Crand !

uncLlon
rlvaLe LqulLy and venLure CaplLal
!ose vlnlegra
Chrls Wong
Marlano Zorrllla

We belleve LhaL lL ls a good ldea for a Lflnanced company Lo aLLempL any exlL when Lhe
company has a solld buslness wlLh sLeady/growLh revenues and proflLs lL also hlghly
dependenL on Lhe markeL senLlmenLs whlle conLemplaLlng when Lo exlL as well ln Lhe case of
Crand !uncLlon neLwork relaLed companles were vlewed as 'hoL' aL Lhe Llme Lhus was a good
Llme for an exlL AnoLher polnL of conslderaLlon ls wheLher an exlL can help Lhe company grow
lf Lhe exlL can help Lhe company galn Lhe necessary resources Lo expand and reach goals whlch
could noL be achleved wlLhouL a huge caplLal ln[ecLlon from golng publlc or a sale Lhen lL
should aLLempL an exlL
8egardlng wheLher a Lllnanced should Lry Lo go publlc versus selllng lLself Lo anoLher
company we Lhlnk LhaL lf Lhe company has a solld growLh plan lL makes more sense Lo go
publlc lnsLead as a sale Lo anoLher flrm as wlLh a sale Lhe owners/managemenL of Lhe flrm
would lose conLrol of Lhe company and Lhese growLh plans may noL be carrled ouL by Lhem
afLer Lhe sale Agaln comlng back Lo Lhe polnL of markeL senLlmenLs lf Lhe mood of Lhe markeL
for LhaL parLlcular lndusLry ls good golng publlc ls Lhe more preferable opLlon
We have ouLllned Lhe pros and cons of Crand !uncLlon's 3 opLlons golng publlc selllng Lo
Clsco/anoLher compeLlLor and remalnlng prlvaLe ln Lxh|b|t 1

Lntrepreneur
lor Lhe enLrepreneur Lhe declslon of wheLher Lo go publlc or sell Lo Clsco really
depends on lf Charney wanLs Lo remaln wlLh Crand !uncLlon and Lhe klnd of llfesLyle he
wanLs Lo pursue golng forward lf Charney wanLs Lo succeed wlLh Crand !uncLlon and
pursue lLs growLh plans he would wanL Lo choose Lhe lC opLlon 1he lC wlll brlng
Lhe needed funds Lo growLh Lhe company and compeLe wlLh Lhe llkes of Clsco and 8ay
neLworks Selllng Lo Clsco would brlng demoLlon and Lhe loss of conLrol on how Crand
!uncLlon can proceed golng forward Powever lf Charney ls looklng for reduced
workload/responslblllLy or posslbly even cashlng ouL and leavlng Crand !uncLlon he
should go wlLh Lhe sale Lo Clsco (lL wlll be dlfflculL for Charney Lo sell hls shares lf
Crand !uncLlon wenL publlc due Lo Lhe negaLlve slgnals LhaL lL wlll glve Lo Lhe publlc)
8emalnlng prlvaLe ls ouL of Lhe quesLlon aL Lhls polnL because lf Lhey dld noL ralse Lhe
caplLal Lo grow Lhe company when ma[or players ln Lhe lndusLry enLers Lhe deskLop
swlLchlng buslness Crand !uncLlon wlll llkely noL be able Lo compeLe

Venture Cap|ta||st
lor Lhe venLure lnvesLors Lhey would be mosL lnLeresLed ln geLLlng Lhe mosL money
ouL of Lhe Crand !uncLlon lnvesLmenL uslng Merrlll lckard as an example lf Lhe sale
Lo Clsco sLands aL Lhe currenL offer of $323m Merrlll lckard (wlLh 193 holdlngs ln

Crand !uncLlon) wlll geL $634m Compare LhaL Lo Lhe lC rouLe wlLh Crand !uncLlon
prlclng lLs llsLlng aL $16/share and Laklng lnLo accounL a llkely 13 bounce on Lhe flrsL
day of lLs offerlng Crand !uncLlon wlll be worLh $3864m whlch equaLes Lo $649m for
Merrlll lckard (wlLh 168 holdlngs ln Crand !uncLlon afLer lLs llsLlng) Whlle Lhe lC
opLlon only brlngs sllghLly more money Lo Merrlll lckard Lhan Lhe sale Lo Clsco
looklng aL oLher recenL llsLlngs of companles such as lore SysLems where lLs sLock
prlce rose 484 Crand !uncLlon's sLock prlce could go up by more Lhan 13 on Lhe
flrsL day whlch would mean more money for Lhe vCs 1he poslLlve senLlmenLs ls also
reflecLed ln Lhe valuaLlon uslng average lndusLry mulLlples (Lxh|b|t 2) of Crand
!uncLlon havlng a value of $4333m compared Lo a uCl valuaLlon (Lxh|b|t 3) whlch
glves a value of $1279m 1hls shows LhaL Lhe markeL ls very hoL for sLocks ln Lhls
lndusLry and Lhus an lC would brlng more money Lo vC flrms 8emalnlng prlvaLe
wlLhouL a sale ls ouL of Lhe quesLlon glven such poslLlve markeL senLlmenLs and Lhe rlsk
of compeLlLors enLerlng Lhe deskLop swlLchlng markeL and overLaklng Crand !uncLlon
should Lhey noL expand aL Lhls polnL 1he vCs wlll noL wanL Lo mlss Lhls golden
opporLunlLy Lo cash ouL

Investment 8ankers
lor Lhe lnvesLmenL bankers Lhey wlll always choose Lhe rouLe LhaL glves Lhem Lhe
mosL fees ln Lhls case Lhe lnvesLmenL bankers wlll prefer Lhe Sale Lo Clsco as LhaL
would reap more fees for Lhem Lhan an lC

Lmp|oyees
Crand !uncLlons Senlor Managers would be demoLed so LhaL lLs roles and
responsablllLles wlll llkely decrease aL Clsco Crand !uncLlon's employees wlll noL wanL
Lhe company Lo be sold Lo Clsco Some of Lhe currenL Crand !uncLlon employees came
from Clsco and wlll noL be welcomed aL Clsco Many of Lhe employees also dld noL
wanL Lo work for a large company 1hus lf Lhe company was lndeed sold Lo Clsco
Crand !uncLlon wlll lose lmporLanL personnel Cn Lhe flnanclal slde as many key
employees held sLock opLlons Lhey would noL be able Lo exerclse Lhem should Crand
!uncLlon be acqulred lnsLead of llsLed Lhus loslng ouL flnanclally Moreover lmporLanL
members of Lhe senlor managemenL Leam wanL Lo go publlc Lhus Crand !uncLlon's
employees would llkely be exLremely agalnsL a poLenLlal sale Lo Clsco or anoLher large
compeLlLor

Lxh|b|t 1 ros and Cons of each opt|on

IC Sa|e to C|sco kema|n r|vate
ros + Plgh valuaLlon
+ resLlge / MoLlvaLlon of
senlor managemenL
employees
+ CreaL precedenLs ln Lhe
lndusLry
+ CaplLal Lo expand
+ Clsco brand leadlng Lo
poslLlve growLh prospecLs
+ LlfesLyle would be less
sLressful
+ keep conLrol of
company
+ Some employees
llke worklng aL small
company
Cons 8esponslblllLles of belng
offlcers of a publlc
company
Sale of shares percelved
as negaLlve Lo publlc
oLenLlal dlfflculLy
aLLracLlng Lop englneerlng
LalenL
no clear longLerm
performance
uemoLlon for senlor
managemenL
CerLaln employees wlll
deparL
no caplLal
ln[ecLlon / growLh
llmlLaLlon
CompeLlLlon from
large players ln
lndusLry

Lxh|b|t 2 Va|uat|on us|ng mu|t|p|es




($ in miIIions) 1996 Industry P/E VaIuation
Revenues 65.5
Cost of Sales 24.0
Gross Profit 41.5
Operating Expenses
R&D 9.2
Marketing 12.4
G&A 2.6
Total 24.2
EBT 17.3
Net ncome 11.2 40.7
omparabIes
Stock nformation Cisco Bay Networks 3Com Average
Stock Price ($) 69.25 51.63 43.50
Shares Outstanding 272,246,000 114,915,000 138,462,000
Last Twelve Months Financial Results ($000)
Revenue 1,978,916 1,342,293 1,479,385
Gross Profit 1,334,764 742,747 792,578
EBT 642,939 199,540 305,486
Net ncome 421,008 130,999 188,632
Net ncome per share 1.55 1.14 1.36
P/E 44.8 45.3 31.9

Lxh|b|t 3 Va|uat|on us|ng DCI

ote: Assume et Income equaIs FF for the purpose of beIow vaIuation

Year 1 2 3 6
199 1996 199 1998 1999 2
Total Total
Revenues 30.0 65.5
Cost of Sales 12.0 24.0
Gross Profit 18.0 41.5
Operating Expenses
R&D 5.3 9.2
Marketing 6.9 12.4
G&A 1.4 2.6
Total 13.6 24.2
EBT 4.4 17.3
Net ncome 2.9 11.2 13.4 16.1 19.4 23.2
Terminal Value 190.6
Total 2.9 11.2 13.4 16.1 19.4 213.8
NPV 129
Growth rate from 1997-2000 20.0%
Terminal grrowth rate 3.0%
Risk free rate 6.6%
Equity risk premium 6.0%
Beta 1.5
Ke (cost of equity): 16%