| EUC | S&P(1) | Enterprise | Services | Software | ||||||||||||||||||||||||||||||||||||||||||||
| Company | HP | Range | Median | Range | Median | Range | Median | Range | Median | Range | Median | |||||||||||||||||||||||||||||||||||||
| CY13E EV/EBITDA |
3.3x | 3.7x | 6.0x—7.8x | 6.9x | 4.2x—6.5x | 4.8x | 5.4x—9.0x | 8.4x | 4.1x—10.1x | 5.5x | 5.4x—7.6x | 6.5x | ||||||||||||||||||||||||||||||||||||
| CY13E Cash Adjusted EV/EBITDA |
4.3x | 4.0x | 6.0x—7.8x | 6.9x | 4.4x—6.5x | 5.0x | 5.6x—9.6x | 8.9x | 4.3x—10.1x | 5.5x | 5.6x—7.8x | 6.9x | ||||||||||||||||||||||||||||||||||||
| CY13E P/E |
6.6x | 4.9x | 11.0x—25.0x | 15.5x | 7.7x—9.5x | 9.0x | 9.3x—20.5x | 12.5x | 7.2x—15.9x | 14.3x | 10.9x—13.7x | 13.3x | ||||||||||||||||||||||||||||||||||||
| (1) | S&P refers to Software & Peripherals. |
The following table represents the results of J.P. Morgan’s analysis of the NTM EV/EBITDA and NTM P/E multiples of comparable publicly traded companies and, with respect to NTM/PE only, for the S&P 500 as of February 1, 2013, November 30, 2012 and their one-, two- and three-year averages, compared to the Company’s trading multiples as of January 11, 2013, the last trading day before media reports of a possible going private transaction involving the Company were first published, and as of November 30, 2012, the last trading day before an analyst report was issued by Goldman Sachs suggesting that the Company might be a target for a leverage buyout transaction and its one-, two- and three-year averages (except with respect to the foregoing for the S&P 500 which is according to FactSet):
| Company | HP | EUC | Enterprise | S&P 500 | ||||||||||||||||||||||||||||||||
| NTM EV/EBITDA |
NTM P/E | NTM EV/EBITDA |
NTM P/E | NTM EV/EBITDA |
NTM P/E | NTM EV/EBITDA |
NTM P/E | NTM P/E(1) | ||||||||||||||||||||||||||||
| Current(2) |
3.3x | 6.6x | 3.7x | 4.9x | 7.4x | 12.2x | 6.7x | 12.0x | 13.0x | |||||||||||||||||||||||||||
| Pre-GS Report |
2.7x | 5.8x | 3.2x | 3.8x | 6.6x | 11.7x | 6.3x | 11.3x | 12.1x | |||||||||||||||||||||||||||
| 1-year average |
3.4x | 6.6x | 3.9x | 4.9x | 6.0x | 11.4x | 6.7x | 11.9x | 12.6x | |||||||||||||||||||||||||||
| 2-year average |
3.6x | 7.4x | 4.1x | 5.8x | 6.3x | 11.1x | 7.1x | 12.5x | 12.3x | |||||||||||||||||||||||||||
| 3-year average |
3.9x | 8.4x | 4.7x | 7.0x | 6.5x | 11.2x | 7.6x | 13.2x | 12.6x | |||||||||||||||||||||||||||
| (1) | According to Factset. |
| (2) | As of February 1, 2013, except for Dell as of January 11, 2013. |
For purposes of its analysis of each of the Company and the selected companies in the tables above, J.P. Morgan used estimates for EBITDA and earnings per share based on consensus analyst research estimates, and based on publicly available financial data, including Wall Street research estimates and FactSet, and, as appropriate, further adjusted to include stock-based compensation expense but exclude non-recurring items.
The selected companies were selected by J.P. Morgan because of similarities to the Company in one or more business, regional or end-market characteristics and, in certain cases, similarities to the Company based on operational characteristics and financial metrics. However, because no selected company is exactly the same as the Company, J.P. Morgan believed that it was inappropriate to, and therefore did not, rely solely on the quantitative results of the selected company analysis. Accordingly, J.P. Morgan also made qualitative judgments concerning differences between the business, financial and operating characteristics and prospects of the Company (including its EUC and ESS businesses) and the selected companies that could affect the public trading values of each in order to provide a context in which to consider the results of the quantitative analysis. These qualitative judgments related primarily to the differing sizes, business sector overlaps, growth prospects, profitability levels and degrees of operational risk between the Company (including its EUC and ESS businesses) and the companies included in the selected company analysis. Based upon these judgments, J.P. Morgan selected certain reference ranges of multiples based on the multiples calculated for selected companies, and applied such ranges to various projections of EBITDA and earnings per share for the Company for the Company’s fiscal year 2014 to calculate the Company’s equity value per share. In calculating the implied equity value per share for the Company, J.P. Morgan reviewed five different cases, two of which, the Preliminary FY14 Internal Plan and the Preliminary FY14 Board Case (each as defined below), were prepared by the Company’s management and three of which, the BCG Base Case, the BCG 25% Case and the BCG 75% Case (each as defined below), were prepared by BCG. Each of these cases is discussed in more detail under “—Background of the Merger” beginning on page 20 and “—Projected Financial Information” beginning on page 94.
A summary of the implied valuation ranges of the Common Stock that J.P. Morgan derived based on the ratio of Enterprise Value to estimated EBITDA under each of the five cases, using a reference range of 3.5x to 5.5x, is set forth below:
| Case |
Implied Valuation Range | |||
| Preliminary FY14 Internal Plan |
$ | 12.00 to $17.25 | ||
| Preliminary FY14 Board Case |
$ | 11.25 to $16.00 | ||
| BCG Base Case |
$ | 10.50 to $15.00 | ||
| BCG 25% Case |
$ | 12.00 to $17.25 | ||
| BCG 75% Case(1) |
$ | 15.25 to $22.50 | ||
|
|
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| (1) Calculated for informational purposes only. | ||||
A summary of the implied valuation ranges of the Common Stock that J.P. Morgan derived based on the ratio of price per share to expected earnings per share under each of the five cases, using a reference range of 5.0x to 10.0x, is set forth below:
| Case |
Implied Valuation Range | |||
| Preliminary FY14 Internal Plan |
$ | 8.75 to $17.50 | ||
| Preliminary FY14 Board Case |
$ | 8.00 to $16.00 | ||
| BCG Base Case |
$ | 7.25 to $14.50 | ||
| BCG 25% Case |
$ | 9.00 to $18.00 | ||
| BCG 75% Case(1) |
$ | 13.00 to $26.00 | ||
|
|
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| (1) Calculated for informational purposes only. | ||||
All values presented were rounded to the nearest $0.25. In each case, J.P. Morgan compared the implied equity values per share to (i) the merger consideration of $13.65 per share in cash to be paid to holders of the Common Stock in the merger, noting that the merger consideration is within each of the implied valuation ranges other than the one based on the ratio of Enterprise Value to estimated EBITDA in the BCG 75% Case (which range was calculated for informational purposes only), (ii) the $10.88 per share closing price of the Common Stock as of January 11, 2013, the last trading day before media reports of a possible going private transaction involving the Company were first published, (iii) the $13.63 per share closing price of the Common Stock as of February 1, 2013 and (iv) the $9.64 per share closing price of the Common Stock as of November 30, 2012, the last trading day before an analyst report was issued by Goldman Sachs suggesting that the Company might be a target for a leverage buyout transaction.
Discounted Cash Flow Analysis
J.P. Morgan conducted a discounted cash flow analysis for the purpose of determining the fully diluted equity value per share for the Common Stock. A discounted cash flow analysis is a method of evaluating an asset using estimates of the future unlevered free cash flows generated by the asset and taking into consideration the time value of money with respect to those future cash flows by calculating their “present value.” “Present value” refers to the current value of one or more future cash payments from the asset, which is referred to as that asset’s cash flows, and is obtained by discounting those cash flows back to the present using a discount rate that takes into account macroeconomic assumptions and estimates of risk, the opportunity cost of capital, capitalized returns and other appropriate factors. “Terminal value” refers to the capitalized value of all cash flows from an asset for periods beyond the final forecast period.
J.P. Morgan calculated the unlevered free cash flows that the Company is expected to generate (i) during the time period from November 2012 through January 2016 on the basis of the BCG Base Case, the BCG 25% Case and the BCG 75% Case, and (ii) during the time period from November 2012 through January 2017 on the basis of the September 21 Case prepared by the management of the Company. J.P. Morgan calculated the unlevered free cash flows based upon the BCG 75% Case and the September 21 Case for informational purposes only. Each of these cases is discussed in more detail under “—Background of the Merger” beginning on page 20 and “—Projected Financial Information” beginning on page 94.
J.P. Morgan also calculated a range of terminal asset values of the Company by applying an EV/EBITDA multiple ranging from 3.5x to 5.5x of the EBITDA of the Company as estimated for the terminal period. The unlevered free cash flows and the range of terminal asset values were then discounted to present values using a range of discount rates from 9.5% to 13.5%. The discount rates used by J.P. Morgan were informed based on the Capital Asset Pricing Model (“CAPM”) methodology. CAPM methodology assumes the weighted average cost of debt and equity, according to the debt to equity ratio based on an assumed capital structure. Accordingly, J.P. Morgan reviewed the capital structure of the Company and of each of the selected companies identified above in “—Public Trading Multiples.” To calculate a cost of equity, CAPM methodology requires adding (i) a risk-free rate to (ii) the product of an assumed beta range multiplied by an equity risk premium. In arriving at its selected beta range, J.P. Morgan reviewed the historical and Barra predicted betas for all of the selected companies identified above. However, because no selected company is exactly the same as the Company, J.P. Morgan believed that it was inappropriate to, and therefore did not, rely solely on the given historical and Barra predicted betas of the selected companies. Accordingly, J.P. Morgan also made qualitative judgments concerning differences between the business, financial and operating characteristics and prospects of the Company and the selected companies that could affect the betas of each in order to provide a context in which to consider the results of the quantitative analysis.
The present value of the unlevered free cash flows and the range of terminal asset values were then adjusted for the Company’s estimated debt, cash and cash equivalents as of November 2, 2012 (as provided by the Company’s management).
A summary of the implied valuation ranges of the Common Stock that J.P. Morgan derived from such analyses is set forth below. As noted above, J.P. Morgan’s analysis took into account its discussions with the Special Committee, management and BCG, including the factors and circumstances discussed with the Special Committee surrounding the forecasts and analyses prepared by BCG and management. Taking into account the actual performance of the Company, the condition of the markets in which it is active and such discussions, the ranges with respect to the September 21 Case and the BCG 75% Case were calculated for informational purposes only, and J.P. Morgan gave no weight to the September 21 Case and the BCG 75% Case in its discounted cash flow analysis.
| Case |
Implied Valuation Range | |||
| BCG Base Case |
$ | 10.50 to $14.25 | ||
| BCG 25% Case |
$ | 12.00 to $16.50 | ||
| BCG 75% Case(1) |
$ | 15.00 to $21.25 | ||
| September 21 Case(1) |
$ | 15.50 to $21.75 | ||
|
|
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| (1) Calculated for informational purposes only. | ||||
All values presented were rounded to the nearest $0.25. In each case, J.P. Morgan compared the implied equity values per share to (i) the merger consideration of $13.65 per share in cash to be paid to holders of the Common Stock in the merger, (ii) the $10.88 per share closing price of the Common Stock as of January 11, 2013, the last trading day before media reports of a possible going private transaction involving the Company were first published, (iii) the $13.63 per share closing price of the Common Stock as of February 1, 2013 and (iv) the $9.64 per share closing price of the Common Stock as of November 30, 2012, the last trading day before an analyst report was issued by Goldman Sachs suggesting that the Company might be a target for a leverage buyout transaction.
Other Information
J.P. Morgan also noted that the 52-week trading range of the Common Stock ending on February 1, 2013 ranged from a low of $8.86 to a high of $18.32. J.P. Morgan noted that this review of historical stock trading is not a valuation methodology but was presented merely for informational purposes.
The foregoing summary of certain material financial analyses does not purport to be a complete description of the analyses or data presented by J.P. Morgan. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. J.P. Morgan believes that the foregoing summary and its analyses must be considered as a whole and that selecting portions of the foregoing summary and these analyses, without considering all of its analyses as a whole, could create an incomplete view of the processes underlying the analyses and its opinion. Except as otherwise noted, in arriving at its opinion, J.P. Morgan did not attribute any particular weight to any analyses or factors considered by it and did not form an opinion as to whether any individual analysis or factor (positive or negative), considered in isolation, supported or failed to support its opinion. Rather, J.P. Morgan considered the totality of the factors and analyses performed in determining its opinion.
Analyses based upon forecasts of future results are inherently uncertain, as they are subject to numerous factors or events beyond the control of the parties and their advisors. Accordingly, forecasts and analyses used or made by J.P. Morgan are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by those analyses. Moreover, J.P. Morgan’s analyses are not and do not purport to be appraisals or otherwise reflective of the prices at which businesses actually could be bought or sold. None of the selected companies reviewed as described in the above summary is identical to the Company. However, the companies selected were chosen because they are publicly traded companies with operations and businesses that, for purposes of J.P. Morgan’s analysis, may be considered similar to those of the Company. The analyses
necessarily involve complex considerations and judgments concerning differences in financial and operational characteristics of the companies involved and other factors that could affect the companies compared to the Company.
The opinion of J.P. Morgan was one of the many factors taken into consideration by the Board and the Special Committee in making their determination to approve the merger. The analyses of J.P. Morgan as summarized above should not be viewed as determinative of the opinion of the Board or the Special Committee with respect to the value of the Company, or of whether the Board or the Special Committee would have been willing to agree to different or other forms of consideration.
As a part of its investment banking business, J.P. Morgan and its affiliates are continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, investments for passive and control purposes, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements, and valuations for estate, corporate and other purposes. J.P. Morgan was selected to advise the Special Committee with respect to the merger on the basis of such experience and its familiarity with the Company. J.P. Morgan has consented to the inclusion of its presentations to the Board and the Special Committee as exhibits to the Schedule 13E-3 filed with the SEC in connection with the merger.
J.P. Morgan has acted as financial advisor to the Special Committee with respect to the merger, and will receive a transaction fee from the Company for its services of approximately $35 million, $2 million of which was earned upon execution of its engagement letter, $3 million of which was earned upon the public announcement of the merger agreement, and the rest of which will become payable upon the closing of the merger. In addition, the Company has agreed to reimburse J.P. Morgan for its expenses incurred in connection with its services, including the fees and disbursements of counsel, and will indemnify J.P. Morgan against certain liabilities, including liabilities arising under the Federal securities laws.
During the two years preceding the date of its opinion, J.P. Morgan and its affiliates had no commercial or investment banking relationships with any of the Parent Parties, the MD Investors or the MSDC Investor, but had commercial or investment banking relationships with the SLP Investors and their affiliates, for which J.P. Morgan or its affiliates received an aggregate of $54.2 million in compensation. Such services during such period included acting as financial advisor to Silver Lake Partners in (a) its acquisition of Smart Modular Technologies in August 2011 and (b) its acquisition of Skype in October 2011. J.P. Morgan or its affiliates also acted as joint bookrunner and joint lead arranger on a term loan and revolving credit facility for Silver Lake Partners for its acquisition of Global Blue in May 2012. In addition, during the two years preceding the date of its opinion, J.P. Morgan and its affiliates had commercial or investment banking relationships with the Company, for which J.P. Morgan and such affiliates received an aggregate of $36.3 million in compensation. Such services during such period included acting as joint lead manager on a revolving credit facility for the Company in April 2011. Further, in the ordinary course of their businesses, J.P. Morgan and its affiliates may actively trade the debt and equity securities of the Company or affiliates of the principal stockholders of the Parent Parties for their own accounts or for the accounts of customers and, accordingly, they may at any time hold long or short positions in such securities.
