Linkages between the Public & Private Markets

Linkages between the Public & Private Markets

Georgiana FungSmall Cap Strategist, MLPF&S

212-449-9189 · [email protected]

May 2007

Refer to important disclosures on slide 33.1

Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.


Background Public Market Structure Relationship to Private Equity

Private Equity Outlook Investments Exits

Outline


BACKGROUND


For Every Large Cap, there are 10 Smaller Cap Names

Source: Merrill Lynch Small Cap Research

Greater than $9.8B, 348 companies

$549M-$2.9B, 1442 companies

$2.9B-$9.8B, 497 companies

$10M-$107M, 1093 companies

$107M-$549M, 1590 companies

NANO

MICRO

SMALL

MID

LARGE


The Linkages between the Public and Private Equity Markets


PRIVATE PRIVATEPUBLIC

Venture Capital

Small Cap

LargeCap

Small Cap

Buyout

AGE OF COMPANY

Going public through IPO

Going private through LBO

SIZE

OF

COM

PANY


Similarities of Smaller Cap Stocks and Private Equity

Characteristics of Smaller Cap stocks & Private Equity vs. Large Cap stocks Less transparent Less recognized Less liquid Faster growth


Information Flow Reduces as Company Size Decreases

Source: Merrill Lynch Small Cap Research, IBES

Analyst Coverage by Size

2

4

7

12

18

0

2

4

6

8

10

12

14

16

18

20

Nano Micro Small Mid Large

Aver

age

Num

ber o

f Est

imat

es


Managers of Less Liquid Assets are More Likely to Provide Value Added

Source: Merrill Lynch Small Cap Research, Lipper

Average Proportion of Active Equity Fund Managers Beating their Respective Size Benchmarks

48%

41%

34%

0%

10%

20%

30%

40%

50%

60%

Small Mid Large

Aver

age,

199

2-20

06


Smaller and Less Liquid Assets have Outperformed the S&P 500

Source: Merrill Lynch Small Cap Research, Venture Economics

10-yr Annualized Returns - Public vs. Private Marketsas of 9/2006

8.6% 9.1%

12.4%11.2%

0%

2%

4%

6%

8%

10%

12%

14%

S&P 500 Russell 2000 MLSCR MicroCap*

Private Equity

Tota

l Ret

urn/

IRR

* Proxy for Private Equity


PRIVATE EQUITY OUTLOOK


Private Equity Outlook

Investments Capital markets supportive of buyouts Opportunities in smaller cap public equities

Exits IPOs expected to be healthy M&A to remain a key driver


INVESTMENTS

Capital markets supportive of buyouts


Fund Raising Has Gone from Strength to Strength

Source: Merrill Lynch Small Cap Research, Venture Economics

Commitments into Private Equity

0

20

40

60

80

100

120

140

160

180

200

1993 1995 1997 1999 2001 2003 2005 Q1/06 Q3/06

$ B

illio

n

Venture Capital Buy out/Mezzanine

Last 4Qtr Breakdown


Investors are Suspect over High Expectations among the Mega-50

Source: Merrill Lynch Small Cap Research, I/B/E/S

5 Year Expected Growth RatesLarge Cap Stocks

11.0%

12.6%12.8%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

Largest 20 Largest 50 Largest 100

Aver

age

5 Ye

ar C

onse

nsus


Anything but Large

Source: Merrill Lynch Small Cap Research, Lipper, ML High Yield Strategy, Venture Economics (*) Bond issuance and PE data is Quarterly as of Q4/06.

Flows Continue to Migrate from U.S. Large Cap Vehicles to Any Other Asset Class

12 Month Trailing Flows as of 12/2006 (*)

$7.7 $10.2

$117.9

$172.1

-$47.9

$151.5

-$100

-$50

$0

$50

$100

$150

$200

U.S. Large CapFunds

U.S. SmallerCap Funds

EmergingMarket Funds

Global & Int'lEquity Funds

High YieldBond Issuance

(*)

Private EquityFunds (*)

12-M

onth

Tra

iling

Flo

ws ($

B)


Capital Markets to Facilitate Deal Making

Source: Merrill Lynch Small Cap Research, Merrill Lynch High Yield Strategy

Use of Proceeds Raised in High Yield Market - M&Avs. High Yield Quality Spreads

2006, $60B

$0

$10

$20

$30

$40

$50

$60

$70

1983 1987 1991 1995 1999 2003

M&A

HY

Issu

ance

, Fac

e Va

lue

($B)

200

300

400

500

600

700

800

900

1000

Spreads, HY less 10-yr Treas (bp)

Face Value Spreads


LBOs of Smaller Public Companies on the Rise

Source: Merrill Lynch Small Cap Research, Securities Data Corp.

Leveraged Buyouts among Smaller Firms(Market Capitalization below $2 Billion)

24

44

82

34

127 8 6 5 6

1115

10

29

50

2024 23

29

39

59

0

10

20

30

40

50

60

70

80

90

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006E

Tota

l Ann

ounc

ed -

Com

plet

ed &

Pen

ding


Relative Values are Not Extreme

Relative Small to Large CapPrice to Sales

0.71

LT Av erage 0.67

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

74 77 80 83 86 89 92 95 98 01 04/Q4 05/Q4

Smal

l/Lar

ge P

/S



Cost of Being Public Weighs on Smaller Companies

Merrill Lynch Smaller Firms SurveySM

Anticipated Increase in Cost of Complying with the Sarbanes-Oxley Act

48%

30%

38%

30% 29%35%

0%

10%

20%

30%

40%

50%

60%

Q1/05 Q2/05 Q4/05 Q1/06 Q2/06 Q3/06

% o

f Res

pond

ents



More Opportunities in Small Cap Stocks

Inexpensive Public Equities with Low ROEby MLSCR Size Benchmarks

13

27

1514

0

5

10

15

20

25

30

Micro Small Mid Large

Num

ber o

f Com

pani

es



EXITS

IPOs likely to be healthy; M&A to remain the driver


IPOs Expected to be Healthy

Risk taking to curtail appetites for IPOs in the near-term

However, healthy markets, a lower cost of capital and rising issuance go hand in hand


Over 400 Companies were Sold by VCs in Each of the Past 3 Years, a Solid Figure

06 (E), 512

Venture Capital backed IPO vs. M&A

0

100

200

300

400

500

600

700

95 97 99 01 03 05 06/1Q 06/3Q

IPO M&A

Last 4Qtrs

Breakdow n

Source: Merrill Lynch Small Cap Research, VentureOne


Risk Appetites Unwinding and will Continue


Risk Posture Barometer in Relation to Venture Capital-backed IPO

0

10

20

30

40

50

60

70

80

1/1988 1/1992 1/1996 1/2000 1/2004

Num

ber o

f IPO

0

1

2

3

4

5

6

7

Risk Posture Barometer

<= Speculative Defensive =>

VC-backed IPO RPB


An Improving IPO Backdrop can Fuel a Spate of Additional Fund Raising


Fund Raising Mark to Market Returns

Where the public and private markets meet

Favorable Credit Cycle

Investments Exits via IPO or M&A • Liquidity events

• credit for smaller firms• equity market eases

• Performance track record

• Commitments to PE funds

• Disbursements


M&A a Key Driver

Hunt for growth by larger firms through acquisition

Especially true in Healthcare


Healthcare Increasingly becoming a more Meaningful Part of the Consolidation Wave

Source: Merrill Lynch Small Cap Research, Securities Data Corp.

Dollar Value of M&A* Activity among Smaller Stocks (Market Capitalization Below $2 Billion)

Healthcare

$0B

$5B

$10B

$15B

$20B

$25B

$30B

1986 1989 1992 1995 1998 2001 2004

Tota

l $ V

alue

of D

eals

Ann

ounc

ed -

Com

plet

ed &

Pen

ding

0%

5%

10%

15%

20%

25%

% of Total Deals


Expectations for Large Pharma Continue to Grind Down


Large Cap Drugs Long-term Expected Earnings Growthvs. Market Expected Growth Rate

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

21.0%

23.0%

1/85 1/87 1/89 1/91 1/93 1/95 1/97 1/99 1/01 1/03 1/05 1/07

Large Cap Drugs Market

Growth Gap


Micro Cap Healthcare Offers Higher Growth


Long-term Expected Growth RatesPrivate Equity/Micro Cap Proxy vs. Large Cap Equities

23%

13%

18%

13%

0%

5%

10%

15%

20%

25%

MLSCR PEMCP (*) MLSCR LargeCap Comp

HealthCare/Drugs Universe* Private Equity/Micro Cap Proxy


Smaller Biotech/Drug Sell Below Long-term Average Valuations


Relative Lower Market Cap Price-to-Sales Biotech & Drugs / HealthCare/Drugs

LT Average 4.26

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

12/84 12/88 12/92 12/96 12/00 12/04

Rela

tive

to L

MC

Sect

or


Large Cap Healthcare Companies are Hunting for Growth

GlycoFi Merck & Co. 4.40% $400

Venetec International C. R. Bard 14.40% $166

Conforma Therapeutics Biogen Idec 14.10% $150

12.70%

23.50%

* 3-5yr Expected Growth Rate from I/B/E/S as of 6/2006.

Target Company

Public Equities Expected Growth*Large Cap

Micro Cap Healthcare


Top VC-backed M&A in Healthcare – Q2/06

Acquiring CompanyAcquiror’s

Growth* Price ($M)


Final Remarks


Fund Raising Mark to Market Returns

Where the public and private markets meet

Favorable Credit Cycle

Investments Exits via IPO or M&A • Liquidity events

• credit for smaller firms• equity market eases

• Performance track record

• Commitments to PE funds

• DisbursementsPUBLICPRIVATE


Disclaimers

Documents

Linkages between the Public & Private Markets