Standard Activism Materials Update

ACTIVISMActivism and Anti-RaidStandard Activism MaterialsStandard Activism BookFall 2007 UpdateUpdate Materials v13.doc lawrdu 15 Jan 2008 11:04 1/17

U.S. M&A Outlook Circa 2008

The New Reality

Illustrative Average Cost of Capital
12.0% 11.7%
10.2%
8.8% 9.0%
8.0%

Goldman, Sachs & Co.
January 2008
1996 2006 Today
Corporates Financial Sponsors


M&A Outlook Circa 2008
Agenda

Likely U.S. Deal Activity – Trends among Key Players

Changes to Transaction Structures and Terms

Evolution of Board, Management and Shareholder Dynamics
— Impact on Activism and Hostile Activity

What’s Next?
This material is intended only to facilitate your discussions with Goldman Sachs as to the opportunities available to our private
clients and is provided solely in our capacity as a broker-dealer. This material does not constitute an offer or solicitation with
respect to the purchase or sale of any security in any jurisdiction in which such offer or solicitation is not authorized or to any
person to whom it would be unlawful to make such offer or solicitation. This material is based upon information which we
consider reliable, but we do not represent that such information is accurate or complete, and it should not be relied upon as such.
Any historical price(s) or value(s) is as of the date indicated. Information and opinions are as of the date of this material only and
are subject to change without notice.

Services offered through Goldman, Sachs & Co. Member FINRA.

© Copyright 2008, The Goldman Sachs Group, Inc. All rights reserved

1


Deal Activity
The Bottom Line: Likely Net Reduction; Change in Nature of Acquirors

Key Takeaways

Financial buyers
— Increased cost of capital
— Financing backlog from pending deals creating overhang / doability issues
− Smaller transactions and joint bids with corporates
— But, $300 billion of capital to invest and new “class” of financial buyer
− Change in the nature of deals

Strategic buyers

? — Sellers:
−
−
Volatility / uncertainty = Fewer companies for sale
More spinoff transactions (Cadbury Schweppes, Bristol-Myers)
— Buyers:
− Decrease in CEO / Board confidence and increase in risk-averse behavior
− Higher M&A “hurdle”
− But, strategic buyers will have reduced competition from financial players
− Weakness of dollar will catalyze cross-border M&A
− Reduced stock prices = more potential acquisition opportunities

What are the likely overall results?
— Strategic activity is not likely to offset decrease in sponsor activity
— Handful of large deals could be big drivers of activity (and the big question mark)

2


Private Equity / Financial Investors
The Bottom Line: Current Conditions in the Financing Markets Likely to Meaningfully Reduce
LBO Activity

Cost of Capital Has Swung Back in Favor of Strategic Buyers Credit Spreads Are Considerably Higher
Illustrative Average Cost of Capital

550
12.0% 11.7% 500
10.2% 450
8.8% 9.0%
8.0% 400

350

300

250

200

150

1996 2006 Today 100
1/1/06 4/1/06 7/1/06 10/1/06 1/1/07 4/1/07 7/1/07 10/1/07
Corporates Financial Sponsors CDX BB Index CDX B Index

Illustrative Financing Terms Mean More Leveraged Finance Backlog Continues to Be Considerable
Operating / Financing Risk (Issuance vs. Backlog)
Pre-Correction Post-Correction HY Issuance Loan Issuance HY Backlog Loan Backlog
$352
Typical EBITDA Leverage: 7.0 – 8.0x 5.0 – 6.5x
Equity %: 20-35% 35-45%
Flex: L + 300 L + 500 $226

Caps: 11% 15%
Covenant: No Yes $86 $91 $86 $79 $94
$78 $101 $66 $69
MAC Clause: No Yes (generally) $56 $54
$39 $33
$11 $9

May-07
Nov-06

Mar-07

Nov-07

(7/07)
Oct-06

Dec-06

Jan-07

Feb-07

Apr-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Dec-07
Projected

Peak
(YE 07)
3


Private Equity / Financial Investors
Likely Themes for 2008

Increase in PIPEs / Hybrids / Convertibles

— Examples: E*Trade, Countrywide Financial, Freddie Mac

Portfolio company acquisitions with greater equity component

Partnering with strategic buyers

Smaller deals (generally, deals will be less than $5 billion in the near term)

New players, such as sovereign wealth funds

Financial and distressed assets are key focus areas

Strong receptivity to monetization / sale of portfolio companies

4


Strategic Buyers – “Traditional Corporates”
Equity Markets, Volatility and Strategic Imperatives Will Drive Appetite for Acquisitions

M&A Volume is Positively Correlated with Equity Markets Corporates Continue to Have Balance Sheet Cash

$300 1,600 12
Current
$250 10 8.5%
M&A Volume ($bn)

$200 1,300

S&P 500

Cash/Assets (%)
8
$150
6
$100 1,000 30-yr average
5.9%
4
$50

$0 700 2
1999

2000

2001

2002

2003

2004

2005

2006

2007
Dec-

Dec-

Dec-

Dec-

Dec-

Dec-

Dec-

Dec-

Dec-
0

Dec-73

Dec-75

Dec-77

Dec-79

Dec-81

Dec-83

Dec-85

Dec-87

Dec-89

Dec-91

Dec-93

Dec-95

Dec-97

Dec-99

Dec-01
Dec-03

Dec-05

Dec-07
All Other Deals greater than $10B S&P 500

But M&A Volume Inversely Related to Volatility Increasing Cost to Move Down Credit Curve

US M&A Volume
350 296
VIX

Differential (bps)
300
Indexed M&A/VIX

250
169
200 149

150 91
74
100 37 33
6
50
0 Average Maximum Minimum Today
Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

1992 - 2007
A to BBB BBB to BB
Source: Thomson Financial Securities Data, FactSet

5


Strategic M&A – Trends and Developments

Strategic Buyer Activity is Now Driving M&A Strategic Deals are Still Happening (US Deals Since July 2007)
Amt
US Strategic M&A Volume
$180 100% Acquiror Target ($bn)

Strategic M&A as % of Total
Announced Volume ($bn)

Strategic M&A as % of Total
$160
90% Basell Lyondell Chemical $18.8
$140
$120 80% Transocean GlobalSantaFe 17.4
$100
70% Ingersoll-Rand Trane 11.5
$80
$60 60% Vivendi Universal Games Activision 10.5
$40
50% Hexion Special Chemicals Huntsman 10.1
$20
$0 40%
Petrochemical Industries Co Dow Chemicals 9.5
May-06

May-07
Mar-06

Nov-06

Mar-07

Nov-07
Jan-06
Feb-06

Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06

Dec-06
Jan-07
Feb-07

Apr-07

Jun-07
Jul-07
Aug-07
Sep-07
Oct-07

Dec-07
KSC (Petrochemicals)
Toronto-Dominion Bank Commerce Bancorp 8.6
Siemens Medical Solutions Dade Behring Holdings 7.7
“Mergers of Equals” Have Received Positive Market Reactions
Nokia NAVTEQ 7.6
27% National Oilwell Varco Grant PrideCo 7.5
24%
% Change in Price
(Day Announced)

SAP Business Objects 5.7
18%
16%
12% Henkel National Starch & Chemical 5.5
10% (Adhesives business)
7% 6% 5% 5%
Plains Exploration & Pogo Producing 5.4
Production
Bank of New
Bowater
Compression

Compressor

Financial

XM Satellite

Transocean

GlobalSantaFe
Abitibi

Sirius Satellite
Mellon

Philips Electronic Respironics 5.1
Hanover
Universal

York

Radio

SK Telecom Sprint Nextel 5.0

Source: Thomson Financial Securities Data, Capital IQ

6


Strategic Buyers – Observations From the Last Downturn
M&A Will Continue, But Overall Volume Likely to Decline

The First Half of 2007 Looked A Lot Like 2000’s Peak, So
if LBOs are the New “Tech Bubble”… Opportunistic Hostile Activity Will Spike Post-“Crises”
1999-2000 1H2007

Hostile as a % of Total M&A
31% 6 Months Prior 6 Months After

Non-Tech 24%
LBOs 19%
50.9% 18% 17% 18%
31.0% 15%
10%
8% 7%
5% 4% 5% 5%

Stock Gulf War Russia- Russian- Tech Bubble 9/11 & Hurricane
Market Conflict Mexico- LTCM Crisis Burst (9/00- Invasion of Katrina
Crash (12/14/90- Orange (8/18/98- 3/01) Afghanistan (8/26/05-
Tech-Related Strategic M&A (10/14/87- 1/16/91) County 10/8/98) (9/11/01- 8/30/05)
49.1% 69.0% 10/19/87) (10/11/94- 12/7/01)
12/20/94)

Traditional M&A Will Be Impacted (But Not As Much) P/E Multiples Will Likely Diverge Based on Credit Rating

A- Or Higher Between BBB- & BBB+ Below BBB-
22.6x
% Decline y-o-y

19.9x 18.4x 17.3x
18.1x 17.4x 17.4x
17.0x 17.5x 17.8x 17.0x

Median P/E Multiple
17.8x 17.1x 17.3x
15.3x 15.5x 16.5x 16.2x 16.4x
-33% 13.1x
-38% 11.7x

-64%
-73%
2001 vs. 2000 2002 vs. 2001

Non-Tech Tech-Related 2001 2002 2003 2004 2005 2006 Current
Source: Thomson Financial Securities Data

7


Cross-Border M&A Is Accelerating

Cross-Border M&A is Nearly Half of Overall Activity Sovereign Wealth Funds – Key Investments
Abu Dhabi Inv Authority Citigroup (4.9%), Advanced Micro Devices
$2,200 Cross-Border Volume $2,053 50%
(“ADIA”) (8.1%), Arab Banking Corporation (26.6%), Arab
2,000 % of Total M&A ($650-1,000 billion) International Bank (25%) Banque de Tunisie et
48%
1,800 des Emirats (38.9%), Union Cement (20.4%)
Cross-Border Volume ($bn)

45%

Percent of Total M&A
1,600 Barneys New York (100%), Standard
1,400 Chartered (2.7%), GLG Partners (3%), Time
40% Warner (2.4%), SpiceJet (3.34%), One
1,200 Istithmar
$1,048 Trafalgar Square (100%)
1,000 ($8 billion)
$920
35%
800 Och-Ziff (9.9%), Doncaster’s Group (100%),
$589 35%
600 EADS (3%), HSBC (Undisclosed), Mauser
$348 32% 30% (100%), Merlin Entertainment Group (20%),
400 $361 30%
Dubai International Capital Travelodge (100%), Sony (Undiscl.)
200 29% 27% ($12 billion)
0 25%
2002 2003 2004 2005 2006 2007
Carlyle (7.5%), Ferrari (5%), Spyker Cars
(17%)

Mubadala Development,
Developing World Acquiring Developed World Assets Abu Dhabi
British Petroleum (Undisclosed), Daimler
$166 Chrysler (7%)
Kuwait Investment Authority
($213 billion)
Volume ($bn)

Barclays (2.1%), Standard Chartered (14%),
Merrill Lynch (Undiscl.)
$73
$48 Temasek, Singapore
$25 ($108 billion)
$22 $17 $22
$10 $12 $10 $7 China State Investment Morgan Stanley (9.9%), Blackstone (9.9%)
Company
($200-400 billion)
1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Qatar Investment Authority Sainsbury (25%), London Stock Exchange
($50-70 billion) (20%), OMX (10%), Lagardere, (5.1%)
Source: Thomson Financial Securities Data, FactSet, other public sources

8


Is the U.S. “For Sale”?

Foreign acquisitions of U.S. companies has outpaced Illustrative Cost of US$1 Billion Cross-Border
U.S. acquisitions of non-U.S. companies for the first time Acquisition
Non-U.S. companies can now acquire U.S. assets (and Jan-06 Nov-2007 % Change Market P/E
companies with substantial U.S. exposure) at significant 12.55x
discounts to historical exchange rates € 0.84 bn € 0.69 bn (18.8)% (DJ Euro Stoxx
50)
However, with exchange rates at a significant discount, 12.42x
the value of earnings purchased is also less than it was ₤ 0.58 bn ₤ 0.50 bn (13.5)%
(FTSE 100)
previously
19.08x
— Exchange rate dislocations historically have not been C$ 1.17 bn C$ 0.99 bn (15.3)% (S&P/TSX
Composite)
a principal driver of M&A
18.22x
¥ 118 bn ¥ 112 bn (5.0)%
(Nikkei 225)

BRIC Countries:
For the First Time, Foreign Buying of US Companies 15.10x
R$ 2.35 bn R$ 1.78 bn (24.3)%
Represents Majority of US Cross-Border Flows (Bovespa)

13.46x
US Acquisitions of Non-US Companies RUR 28.7 bn RUR 24.5 bn (14.8)% (Russian RTS
$404
Non-US Acquisitions of US Companies Index)

27.88x
$301
IDR 45.0 bn IDR 39.3 bn (12.5)%
Volume ($bn)

(BSE Sensex)
$234
$217
$183 44.37x
$163 CNY 8.1 bn CNY 7.3 bn (9.5)% (Shanghai SE
$123 $135
Composite)
$100
$82

18.64x
$1 bn $1 bn N/A
2003 2004 2005 2006 2007 (S&P 500)

Source: CapitalIQ; Thomson Financial Securities Data; Bloomberg

9


What Will Be The Deal Dynamics?

Increased Tensions Regarding “Deal Certainty”
Boards Will Assert More Control in M&A Processes in Negotiating LBOs
Public scrutiny / risk of embarrassment Buyer Perspectives Seller Perspectives
Acquirors and activist shareholders approaching board Reduced competition may lead Boards likely to demand more
members directly with deal ideas to demands for less “seller- certainty in M&A contracts
friendly” M&A terms More granularity /focus on
Board involvement in discussing deals with shareholders Fewer carveouts to Material agreements with financing
and ISS Adverse Effect clauses sources
Potential “O’Neal effect” – Will CEOs be less likely to act Less willing to accept go-shop Increased reverse breakup fees
without board authorization? clauses and reverse breakup
fees
Bottom Line:
More focus on issues relating to deal completion
More deals will fall apart

Focus on Shareholder Support of M&A Deals Other Key Issues
Attempts to bring large shareholders “under the tent” Emergence of new players
prior to announcement, similar to U.K. transactions — SPACs (Special Purpose Acquisition Companies) –
ISS’s Contentious List over $10 billion raised to date
— List of deals which ISS is focused on that require a — Sovereign Wealth Funds
shareholder vote — Funds paired with or formed by former executives
— ISS recommends against a significant percentage of Shareholder vote dynamics
transactions on this list — Stock lending and derivatives
— Setting the record date
— Getting out the vote
Cross-border transactions
— Flowback (stock deals)
— CFIUS

10


Rule Changes Have Re-Opened Tenders as the Preferred
Deal Structure

Number of U.S. Tender Offers Emerging Themes

Tender offers have become more common since the
implementation of SEC guidance relating to the “Best
70 Price Rule”

Tender offer provides tactical advantage for both
sides
— Smaller window for deal jump
— Smaller window for opportunity to argue that a
# of Tender Offers

MAE has occurred

More likely to get 50% approval
— Shareholders are more likely to tender than vote
30 — Mitigates “dead shares” problem
27
— No ISS involvement (at this point)
21
Merger should be used if
— Regulatory delay
— Buyer shareholder vote is required (if more than
3 20% of shares issued)

Can be used in LBOs, but not the preferred structure
2003 2004 2005 2006 2007
— Financing risk
Source: FactSet MergerMetrics

11


Shareholder / Management / Board Dynamics
Shareholder Activism

Shareholder activism will continue
— Perception of “alpha” returns has resulted in increased fundraising by activists
— More direct engagement of boards, other shareholders and potential buyers
— Focus likely to shift given market conditions divestiture of noncore assets or sale of company to strategic buyers vs.
LBO or additional leverage
— New Internet proxy rules, other regulatory proposals and the removal of takeover defenses will make it easier to pursue
proxy fights

Deals have become more difficult to get done
— Rapidity of trading and stock lending impacting voting trends
— Activism against transactions by hedge funds and traditional investors
— ISS influence on M&A transactions
— More topping bids / go-shops
— Process litigation is the norm
— Cross-border issues

Corporate governance used as a “wedge” to achieve other ends
— Pressure to remove takeover defenses
— Attack compensation and related disclosures to undercut CEO
— Threat of withhold votes – particularly at companies with “majority vote” requirements for director elections – to effect
other changes or actions

12


Institutionalization of Activism
How Have the Goals of Activism Evolved?

Yesterday
(Pre-Crunch) Today

Sale of Company
(sales to strategic buyers)

LBO

Leveraged Recapitalizations

Change Management / Board

Portfolio Changes
(divestitures to strategic buyers)

Monetization of Balance Sheet

Change Governance

13


Post-Bubble, Post-Proxy Season Activism

Current Drivers of Activism Post-Bubble Activism Situations
CalPERS increasing investments in “activist”
funds from $5 billion to $12 billion
(Ramius) (Icahn) (Icahn)
Success of targeted activism vehicles
— Pershing Square raised $2 billion in two
weeks to pursue activism at an unnamed
(Chapman Capital) (Ramius) (Barington)
$40 billion “U.S. icon” (later disclosed to
be Target Corporation)
Trian recently filed to raise $750 million for a
SPAC (Breeden) (Knight Vinke) (S.A.C. Capital)

Perception that activists have achieved
“alpha” returns
(Barington) (Red Mountain) (Steel Partners)
ISS support of many dissident proxy fights
leading to greater success
More funds pursuing activism
(Relational) (K Capital) (Sandell)
Shifts in sector focus by activists
— In: Sector consolidation
— Out: Leveragability (Pershing Square) (Tracinda) (HealthCor)

14


Hostile Activity Has Increased and Fewer Companies Remain
Independent, Driven by Buyer Opportunism and Fewer Defenses

Hostile M&A Activity Continues to be High1 Outcome of Hostile Bids > $250mm

$725

$620
Global Hostile/Unsolicited Volume ($bn)

30% 28%

29%
41%

$264 $269

41%
30%
$119

1997-2004 2005-2007

Remained Independent Sold to Third Party
2003 2004 2005 2006 2007
Sold to Unsolicited Bidder

Source: Thomson Financial Securities Data
1
Hostile / unsolicited activity includes transactions that began as unsolicited.

15


What’s Next?
Final Observations

Strategic Buyers:
Proactive, well-capitalized industry leaders can press their advantage(s)
— Cash / certainty will be king

Inbound activity into the U.S.

Certain buyers will be aggressively opportunistic

Financial Buyers:
Sponsors will be more creative (PIPEs, divestitures, debt, LPDs)

Financing terms will revert to prior periods with attendant impact on valuation (lower multiples, less exotics, market
outs)

Process:
Tougher for sellers to generate broad auctions and competition

Wider bid / asks and longer negotiations

Low tolerance for risk

Activism:
Activism, driven by poor performance or industry dynamics
— Continued deal scrutiny by investors

Gap between boards and shareholders will continue to narrow

16

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