M&A for Catalist Companies Valuation Issues5 March 2009

2

Smaller Cap = Higher Expected Return

Long-Term Returns in Excess of CAPM Estimation for Decile Portfolios of the NYSE/AMEX/NASDAQ1926 - 2007

Decile BetaA B A - B

1 - Largest 0.91 6.10% 6.45% -0.35%2 1.03 7.95% 7.27% 0.68%3 1.10 8.51% 7.75% 0.76%4 1.12 8.86% 7.93% 0.93%5 1.16 9.64% 8.17% 1.47%6 1.18 9.93% 8.33% 1.60%7 1.24 10.26% 8.76% 1.50%8 1.30 11.38% 9.18% 2.20%9 1.35 12.07% 9.51% 2.56%10 - Smallest 1.41 15.77% 9.95% 5.82%Mid-Cap, 3 - 5 (N2) 1.12 8.81% 7.88% 0.93%Low-Cap, 6 - 8 (N3) 1.22 10.29% 8.64% 1.65%Micro-Cap, 9 -10 (N4) 1.36 13.25% 9.59% 3.66%Source: SBBI Valuation edition 2008

Notes:N1 - Theoretical equity risk premium computed based on the Capital Asset Pricing ModelN2 - Market capitalisations of US$2,411,794,001 - US$9,206,713,000N3 - Market capitalisations of US$723,258,001 - US$2,411,794,000N4 - Market capitalisations below US$723,258,000

Realised Return in Excess of Riskless Rate

Estimated Return in Excess of Riskless Rate

(N1)

Size Premium (Return in Excess

of CAPM)

3

How to improve valuation?

Note: Capitalisation multiples calculated as 1/WACC-g

8% 9% 10% 11% 12% 13% 14% 15%0% 12.5x 11.1x 10.0x 9.1x 8.3x 7.7x 7.1x 6.7x1% 14.3x 12.5x 11.1x 10.0x 9.1x 8.3x 7.7x 7.1x2% 16.7x 14.3x 12.5x 11.1x 10.0x 9.1x 8.3x 7.7x3% 20.0x 16.7x 14.3x 12.5x 11.1x 10.0x 9.1x 8.3x4% 25.0x 20.0x 16.7x 14.3x 12.5x 11.1x 10.0x 9.1x5% 33.3x 25.0x 20.0x 16.7x 14.3x 12.5x 11.1x 10.0x

g

WACCCapitalisation multiples with varying WACC and g

= DIV * (1 + gn)r - gn

P0

EPS0

4

How M&A Can Create New Value

Taking advantage of economies of scaleImprove target managementCombine complementary resourcesCapture tax benefitsProvide low-cost financing to a financially constrained targetCreate value through restructuringPenetrating new geographiesReducing competition

5

M&A require thorough preparation

Stand alone value of target

Synergies generated

Value of target afterrealisingsynergies

Transaction costs

Taking a Disciplined Approach to Find the Right Value

6

Year Average Medium Deals1986 38.2% 29.9% 3331987 38.3% 30.8% 2371988 41.9% 30.9% 4101989 41.0% 29.0% 3031990 42.0% 32.0% 1751991 35.1% 29.4% 1371992 41.0% 34.7% 1421993 38.7% 33.0% 1731994 41.9% 35.0% 2601995 44.7% 29.2% 3241996 36.6% 27.3% 3811997 35.7% 27.5% 4871998 40.7% 30.1% 5121999 43.3% 34.6% 7232000 49.2% 41.1% 5742001 57.2% 40.5% 4392002 59.7% 34.4% 4392003 62.3% 31.6% 3712004 30.7% 23.4% 3222005 34.5% 24.1% 3922006 31.5% 23.1% 454Average 42.1% 31.0% 361Median 41.0% 30.9% 366Average 5 Years 43.7% 27.3% 396S ource : Mergers tat Review

Premium offered

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M&A Valuation

Pre DealPre Deal

Financial InstrumentsFRS 32/39

Post DealPost Deal

Share Based PaymentsFRS 102

Business Combinations

FRS 12/38/103

Impairment of assetsFRS 36

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Implications of FRS 103 - Overview

PurchaseConsideration

PurchaseConsideration

Fair Value of Net Tangible AssetsFair Value of Net Tangible Assets

Identifiable Intangible Assets

Identifiable Intangible Assets

Resulting Goodwill

Resulting Goodwill

Technology

Trade Name

Customer Relationships

Copyrights

Identification Process

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Excess of purchase price over net assets acquired – formerly known entirely as “goodwill” has to be allocated to intangible assets previously not identified

9

Different Types of Intangible Assets

Marketing-relatedMarketing-related Customer-relatedCustomer-related Contract-basedContract-based Technology-basedTechnology-based Artistic-relatedArtistic-related• Trademarks,

tradenames, brands• Service marks,

certification marks• Internet domains• Non-competition

agreements

• Customer lists• Order or production

backlog• Customer contracts

and related customer relationships

• Non-contractual customer relationships

• Licensing, royalty, standstill agreements

• Lease agreements• Construction permits• Franchise

agreements• Operating and

broadcasting rights• Employment contracts• Advertising,

construction, management, service or supply contracts

• Patented technology• Computer software• Unpatented

technology• Trade secrets• Registration

• Compositions, advertising jingles

• Pictures, photographs

• Video and audiovisual material

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FRS 103 – Amortisation

Intangible Assets

Amortisationover useful life

Monthly charge to Profit & Loss

M&A Considerations

Are profit guaranteed inclusive of amortisation charges?

Is the intangible Asset supportable by cashflow projections – auditors’ focus on revenue growth rate, profit margin and discount factor used.

Annual impairment

Definite useful life

Indefinite useful life

Impairment Loss charged to Profit & Loss

Financial Impact

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Methodologies

Valuation ApproachesValuation Approaches

Market ApproachMarket Approach Income ApproachIncome Approach Cost ApproachCost Approach

Value EstimateBased on multiples or

prices from market transactions involving

the sale of comparable assets

Value EstimatePresent value of

earnings attributable to the asset; or costs avoided as a result of

owning the asset

Value EstimateReproduction /

replacement cost adjusted for

depreciation & obsolescence

Decreasing hierarchy for estimating value

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FRS 103 – Resulting Goodwill

Goodwill Impairment?Any impairment Loss charged to Profit & Loss

M&A Considerations

What does the goodwill represent? Synergies? Economies of Scale?

Is the premium paid for acquisition supportable by cashflowprojections used to test for annual impairment?

Financial Impact

13

Comparison of Value Concepts

13

14

Impairment Test

14

15

Key Points

15

Smaller Capitalisation = less attention from market investors = higher expected return = lower valuation (all else equal)Acquisitions or mergers can lead to higher capitalisation, lower risk and higher valuation, but…Consider the post deal valuation issues early, i.e. in the pre deal valuation exercise

Impact on post merger/acquisition financials (definite lived vs. indefinite intangibles)Robustness of business model and forecast assumptions (pre deal “euphoria” can lead to serious post deal consequences)