgmt 900,000.00$
BSI Financials
2010A 2011P 2012PRevenue 538.70$ 605.10$ 609.10$ EBITDA 28.30$ 38.30$ 43.50$ BSI est. enterprise value $226,000,000 8x 2010 EBITDA
12/31/10 Net Debt 14.70$ BSI Senior Debt Interest 6%BSI Subordinated Debt 12% (10-14% is normal)
Estimated IPO Value (by Longshot Captial) 100,000,000.00$ $12 per shareBSI current shares common stock outstanding 24,000,000
Government budget and IPO Market data not included26
EXHIBITS
Exhibit 2-Topnotch Technologies Income Statement
2008 2009 2010 2011 2012 2013 2014Actual Actual Actual Projected Projected Projected Projected
Revenue 200.1$ 315.2$ 305.6$ 405.6$ 476.0$ 510.0$ 552.2$ % growth 29.1% 57.5% -3.0% 32.7% 17.4% 7.1% 8.3%Cost of Revenue 185.2$ 290.2$ 273.4$ 360.3$ 422.1$ 452.3$ 489.2$ Gross Profit 14.9$ 25.0$ 32.2$ 45.3$ 53.9$ 57.7$ 63.0$ Gross Margin 7.4% 7.9% 10.5% 11.2% 11.3% 11.3% 11.4%SG&A 9.3$ 12.6$ 21.0$ 22.5$ 24.4$ 25.5$ 27.6$ Depr. and amort. 3.2$ 3.5$ 4.8$ 4.5$ 6.0$ 5.9$ 6.3$ Other exp./income 0.4$ (0.5)$ 0.5$ 1.4$ - - -Oper. Income 2.0$ 9.4$ 5.9$ 16.9$ 23.5$ 26.3$ 29.1$ Oper. Margin 1.0% 3.0% 1.9% 4.2% 4.9% 5.2% 5.3%Interest Expense, Net 0.4$ 0.5$ 1.8$ 1.3$ - - -Earning before taxes 1.6$ 8.9$ 4.1$ 15.6$ 23.5$ 26.3$ 29.1$ Taxes 0.1$ 3.5$ 1.6$ 6.2$ 9.4$ 10.5$ 11.6$ Net income avail. To common 1.0$ 5.3$ 2.5$ 9.4$ 14.1$ 15.8$ 17.5$ Cap. Ex. 5.0$ 4.5$ 5.6$ 4.5$ 8.9$ 9.1$ 10.3$
FYE Dec 31
27
EXHIBITS
Exhibit 3- Topnotch Technologies Balance Sheet
2008 2009 2010Current AssetsCach and Cash Equiv 3.8$ 8.7$ 9.4$ AR, net 50.3$ 54.8$ 46.1$ Prepaid Expenses 3.5$ 8.8$ 7.8$ Other curr. Assets 4.6$ 12.9$ 6.9$ Total Current Assets 62.2$ 85.3$ 70.3$ Long Term AssetsProperty and Equip 17.4$ 20.3$ 32.0$ Deferred Charges and other assets 1.9$ 2.0$ 2.0$ Total long-term assets 19.3$ 22.3$ 34.0$ Totals assets 81.5$ 107.5$ 104.2$
Current LiabilitiesCurrent maturities of LT debt 1.7$ 2.1$ 1.6$ Account Payable 26.6$ 24.8$ 20.1$ Accrued Expenses 6.3$ 12.5$ 14.6$ Billings in excess of revenue earned 13.5$ 26.4$ 23.1$ Total Current Liabilities 48.2$ 65.9$ 59.3$ Long Term LiabilitiesLong term debt 13.9$ 15.1$ 13.1$ Other 6.2$ - -Total Long Term Liabilities 20.2$ 15.1$ 13.1$ Total Liabilities 68.4$ 80.9$ 72.4$
Net stockholders' equity 13.2$ 26.6$ 31.8$ Total liabilities and stockholder's equity 81.5$ 107.5$ 104.2$
FYE Dec 31
28
EXHIBITS
Exhibit 4- Comparable Companies
LTM Margins 2-Year CAGRRevenue Gross Profit EBITDA EBIT Net Income Gross Profit EBITDA EBIT Net Income Revenues EBITDA EBIT Net Income
ICF 745.9 282.5 68.8 45.7 26.2 37.90% 9.20% 6.10% 3.50% 1.60% -1.90% -12.10% -9.80%KeyW 90.7 26.9 5.6 -0.1 10.1 29.60% 6.10% -0.10% 11.20% 0.00% 0.00% 0.00% 0.00%MTI 2448.2 380.3 229.8 203.9 120.6 15.50% 9.40% 8.30% 4.90% 16.70% 17.70% 16.80% 17.70%SAIC 10927 1508 1022 922 572 13.80% 9.40% 8.40% 5.20% 6.60% 12.20% 12.70% 17.30%TNT 305.6 32.2 10.7 4.1
Company Total Assets Return on Assts Return on Equity Current Ratio Quick Ratio Inventory Turnover A/R Days A/P Days NWCICF International $567.70 5.10% 9.20% 1.7 1.7 0 82.3 18.7 $72.70KEYW Holding corporation $140.40 0.00% 0.00% 0.9 0.7 0 0 0 $17.10Man Tech International Corporation $1,504.00 10.10% 14.10% 2.2 2.1 0 64.7 31.1 $206.30SAIC Inc. $5,174.00 11.20% 24.40% 1.8 1.6 29.1 66.7 44.4 $736.00
Company Total Debt Market Capitalization CashICF Internation 100 478.6 6.5Man Tech International Corporation 200 1455.8 152.1SAIC, Inc 28.5 287.9 1.9The KeyW Holding Corporation 30.2 301.6 1.3
LTM Operating Indicators
29
EXHIBITS
Exhibit 4 (Cont.)
VI. Control PremiumsControl Premium % Paid in Recent TransactionsAll Transactions Medium Control Premium Number of Transactions
2009 43.70% 4482008 31.40% 7382007 20.70% 7772006 20.60% 565
Aerospace, Defense, and Government Companies2009 22.60% 22008 27.10% 102007 9.30% 82006 31.60% 7
30
EXHIBITS
Exhibit 6- WACC
31
DebtPref
Stock
Market Value of Equity
Total Cap.
Debt to Equity
Debt to Total Cap.
Pref to Total Cap.
Equity to Total Cap.
Levered Beta
Unlevered Beta
Equity Risk
Premium
Size Risk Premium
Cost of Equity
Cost of Debt
Cost of Preferred
WACC
ICF 100 0 478.6 578.6 20.90% 17.30% 0 82.70% 1.11 0.99 6% 2.49% 13.70% 9.00% 0.00% 12.20%KEYW 30.2 0 301.6 331.8 10% 9.10% 0 90.90% 0.85 0.8 6% 2.85% 12.50% 8.30% 0.00% 11.80%MTI 200 0 1455.8 1655.8 13.70% 12.10% 0 87.90% 0.97 0.9 6% 1.73% 12.10% 7.30% 0.00% 11.10%SAIC 1105 0 5772.3 6877.3 19.10% 16.10% 0 83.90% 1.82 1.64 6% 0.85% 16.30% 6.20% 0.00% 14.30%
0.152924 1.13605 1.039807 1.8% 7.63%
debt 0.15equity 0.85
Levered Beta 1.14
Cost of Equity 11.8%Cost of Debt 1.2%WACC 13.0%
WACC
EXHIBITS
Exhibit 7- DCF
32
2008 2009 2010 2011 2012 2013 2014 WACC= 13.00%Growth= 3%
Sales $200.1 $315.2 $305.6 $405.6 $476.0 $510.0 $552.2 T= 40%Cost of goods sold $185.2 $290.2 $273.4 $360.3 $422.1 $452.3 $489.2Gross profit $14.9 $25.0 $32.2 $45.3 $53.9 $57.7 $63.0SAG $9.3 $12.6 $21.0 $22.5 $24.4 $25.5 $27.6Other income—net $0.4 ($0.5) $0.5 $1.4 $0.0 $0.0 $0.0Interest $0.4 $0.5 $1.8 $1.3 $0.0 $0.0 $0.0Income before taxes $5.2 $12.9 $10.7 $21.4 $29.5 $32.2 $35.4Taxes $0.6 $3.5 $1.6 $6.2 $9.4 $10.5 $11.6Net income $4.2 $8.9 $7.3 $13.9 $20.1 $21.7 $23.8
Depreciation $3.2 $3.5 $4.8 $4.5 $6.0 $6.0 $6.3Net Working Capital $14.0 $19.4 $11.0 $11.3 $11.7 $12.0 $12.4Change in working capital ($5.4) $8.4 ($0.3) ($0.3) ($0.4) ($0.4)Capital Expenditures $5.0 $4.5 $5.6 $4.5 $8.9 $9.1 $10.3
Cash Flows $13.3 ($1.9) $14.2 $17.5 $18.9 $20.2Terminal Value $207.7Incremental CF $13.3 ($1.9) $14.2 $17.5 $18.9 $227.8
VDCF= $164.8 TNT value based on DCF calculations
Actual Projected
EXHIBITS
Exhibit 8- M&A
33
$2,010.00 2010 (Adjusted)Actual
Revenue $305.60 $305.60% growth -$0.03 -$0.03Cost of Revenue $273.40 $273.40Gross Profit $32.20 $33.20Gross Margin $0.11 $0.11SG&A $21.00 $12.76Depr. and amort. $4.80 $4.80Other exp./income $0.50 $0.50Oper. Income $5.90 $15.14Oper. Margin $0.02 $0.02Interest Expense, Net $1.80 $1.80Earning before taxes $4.10 $13.34Taxes $1.60 $5.34Net Income $2.50 $8.00
EDITDA $19.94***Numbers in millions
Avg. Times EBITDA 9.99
Adjusted EBITDA 19.94
Enterprise Value $199
EXHIBITS
34
Exhibit 9- Earnout
2008 2009 2010 2011 2012 2013 2014 WACC= 13.00%Growth= 3%
Sales $200.1 $315.2 $305.6 $405.6 $476.0 $510.0 $552.2 T= 40%Cost of goods sold $185.2 $290.2 $273.4 $360.3 $422.1 $452.3 $489.2Gross profit $14.9 $25.0 $32.2 $45.3 $53.9 $57.7 $63.0SAG $9.3 $12.6 $21.0 $13.1 $15.0 $25.5 $27.6
Other income—net $0.4 ($0.5) $0.5 $1.4 $0.0 $0.0 $0.0Interest $0.4 $0.5 $1.8 $1.3 $0.0 $0.0 $0.0Income before taxes $5.2 $12.9 $10.7 $30.8 $38.9 $32.2 $35.4Taxes $0.6 $3.5 $1.6 $6.2 $9.4 $10.5 $11.6Net income $4.2 $8.9 $7.3 $23.3 $29.5 $21.7 $23.8
Depreciation $3.2 $3.5 $4.8 $4.5 $6.0 $6.0 $6.3Net Working Capital $14.0 $19.4 $11.0 $11.0 $11.0 $11.0 $11.0Change in working capital ($5.4) $8.4 $0.0 $0.0 $0.0 $0.0Capital Expenditures $5.0 $4.5 $5.6 $4.5 $8.9 $9.1 $10.3
Cash Flows $13.3 ($1.9) $23.3 $26.6 $18.6 $19.8Terminal Value $203.9Incremental CF $13.3 ($1.9) $23.3 $26.6 $18.6 $223.7
VDCF= $174.3
Actual Projected
TNT value based on DCF calculations
Senstivity Analysis @ 0% Growth Rate
Year 2011 Year 2012
EBITDA $30.5 70
