LBO Start-Up Pack

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Objectives

• LBO: The Big Picture: provide a broad overview of the

LBO marketplace and trends

• Due Diligence Process: review the role of due diligence

within the LBO transaction process
- key players
- typical timeline

• Roles: illustrate Bain’s involvement in the LBO process

generally and
- Bain’s Role
- Consultant's Role: Bain due diligence team member
GXC

LBOStartUpPack 2
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Agenda

LBO: The Big Picture

Due Diligence Process

Bain Role

Consultant’s
Role
GXC

LBOStartUpPack 3
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Corporate Combinations
Corporations can combine in several ways, the most common of which
are mergers and acquisitions.

Joint Venture Minority Interest Merger Acquisition

 Company A and  Company A  Company A and  Company A

Company B both purchases a <50% Company B purchases >50%
contribute resources interest in combine into a of Company B
to form a new Company B new company,
Company C Company C
Company A Company B Company A Company A Company B Company A
50% 50% <50% >50%
Ownership Ownership Ownership Merger Ownership

Company C Company B Company C Company B

GXC

LBOStartUpPack 4
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Definition (1 of 2)
The Leveraged Buyout (LBO) is an Acquisition where the acquiring
company is a buyout fund.

“The term ‘buyout or LBO’ generally refers to the acquisition of an existing company
or division of a company by a new corporation formed by the acquirer for that sole
purpose, and funded simultaneously with substantial amounts of institutional debt
relative to contributed equity.”
LBO
 Buyout fund purchases 100% of
Target Company

LBO Fund

100%
Ownership
GXC
Target Company

LBOStartUpPack 5
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Definition (2 of 2)

The definition of a Leveraged Buyout (LBO) can be seen in its name.

•“Buyout” = Fund is “buying out” the existing owners

•“Leveraged” = The funding for the acquisition is typically

“leveraged”, that is, it utilizes high amounts of
debt

Just as a “lever” allows you to move a large amount of weight using just a
little weight, the “leverage” of debt allows the fund to buy the Target
Company using a small amount of Equity

Equity Debt

Target
Company
GXC

LBOStartUpPack 6
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Fund Economies
Here is an example of an LBO valuation.

1996 1997 1998 1999

Revenue $1,000 $1,100 $1,200 $1,300
EBIT $100 $110 $120 $130

•Total Debt = $523

•Calculation of Initial Equity
– 1999 EBIT = $130
– Exit Multiple = 7.0x
– 1999 Total Value = $910
– Less Debt = 523
– 1999 Equity Value = $387

– Target IRR = 35%

– Initial Equity = = $157

387/(1+.35)^3 GXC

– Total Capitalization = $680

1996 EBIT 100
6.8x
EBIT Multiple

LBOStartUpPack 7
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Key Takeaways
Sadly, LBO valuations are MUCH more complicated in practice than the
example we just went through. However, there are several key takeaways.

 The total debt that can be put on the company is

constrained by
- the value of the assets that can be loaned against
- a total EBIT/interest ratio that is less than 2.0x
 Initial equity put into the deal is constrained by the
required equity returns
- less equity put into the deal means higher returns
 Under the set of constraints laid out here, equity will
generally be ~20-25% of the capital structure
- this is the typical structure we are seeing in the 90s (as
opposed to the 10% ratios of the 1980s)
 Obviously, there are numerous additional complexities
which get incorporated in an actual LBO model GXC

- however, if you want to do a quickie valuation (i.e.,

calculate a likely price, check for likely IRRs) this is your
best bet

LBOStartUpPack 8
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Buyout Fund Definitions
A Buyout Fund is an investment vehicle formed for the purpose of acquiring
target companies.

Legal  Formed as a General Partnership, with one group of General Partners

Formation: and a number of Limited Partners, or "Limiteds"
General  Typically come from investment banking or consulting backgrounds; hire
Partners: a few analysts to crunch numbers and assist with deal processes
Limited  Typically large institutions with large amounts of capital, mid-to-long-
Partners: term time horizons who are looking for an opportunity to invest
- insurance companies
- state and/or Corporate Retirement Funds (e.g., CALPERS)
- university trust funds (Harvard Fund)
- state treasuries (Oregon State, Washington State)
- wealthy individuals
Objective:  Invest the fund's equity by purchasing target companies, holding them
for a maximum of 4 to 5 years, and reselling at a profit. Target returns
are in the range of 30-35% annual return on equity invested
Operations:  Limited partners pledge, or "commit", to contribute their capital to the
GXC

fund on demand
- commitments are generally done in $1M increments
- when the Fund needs the capital to purchase a company the Limited wires the
committed funds

LBOStartUpPack 9
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Fund Value Chain
LBO firms combine privately invested capital with leverage of
debt to acquire attractive target companies.

Institutional
investors Corporate
bonds
 Retirement
- defined benefit
- defined
contribution

 Endowment
- charity Target
LBO fund + Bank debt
- school company
 Financial companies
- insurance
- banks
 Operational
- hospitals
Other GXC
Wealthy equity
individuals

LBOStartUpPack 10
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Fund Economics (1 of 2)
An LBO firm makes its profit through the fund’s “carry,” the
percent of total return the firm keeps for the General Partners.

As the acquired company’s …and debt is paid down, …generating a sizable return
earnings grow... equity share increases... for shareholders and the LBO
fund
EBITDA Capitalization Target Value
EBITDA Dollars
% of Total
$20 100% $80
"Carry" LBO
Equity firm
profit
80
15 60 LBO
Profit fund
share-
60 Initial holder
equity returns
10 40 Initial Initial
40 Debt equity equity
stake
GXC
5 20 Debt
20

0 Year Year Year Year Year

0 0 Buying price Selling price
At 5 years
1 2 3 4 5 year 1 year 5
acquisition later
Notes: “Carry” is typically 20% of the overall equity appreciation
LBOStartUpPack 11
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Fund Economics (2 of 2)
A Buyout Fund makes it profit through its “carry”, i.e., the percent of
the total return it keeps for itself.

Example:  Purchase a target company for $50M (5.0x EBITDA) with $40M debt and
$10M equity from the fund
 Exit (sell) the company in Year 5 for the same multiple of EBITDA (5.0x)
 EBITDA growth of ~10%
 Pay down $2M of debt per year

($ million) Transaction Year 1 Year 2 Year 3 Year 4 Year 5 (exit)

EBITDA $10 $11 $12 $13 $14 $15
Multiple 5.0x 5.0x
Total Company Value $50 $75
Debt $40 $38 $36 $34 $32 $30
Equity $10 $45
Year 5 Equity $45
Initial Equity $10 GXC
Multiple of Initial Equity 4.5x
Annual Return on Equity 35%
Year 5 Equity $45
Initial Equity $10
Total Profit $35
Fund's Carry 20%
Profit to LBO Fund $7
LBOStartUpPack 12
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
U.S. LBO Funds (Fund Size*)
Rosewood
Capital
Perseus
WE Simon Capital
Citicorp Venture Capital Seaver
BT Capital Partners Kent
Arbor Wingate
$35,638B $26,680B $19,099B $22,597B Total = $104,014B
100% Ziff Brothers Shansby Group
Patricof Kohlberg & Co
Wasserstein Perella
Lehman Brothers Summit Partners Western Presidio
Banc Boston Fox, Paine
Chemical Venture Partners Stonington Partners Berkeley Harvard Private Capital
MBO Capital Gibbons Genstar
80% Texas Pacific Group Kelso Monitor Clipper
American Industrial
Haas, Wheat
Joseph Littlejohn & Levy Partner
Frontenac
Cornerstone
Apollo Management Investcorp International Willis Stein
Thayer Capital
Greenwich Street Heritage Partners
The Fremont Group
Hicks Muse Crown Capital Liberty Partners
Jupiter Partners
Percent of Total

Centre Partners
Brera Capital
60% Beacon JW Childs
EM Warburg Bain Capital Leonard Green
AEA Investors Fenway Partners
DLJ The Cypress Group Freeman Spogli
The Carlyle Group McCown De Leeuw
Berkshire Partners
40% Thomas H Lee Welsh, Carson 100+ Companies
Golder, Thoma
Soros Capital Tully M. Friedman
Forstmann Little Windward Partners
Hellman & Friedman
TCW Capital
Blackstone Clayton, Dubilier & Rice Boston Ventures
20%
Goldman, Sachs Charterhouse
Madison Dearborn Partners
Acadia Partners GXC
KKR GE Investments
Morgan Stanley Capital TA Associates
0%
>$2B >$1B $500-999MM $<499MM

*Funds with amount known or estimated available capital

Sources: 1997 Directory of Buyout Financing Sources; Buyouts Newsletter; 1997 Buyout Yearbook; Bain
Analysis LBOStartUpPack 13
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
U.S. buy-out industry
Increasing amount of ...means higher
...chasing fewer deals...
investment capital... purchase multiples.
Number of LBO/Merchant
LBO Dollars Raised Bank Deals Purchase Multiples

Number of

$28,987M
Buyout Fund Closes EBIT Multiples
(Millions of Dollars) Deals Closed
$30,000.0 300.0 10.0
$22,600M

270 277 275

255 248 8.6
245
$18,431M

8.0
7.0 7.1
20,000.0 200.0 6.5
6.0 5.4
$11,612M

4.0
$5,905M
$5,174M

10,000.0 100.0
2.0
GXC

0.0 0.0 0.0 1993 2/95 2/96 2/97 2/98

1992
1993
1994
1995
1996
1997

1992
1993
1994
1995
1996
1997

U.S. buy-out industry is becoming increasingly competitive

Sources: BUYOUTS Newsletter; 1997 Buyouts Yearbook
LBOStartUpPack 14
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Private Equity Group
EBITDA Multiples Trend (1994-97)
… which has led to increased purchasing multiple across all deal sizes.

Buyout Purchase Multiples

LBO Purchase EBITDA Multiples (1994-97)
10
8.3
8 7.9
7.1 7.2 7.0
6.4 6.4 6.1
6 5.5

2 GXC 1997
1996
1994-95
0
$500M $250M-$499M <$250M

Source: BancAmerica Robertson Stephens, Portfolio Management Data LLC

LBOStartUpPack 15
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Purchase Multiples by Industry (1997)
Industries with high growth rates (e.g. telecom) will command higher
purchase multiples relative to mature or volatile industries.
Buyout Purchase Price
(EBITDA Multiples) Buyout Purchase EBITDA Multiples (1997)

13
10.9

10
8.1
7.4 7.5
8 7.0 6.9 7.0 6.8 7.1 6.5
5.9 6.0
5.4
5

3
GXC

0
Chemicals

Products

Industries

Services

Textiles
Telecom
Beverage

Healthcare
Home
General
Technology
Food &
Automotive

Forest

Furnishing
Publishing

Retailing

Sources: BancAmerica Robertson Stephens, Portfolio Management Data LLC LBOStartUpPack 16

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
West Coast (Fund Size*)

Seaver Kent
Bain client

$1.7B
$12.7B $4.6B $2.6B $3.5B $4.0B Total = $29B
100%
Summit Partners BT Capital Other

Wasserstein
Arbor Other Partners

Perella
James McGoodwin & Co.
Hellman & Friedman
Berkeley Rosewood James A Matzdorff & Co.
80%
American G-2 Holdings
Patricof Industrial
Partners
Freeman Catterton Partners
Spogli
Percent of Total

Bastion Capital
60% Cornerstone Trident
Stolberg Partners

Texas Pacific Group Leonard

Apollo Management
MBO
Green & Capital
The Fremont
Partners Northwest Opportunity
Group Westar
40% Capital

McCown Tully M.
Aurora Capital Partners
De Leeuw Fox, Friedman Capstan Partners
KKR Paine
20% Triumph Capital Group
Genstar
TA TCW
Associates Western Capital GXC Brentwood Associates
Presidio Cornerstone Equity Partners
0% ($100-400M)

($100-400M)
Francisco
San

San Francisco (>$1B) San Los Los Angeles

Los Angeles
Francisco Angeles ($500-800M)
($500-999M) (>$1B)
*Funds with known or estimated available capital
Note: Other includes funds with $100M or less. Administrative/branch offices not included
Sources: 1997 Directory of Buyout Financing Sources; Buyouts Newsletter; 1997 Buyout
Yearbook; Bain Analysis
LBOStartUpPack 17
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Hicks, Muse, Tate & Furst (1 of 2)

Location(s) Senior Management

200 Crescent Court  Tom Hicks, CEO & Chm (Dallas)
Suite 1600  Charles Tate, Mng Dir & Princ (Dallas)
Dallas, TX 75201  John R. Muse, Mng Dir & Princ (Dallas)
214-740-7300  Jack Furst, Mng Dir & Princ (Dallas)
 Allen Menkes, VP (New York)
1325 Avenue of the Americas
25th Floor
Company History
New York, NY 10019
 Founded 1989
212-424-1400
 Tom Hicks was previously with very
successful Hicks, Haas (also of Dallas)
but both Hicks and Haas started own
funds
 Also involved in managing other
specialized asset categories including GXC
high yield and mezzanine securities, real
estate, Small Business Investment
Company debt and equity investments

LBOStartUpPack 18
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Hicks, Muse, Tate & Furst (2 of 2)

Industry Focus Investment Strategy

 True generalists, but have had a  Transactions generally $100M-1B
number of investments in low- range
tech manufacturing and radio  Stated preference for investments
broadcasting
that include:
- strong growth potential
- leading market position
- well-defined niche business
- entrepreneurial owner/managers
Size of Fund - consolidating industries
 $1,000M capital available - avoidance of identifiable risks (early
stage, technology, etc.)
- $1,000M from Equity Fund III (launched
in 1996) - reasonable selling price

  Does not engage in hostile

$2,055M total capital raised
- $1,000M from HM Equity Fund III in takeovers
1996
- $800M from HM Equity Fund II in 1994
- $255M from HM Equity Fund in 1989 GXC

 13 current portfolio companies with

estimated annual sales of more than
$3B

LBOStartUpPack 19
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Texas Pacific Group (1 of 2)

Location(s) Senior Management

201 Main Street  David Bonderman (Fort Worth)
Suite 2420  James G. Coulter (San Francisco)
Fort Worth, TX 76102  William S. Price (San Francisco)
817-871-4000

600 California Street

Suite 1850
San Francisco, CA 94108
415-616-0400

GXC

LBOStartUpPack 20
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Texas Pacific Group (2 of 2)
Industry Focus
 Preferred industries
- Consumer Products
- Consumer Services (Inc. Retail)
- Industrial Chemicals and Materials
- Publishing
- Computer and Electronic Products
- Telecommunications
- Medical/Health-related
- Transportation
- Finance and Insurance
- Oil and Gas, Mining, Natural Resources
- Real Estate/Construction
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Investment Strategy
 Does not require controlling interest
 Target period to exit investment is 4 to 7
years
 Contrarian investment strategy—pursues
industries in flux (e.g., airlines or
healthcare), and generally carry
investment risk
 International presence
 Partner frequently with other investors
Size of Fund
 $720M capital available
from only fund
 About 60% invested
($430M)
GXC
 11 companies in portfolio
with an estimated total
sales of more than $8B
LBOStartUpPack 21
Genstar (1 of 2)

Location(s) Sr. Management

950 Tower Lane  Mark E. Bandeen (Managing Dir)
Foster City, CA 94404  Richard D. Paterson (Managing Dir)
415-286-2350  Dan Boverman (Principal)
 Jean-Pierre L. (“JP”) Conte (Principal)
 Robert J. Weltman (Associate)

Company Background
 Parent is Genstar Capital
Corporation, an LBO specialist
in Toronto
 Based in Canada, but much of
the investment activity is
GXC
coordinated in the Bay Area (5
to 12 board members are
based out of Foster City Unit)

LBOStartUpPack 22
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Genstar (2 of 2)

Industry Focus Investment Strategy

 Manufacturing  Acquisitions in the $50-300M range

industries  Investment holding period is 3 to 7 years
 Service industries  Platform and “add-on” acquisitions
 Operational turnarounds with heavy fund
involvement
 Middle market companies (often
Size of Fund corporate orphan divisions or family
owned) that are undermanaged, have
 $271.8M capital available poor strategy development and
- $107.5M for GCC fund 1989 - execution, and/or have allocated
Canadian and European resources ineffectively
investors ($85.7M now
 Requires portfolio management as
invested)
- $250M Genstar Capital owners
GXC
Partners II, LP 1996 for U.S.
and Canadian investors

LBOStartUpPack 23
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
McCown De Leeuw (1 of 2)

Location(s) Senior Management

3000 Sand Hill Road  George E. McCown (Managing Partner)
Building 3 Suite 290  David E. De Leeuw (Managing Partner)
Menlo Park, CA 94025  Charles Ayres (Partner)
415-854-6000s  Robert B. Hellman Jr. (Partner)
 David E. King (Partner)
101 East 52nd Street
 Steven A. Zuckerman (Partner)
31st Floor
New York, NY 10022
212-355-5500
Company History
 Founded 1984 by George
McCown and David De Leeuw

GXC

LBOStartUpPack 24
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
McCown De Leeuw (2 of 2)
Industry Focus Investment Strategy

 Will not do technology deals  Middle market companies (value of $30-

 150M) in partnership with management
Preferred industries
- Consumer Products  Likes fragmented industries for
- Consumer Services (Inc. Retail) consolidation
- Industrial Machinery and Equipment  Looks for leaders in niche and/or regional
- Industrial Chemicals and Materials markets
- Business Products and Services
 Looks for next phase growth, family run, or
- Publishing
corporate “orphans”
- Wholesaling/Distribution
- Transportation  Requires controlling interest
- Finance and Insurance  Target period to exit investment is 5 to 7
- Forest Products years
Size of Fund
 $200M capital available
- $278M from MDC III LP in 1995
($74.2M invested to date) GXC

 $450M total raised

- $278M MDC III
- $170M MDC I & II
 Current portfolio companies with
estimated annual sales of $1.5B
LBOStartUpPack 25
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Agenda

LBO: The Big Picture

Due Diligence Process

Bain Role

Consultant’s
Role
GXC

LBOStartUpPack 26
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Transaction Process
In the transaction process which starts at fund raising and goes through
purchasing the target, Bain primarily participates in the area of due diligence.
Bain areas
Pre- Primary Due Preliminary Bid/Funding
Transaction: Fund Raising Deal Flow
Diligence Valuation Indications

Market LBO
Proprietary I-Bank Multiples
Assessment (Financing)

NPV

Transaction: Commercial Financing Final

Final Valuation
Due Diligence Commitments Negotiation

Market Equity Debt P&S

IRRs EBITDA
Competitors Intercreditor
Upside/ Downside
GXC
Downside
Potential Legal, Tax &
Cost Savings Other

Post- Cost Reductions/

Strategy
Transaction: Operational Improvements

LBOStartUpPack 27
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Definition
Due diligence is the broad activity of verifying all the information about a
company.
 The Seller of a company (or the seller’s agent, such as an investment bank)
will generally provide prospective Buyers a copy of a Confidential
Memorandum (and sometimes other company data) which includes:
- an overview of the Company
- description of the Company’s operations, facilities, management, markets, products,
etc.
- brief financial overview
 It is then the duty of the Buyer to “verify all such information with all due
diligence” to reach their own conclusion. This process of verification is called
due diligence
 Due diligence activities cover several areas
- accounting: verify the financial data are sound
- asset appraisal: verify the value of the assets
- legal: verify ownership of assets and validity of contracts GXC

- commercial due diligence: verify the validity/sustainability of the underlying

business
 markets
 operations
 customers
 etc.
LBOStartUpPack 28
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
The Players
Bain is one player in a crowded field of participants in the due diligence and
transaction process. Bain's focus is on business issues.

Tax Counsel Legal Counsel Accountants

Environmental
Appraiser (Real Auditor  Transaction  Transaction  Due diligence
Estate, PP&E) structure to reduce  Contract (sale)  Tax
 Environmental tax liability
 Negotiation  Audit
liability of assets
 Value of assets

Buyout Fund BAIN

Buyout Fund Associate/VP
Partners
 Stability of underlying
business
 Identify potential
Selling Agent
business landmines
 Identify opportunities
 Running the
auction Seller’s Legal
 Maximizing Counsel Subdebt
the price Target’s Senior GXC Lenders
Management Lenders
 Transaction
  Financial
Contract  Running the  Financial
(sale) projections
business projections
  Upside
Negotiation  Employee morale  Downside risk
potential
 No leakage of info  Coverage ratios  Downside risk

LBOStartUpPack 29
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Transaction Process Timeline (1 of 3)

Seller Preparation

0 1 2 3 4 5 6 7 8

Board of Seller select a Sellers notify top I-bank meets with I-bank writes
Directors/Owner selling agent management management; Information
make decision to (I-bank) begins writing Memorandum
sell Information
Memorandum
I-bank identifies potential
buyers

I-bank prepares
valuation to assess
GXC
target price

LBOStartUpPack 30
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Transaction Process Timeline (2 of 3)

Buyer Bid Process

Bain continues external Buyer selects
I-bank faxes and internal due lender(s)
Buyer a diligence
Confidentiality Buyer
Buyer attends
Agreement; Buyer Bain does initial "Indication
Lenders give determines final
management preez
signs it and faxes external commercial of Interest" w/prospective lenders
Buyer a valuation and
it back due diligence "commitment submits bid
due letter"
0 1 2 3 4 5 6 7 8

I-bank asks Buyer forms initial I-bank selects Management begins

Buyer receives Bids Due
Buyer if they valuation of target Buyers for giving "dog and
Confid. Memo pony" shows
would be second round;
interested in a notifies Buyers
"blah-blah" type Buyer begins lining
company Buyer reads up prospective Management answers
Confid. Memo lenders due diligence
requests

GXC

Buyer gets "comfort

letter" from lenders

LBOStartUpPack 31
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Transaction Process Timeline (3 of 3)

Buyer Due Diligence Process

Purchase and Sale
Environmental audit Agreement Signed

Lenders perform Lenders get comfortable with

appraisal of assets management projections Lenders begin syndication

Bain does internal/external commercial

due diligence Final negotiation Final final negotiation

0 1 2 3 4 5 6 7 8 9 10

Tax Counsel and Tax Accountants determine best Negotiate management Finalize reps &
transaction structure contracts warranties

Auditing accountants perform closing

Auditing accountants begin audit process audit
Lenders give Closing
Legal review of contracts and liens
"take or place"
commitments
Buyer performs GXC
appraisal of assets

LBOStartUpPack 32
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Agenda

LBO: The Big Picture

Due Diligence Process

Bain Role

Consultant’s
Role
GXC

LBOStartUpPack 33
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
LBO Due Diligence Over Transaction
While Bain is involved in several steps of an LBO transaction, most work is
in due diligence stage.

Investment Deal Portfolio

Due Diligence
Fund Thesis Generation Consulting
Description:  Develop an LBO  Identify  Communicate  Perform
fund thesis specific deals informed traditional Bain
based on close for LBO fund opinion about work on the
analysis of to execute quality of acquired
specific  Work within proposed deal company
industries universe  Respond to - strategy
 Use to convince established by client - cost reduction/
operation
institutional the investment questions to improvement
investors to fund thesis address
allocate capital specific  Bain typically
to the LBO fund aspects of hired by the LBO
target fund rather than
company target company
Timing: GXC

 2-3 weeks  4-6 weeks  2-6 weeks  1-3 months +

Percent of
Bain Work:    
5% 5% 50% 30%

LBOStartUpPack 34
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Summary

Is this a good business to be in?

Identifying Landmines Identifying Opportunities

Market
Competitive
Customers
Costs

GXC

LBOStartUpPack 35
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Identifying Landmines

Potential Landmines

 Negative market growth expectations

Market
 Rapid erosion of barriers to entry
 Market evaporation through technological
obsolescence
Competitive  Highly aggressive “behemoth” competitor in key
Position segments
 Competitors outperform company on key customer
needs
 High levels of customer dissatisfaction on key
Customers
product/ service attributes
 Low customer retention (high churn)

 Exceptions of accelerating input costs

Costs GXC
 Structurally high cost producer

LBOStartUpPack 36
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Identifying Opportunities

Potential Opportunities

 Attractive vertical/horizontal integration

Market
opportunities
 Potential for growth through geographic
expansion

Competitive  Attractive acquisition/consolidation plays

Position  Joint venture/merger opportunities to provide
complementary products/services

 Capabilities to address unmet customer needs

Customers
(or entire customer segments)
 Opportunity to increase customer retention

 Plant consolidation opportunities driven by excess

Costs capacity
GXC

 Potential for SG&A reduction

 Dissemination of internal/external BDP opportunities

LBOStartUpPack 37
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Overview (1 of 2)
Due diligence is the broad activity of verifying all the information
about a prospective target company.

Review Attend Perform Communicate

Generate data
confidential management relevant informed
request
memorandum meeting analysis opinion
General
Description: Overview of  Presentation  A "data room"  Multiple players  Each player
target by senior will be made involved in deal involved in
- description management available help verify due diligence
of of target - includes information for
operations, - overview of financials, about company prospective
facilities, contracts,
target - accounting: buyer
managemen business
t, markets,
- adds color to financial data develops
confidential plans, etc.
products, - asset appraisal: opinion on
memorandum Prospective asset value specific area
etc.
- brief  Opportunity for buyers - legal: of expertise
financial buyer to indicate which ownership of
overview data they assets; validity  Opinions
interview of contracts incorporated
 Created and management need
- commercial: GXC into final bid
distributed by - seek answers - seller
delivers copy
validity/ negotiation
seller or to initial sustainability of
questions of all data
seller's agent underlying
(e.g., - probe for business
other
investment landmines
bank)

LBOStartUpPack 38
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Overview (2 of 2)
Due diligence is the broad activity of verifying all the information
about a prospective target company.

Review Attend Perform Communicate

Generate data
confidential management relevant informed
request
memorandum meeting analysis opinion

Bain Role:  Gain  Attend as  Review “data  Lead  Create

understandi guests of LBO room” commercial summary
ng of target fund contents list due diligence preez of key
  prior to - markets insights
Develop Provide high
management - customers 
preliminary level analysis Provide
meeting - operations
“answer to LBO fund critical data
first” prior to  Prepare data - profitability for valuation
hypothesis meeting request - etc. model (if
 based on requested by
Prepare and
data available LBO fund)
ask questions
- revenue
regarding key  Develop list
projections
issues of additional
GXC - margin
data required projections
- etc.
 Deliver final
opinion as to
quality of deal

LBOStartUpPack 39
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Agenda

LBO: The Big Picture

Due Diligence Process

Bain Role

Consultant’s
Role
GXC

LBOStartUpPack 40
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Key Success Factors (1 of 2)

General

• Constantly think of due diligence as “defense,” & remember the

“80/20” rule: Due diligence is primarily an exercise in assuring that
there are no significant “deal-breaker” issues. Think about the most
leveraged way to quantitatively get comfortable with an issue (e.g.,
customer base appears stable).
• Be prepared to work quickly: LBO due diligence projects are typically
in the 2-6 week range vs. 3-6 months.
• Invest time in up-front thinking: Taking the time at the beginning of
the case to clearly lay out the important issues, and critical questions.
Preparing blank slides will focus your work on these critical questions and
minimize yield loss.
• Have a bias to output: The compressed time frames dictate that output
begin almost immediately. Try to get your ideas and analysis sketched
out into slides every day. Ask yourself, “What have I learned today,
GXC
and
how does it change the answer?” You will have difficulty if you save your
slides to the end.
• Think “Value Creation”: Take time out during the case to consider
value creation insights--where can the LBO client create potential upside?

LBOStartUpPack 41
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Key Success Factors (2 of 2)

Operational

• Be prepared to take a stance on limited data: Many times you will

not be able to get all the data you want to address an issue. You must
have an opinion anyway, because you know more than anybody else.
• The phone is your friend: A large part of Bain’s value added is getting
feedback from customers, competitors, and market. Being diligent and
aggressive on the phone will only make your job easier.
• Be prepared for, and quickly recognize, data limitations: In the
case of limited data (due to lack of sources, lack of time, etc.) always
have a backup in mind for the next best data alternative.
• Check, recheck, and check one last time for data inconsistencies:
LBO clients get a perverse thrill out of finding and hammering on these
inconsistencies. If they find them, you lose credibility.
• Don’t be afraid of saying “I don’t know”: LBO clients will push and
push until they have extracted every ounce of information from you. You
GXC
are not expected to know everything, just the important things.
• Carefully document all sources: In the heat of an LBO project, it is not
always easy to keep good records of all your sources (secondary
reference sources, people you spoke to, etc.)—this will come back to
haunt you.

LBOStartUpPack 42
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Case Startup Checklist (1 of 2)

Case Context Understood Team Groundwork Laid

 Target company name  Kick-off case team meeting
 Target company line of business (entire see attached agenda
company is target, or only a portion?)
 Full team contact list created
 Deal status (pre-letter of intent, post-letter
 Voicemail distribution list created
of intent, exclusive, auction, etc.)
 Case code created/communicated to
 Level of analysis done to date, by whom
team
 Likely financing structure or options being
 Case historian, client info
discussed
coordinator identified
 Likely price range (EBITDA multiple, PE,
 Operating principles developed
price per share or total dollar range)
 PD conversations held (past reviews,
 Acquiring division (if relevant)
skill plans consulted as appropriate)
 Client personnel involved
– project leader
– other individuals “in the know” GXC

 Timeline for deal, critical dates

 Project “code name” (if relevant)

LBOStartUpPack 43
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Case Startup Checklist (2 of 2)
Value Addition Groundwork Laid Client Groundwork Laid
 Start-up pack assembled, distributed, and reviewed by  Client contact list created
all  Location, directions to client
– see attached contents guideline sites on file
 BRAVA, experience center consulted  Management interviews
– key relevant cases identified scheduled
– names of VPs/Managers with relevant experience  Preliminary client data request
identified submitted
– copies of relevant client work/selling presentations,  Initial client updates scheduled
proposals obtained and reviewed
 Bain alumni directory consulted
– key alumni in industry identified
 Initial workplan completed
– see standard workplan sample
 Responsibility for blank slides assigned
 Internal meetings/updates scheduled
 Initial industry overview
– industry magazines identified, back
issues/subscriptions ordered, responsibility GXC

assigned for reviewing them

– trade association/external industry analysis
identified, responsibility for reviewing and obtaining
available studies assigned, trade show schedule
checked
– standard industry overview data collected (see
attached) LBOStartUpPack 44
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Analysis Toolkit

Competitive
Market Customers Costs
Output Position
Market
Definition/Sizing:
Industry Dynamics:
Industry Trends:
Competitor
Market Map:
Competitor
Dynamics/Profile:
Competitor
Benchmarking:
Customer
Analysis:
Impact of Input
Costs:
Cost Reduction
Opportunities:
GXC
Internal BDP
Opportunities:
Growth
Opportunities:

LBOStartUpPack 45
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Critical Activities & Data Sources (1 of 2)

ies
s
g

rtu BDP
ies
t ie
r

kin

ts
Pr nam tito

rt u n
Ma r

hm itor

nit
ile ics/

tC f
g on/

p
o

pu t o

ni

nit
po tio
os
is r
rk tit

ar

al m e
ds y

Op wt h
m y

rt u
l
Si fin t

Dy mpe

na
t

In pac
en tr
De rke

na tr

Op d u c
zin iti

ic

M a m pe

Be mpe

Re t s
Tr dus

et
Dy dus

An sto
ys

po
ter
Co

o
a

po
Im
nc
Co

Gr
M

of

Cu
Co

Co
In

In

In
Activities

Op
Primary Data
Gathering

•Management
interviews        

•Customer
interviews     

•Competitor
interviews       

•Industry
expert       
interviews
GXC
•Supplier
interviews   

•Plant/facility
visits  

LBOStartUpPack 46
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Critical Activities & Data Sources (2 of 2)

ies
s
g

rtu BDP
ies
t ie
r

kin

ts
Pr nam tito

rt u n
Ma r

hm itor

nit
ile ics/

tC f
g on/

p
o

pu t o

ni

nit
po tio
os
is r
rk tit

ar

al m e
ds y

Op wt h
m y

rt u
l
Si fin t

Dy mpe

na
t

In pac
en tr
De rke

na tr

Op d u c
zin iti

ic

M a m pe

Be mpe

Re t s
Tr dus

et
Dy dus

An sto
ys

po
ter
Co

o
a

po
Im
nc
Co

Gr
M

of

Cu
Co

Co
In

In

In
Activities

Op
Secondary Data
Gathering
• Confidential
memorandum
      
• Annual
report/10-K     
• Analyst reports
(industry and         
company)

• BRAVA   
• Literature   
searches

• Market research
reports        

• Trade publications/
associations      GXC 

• LotusOne    
Source

• D&B Filings   
• World Wide Web   
• Internal
company data          
LBOStartUpPack 47
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 LBO Toolkit Glossary

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
Glossary
Closing:  The event at which all funds are exchanged or transferred from buyer to
seller. This includes both equity and debt. After the closing, the Buyer
has legally taken ownership of the target company

Closing  Adjustments to the purchase price made at the time of closing. These are
Adjustments: almost always adjustments based on the difference between the actual
value of the assets agreed to in the Purchase and Sale Agreement and the
value at the time of closing

Closing Audit:  The audit which determines the Closing Adjustments

Comfort  A non-binding commitment which broadly states an entity’s (usually a

Letter: lender) interest in participating in a transaction. This non-biding
commitment can be gotten out of with little hassle
Commitment  A binding commitment to provide funding in a transaction. This
Letter: commitment can be exited if circumstances change materially or if there is
lack of good faith on either party’s behalf

Final  The negotiation between Buyer and Buyer’s attorneys and the Seller, the
Negotiation: GXC
Seller’s agent(s) and the Seller’s attorneys. The result of the final
negotiation is either a Purchase and Sale Agreement or no deal

Glossary 49
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Glossary
Final Final  The negotiations that come after the Final Negotiation
Negotiation:

Indication of  A non-legally binding commitment expressing a Buyer’s interest in

interest: purchasing the target. This is not an offer to purchase. Wording typically
includes the following: “presuming no material change in the operations
of the business, and subject to financial and commercial due diligence and
customary representations and warranties, [buyer] would anticipate a
purchase price in the range of [$x]”

Reps and  Representations are promises made by the Seller that everything is
Warranties: what it appears to be. Warranties are financial guarantees that will be
paid as restitution if everything turns out not to be how it appears

Syndication:  When a lender initially loans a large amount, but wishes to diversify
its portfolio (i.e., minimize exposure to a given deal), it will sell off
parts of the loan to other lenders. This is called syndication

Take or Place  The ultimate financing commitment. This says that a lender
GXC
Commitment: guarantees to loan a certain amount, either by placing it with
syndicatees or, if necessary, taking the whole amount for themselves

Glossary 50
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.