OPINION OF QLOGIC'S FINANCIAL ADVISOR
Pursuant to an engagement letter dated April 21, 2000, QLogic retained SG
Cowen Securities Corporation to act as exclusive financial advisor to QLogic in
connection with the merger.
On May 6, 2000, SG Cowen delivered certain of its written analyses and its
oral opinion to the QLogic board, subsequently confirmed in writing as of the
same date, to the effect that, as of that date, and subject to the various
assumptions set forth therein, the exchange ratio was fair, from a financial
point of view, to QLogic.
STOCK TRADING HISTORY. To provide contextual data and comparative market
data, SG Cowen reviewed the historical market prices of Ancor common stock from
May 6, 1997 to May 4, 2000 and for the twelve month period ended May 4, 2000. SG
Cowen noted that over the indicated periods the high and low prices for shares
of Ancor were $94.13 and $1.00, and $94.13 and $6.13, respectively.
SG Cowen also reviewed the historical market prices of QLogic common stock
from May 6, 1997 to May 4, 2000 and for the twelve month period ended May 4,
2000. SG Cowen noted that over the indicated periods the high and low prices for
split-adjusted shares of QLogic common stock were $203.25 and $2.81, $203.25 and
$17.41, respectively.
HISTORICAL EXCHANGE RATIO ANALYSIS. SG Cowen analyzed the ratios of the
closing prices of Ancor common stock to those of QLogic common stock over
various periods ending May 4, 2000. The table below illustrates the ratios for
those periods and the premium or discount of the 0.5275 exchange ratio in the
merger to those historical exchange ratios.
PREMIUM / (DISCOUNT)
% IMPLIED BY
PERIOD EXCHANGE RATIO EXCHANGE RATIO
------ -------------- --------------------
<S> <C> <C>
Latest twelve months average............. 0.6203 (15.0)%
Latest six months average................ 0.6061 (13.0)%
High (latest twelve months).............. 1.4555 (63.8)%
Low (latest twelve months)............... 0.2457 114.7%
May 4, 2000.............................. 0.3308 59.5%
CONTRIBUTION ANALYSIS. SG Cowen analyzed the respective contributions of
latest reported twelve month, or LTM, revenues, operating income and earnings,
and calendar year 2000 and calendar year 2001 estimated revenues and earnings of
QLogic and Ancor to the combined company, based upon the historical and
projected financial results of QLogic and Ancor (based upon the financial
forecasts which were prepared by the managements of QLogic and Ancor as referred
to above).
% OF COMBINED COMPANY
----------------------------
QLOGIC ANCOR
CONTRIBUTION CONTRIBUTION
------------ ------------
<S> <C> <C>
Operating Results
LTM
Revenue....................................... 90.5% 9.5%
Operating Income.............................. NM NM
Earnings...................................... NM NM
CY 2000
Revenue....................................... 83.5% 16.5%
Earnings...................................... NM NM
CY 2001
Revenue....................................... 68.2% 31.8%
Earnings...................................... 82.3% 17.7%
ANALYSIS OF PREMIUMS PAID IN SELECTED TRANSACTIONS. SG Cowen reviewed the
premium of the offer price over the trading prices one trading day and four
weeks prior to the announcement date of 19 representative acquisition
transactions in the data networking industry and other similar technology
industries announced since March 30, 1997.
48
<PAGE> 59
The following table presents the premium of the offer prices over the
trading prices one day and four weeks prior to the announcement date for the
representative transactions, and the premiums implied for Ancor, based on the
exchange ratio. The information in the table is based on the closing stock price
of QLogic and Ancor stock on May 4, 2000.
PREMIUMS PAID FOR
REPRESENTATIVE PREMIUM IMPLIED BY
TRANSACTIONS EXCHANGE RATIO
------------------ ------------------
<S> <C> <C> <C>
Premiums Paid to Stock Price: Median Mean
One day prior to announcement................ 34.6% 33.2% 59.5%
Four weeks prior to announcement............. 84.1% 72.5% 43.4%
ANALYSIS OF SELECTED TRANSACTIONS. SG Cowen reviewed the financial terms,
to the extent publicly available, of the representative transactions in the data
networking industry and other similar technology industries. These transactions
were (listed as acquiror/target):
- Corning Inc. / NetOptix Corp.
- Lucent Technologies Inc. / Ortel Corp.
- JDS Uniphase Corp. / E-TEK Dynamics, Inc.
- Corning Inc. / Oak Industries Inc.
- Cisco Systems, Inc. / Aironet Wireless Comm., Inc.
- JDS Uniphase Corp. / Optical Coating Lab., Inc.
- Intel Corp. / DSP Comm., Inc.
- Lucent Technologies Inc. / Excel Switching Corp.
- EMC Corp. / Data General Corp.
- IBM Corp. / Mylex Corp.
- General Electric Company, p.l.c. / FORE Systems, Inc.
- Intel Corp. / Level One Comm., Inc.
- Alcatel / Xylan Corp.
- Lucent Technologies Inc. / Ascend Comm., Inc.
- Cisco Systems, Inc. / Summa Four, Inc.
- Northern Telecom Ltd. / Bay Networks, Inc.
- Alcatel / DSC Comm. Corp.
- Lucent Technologies Inc. / Yurie Systems, Inc.
- Ascend Comm., Inc. / Cascade Comm. Corp.
SG Cowen reviewed the market capitalization of common stock plus total debt
less cash and equivalents, or Enterprise Value, paid in the representative
transactions as a multiple of latest reported twelve month, or LTM, revenues,
last reported quarter annualized, or LQA, revenues, latest reported twelve month
earnings before interest expense, income taxes, depreciation, and amortization,
or LTM EBITDA, and latest reported twelve month earnings before interest expense
and income taxes, or LTM EBIT, and also examined the multiples of equity value
paid in the representative transactions to book value and LTM earnings.
49
<PAGE> 60
The following table presents, for the periods indicated, the multiples
implied by the ratio of Enterprise Value to LTM revenues, LQA revenues, LTM EBIT
and LTM EBITDA, and the ratio of equity value to book value and LTM earnings.
The information in the table is based on the closing stock price of QLogic on
May 4, 2000.
MULTIPLES FOR
REPRESENTATIVE TRANSACTIONS
------------------------------- MULTIPLE IMPLIED
LOW MEAN MEDIAN HIGH BY EXCHANGE RATIO
---- ---- ------ ----- -----------------
<S> <C> <C> <C> <C> <C>
Enterprise Value as a ratio of:
LTM Revenues..................... 0.7x 18.5x 8.3x 132.5x 80.8x
LQA Revenues..................... 0.7x 15.8x 6.9x 107.5x 52.3x
LTM EBITDA....................... 11.8x 35.4x 33.9x 67.1x NM
LTM EBIT......................... 30.4x 56.6x 47.0x 132.9x NM
Equity Value as a ratio of:
Book Value....................... 2.3x 14.9x 9.4x 66.9x 18.6x
LTM Earnings..................... 28.8x 68.2x 58.9x 113.1x NM
Although the representative transactions were used for comparison purposes,
none of those transactions is directly comparable to the merger, and none of the
companies in those transactions is directly comparable to QLogic or Ancor.
Accordingly, an analysis of the results of such a comparison is not purely
mathematical, but instead involves complex considerations and judgments
concerning differences in historical and projected financial and operating
characteristics of the companies involved and other factors that could affect
the acquisition value of such companies or Ancor to which they are being
compared.
ANALYSIS OF SELECTED PUBLICLY TRADED COMPANIES. To provide contextual data
and comparative market information, SG Cowen compared selected historical
operating and financial data and ratios for Ancor to the corresponding financial
data and ratios of selected other companies in the data networking industry and
other similar technology industries whose securities are publicly traded and
which SG Cowen believes have operating, market valuation and trading valuations
similar to what might be expected of Ancor. These companies were:
- Brocade Comm. Systems, Inc.
- Crossroads Systems, Inc.
- EMC Corp.
- Emulex Corp.
- Finisar Corp.
- Gadzoox Networks, Inc.
- QLogic Corp.
- JNI Corp.
- Vixel Corp.
The data and ratios included the Enterprise Value of the selected companies
as multiples of LTM revenues, calendar year 2000 projected revenue and calendar
year 2001 projected revenue. SG Cowen also examined the ratios of the current
share prices of the selected companies to the LTM earnings per share, or EPS,
estimated calendar year 2000 EPS and estimated calendar year 2001 EPS (in each
case, as available from research analyst reports or, if not so available, First
Call) for the selected companies.
50
<PAGE> 61
The following table presents, for the periods indicated, the multiples
implied by the ratio of Enterprise Value to LTM revenues and estimates for
calendar year 2000 and 2001 revenues, and the ratio of equity value to LTM
earnings and estimates for calendar year 2000 and 2001 earnings. The information
in the table is based on the closing stock price of QLogic on May 4, 2000.
SELECTED COMPANY MULTIPLES
-------------------------------- MULTIPLE IMPLIED
LOW MEAN MEDIAN HIGH BY EXCHANGE RATIO
---- ----- ------ ----- -----------------
<S> <C> <C> <C> <C> <C>
Enterprise Value as a ratio of:
LTM Revenues.................... 5.8x 47.2x 21.4x 141.9x 80.8x
CY00 Revenues................... 5.8x 25.7x 17.7x 55.4x 30.0x
CY01 Revenues................... 3.8x 16.4x 15.5x 34.0x 10.2x
Equity Value as a ratio of:
LTM Earnings.................... 87.8x 263.0x 142.5x 770.4x NM
CY00 Earnings................... 72.8x 160.4x 95.1x 318.0x NM
CY01 Earnings................... 61.6x 119.4x 84.7x 256.5x 56.9x
Although the selected companies were used for comparison purposes, none of
those companies is directly comparable to Ancor. Accordingly, an analysis of the
results of such a comparison is not purely mathematical, but instead involves
complex considerations and judgments concerning differences in historical and
projected financial and operating characteristics of the selected companies and
other factors that could affect the public trading value of the selected
companies or Ancor to which they are being compared.
PRO FORMA EARNINGS ANALYSIS. SG Cowen analyzed the potential effect of the
proposed merger on the projected combined statement of operations of QLogic and
Ancor for the calendar years ending December 31, 2000 and 2001. This analysis
was based upon (1) the projected financial results of QLogic and Ancor (based
upon the financial forecasts which were prepared by the managements of QLogic
and Ancor as referred to above) and (2) 33,053,807 fully-diluted common shares
outstanding for Ancor. This analysis indicated that the proposed merger could
decrease QLogic's projected earnings per share, on an after-tax basis, for the
calendar year ending December 31, 2000 by approximately 19.9% and could decrease
QLogic's projected earnings per share, on an after-tax basis, for the calendar
year ending December 31, 2001 by approximately 0.3%. SG Cowen's pro forma
earnings analysis did not take into account the possible effect of cost savings,
synergies or Ancor's net operating loss carryforwards in the proposed merger.
The table below summarizes the results.
ACCRETION/
AFTER-TAXES EARNINGS PER SHARE (DILUTION)%
------------------------------ -----------
<S> <C>
Calendar year 2000.......................... (19.9)%
Calendar year 2001.......................... (0.3)%
PRO FORMA OWNERSHIP ANALYSIS. SG Cowen analyzed the pro forma ownership in
the combined company by the holders of QLogic and Ancor and noted that holders
of Ancor common stock would own approximately 18% of the combined company.
The summary set forth above does not purport to be a complete description
of all the analyses performed by SG Cowen. The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analyses and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. SG Cowen did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, notwithstanding the separate factors summarized above, SG
Cowen believes, and has advised the QLogic board, that its analyses must be
considered as a whole and that selecting portions
of its analyses and the factors considered by it, without considering all
analyses and factors, could create an incomplete view of the process underlying
its opinion. |
