OPINION OF ANCOR'S FINANCIAL ADVISOR
On May 7, 2000, Goldman Sachs delivered its oral opinion to the board of
directors of Ancor that, as of such date, the exchange ratio was fair from a
financial point of view to the holders of Ancor common stock. Goldman Sachs
subsequently confirmed its oral opinion by delivery of its written opinion dated
May 7, 2000.
In connection with its opinion, Goldman Sachs reviewed, among other things:
- the merger agreement;
- annual reports to shareholders and annual reports on Form 10-K of Ancor
for the five years ended December 31, 1999;
- annual reports to stockholders and annual reports on Form 10-K of QLogic
for the five fiscal years ended March 31, 1999;
- interim reports to stockholders and quarterly reports on Form 10-Q of
Ancor and QLogic;
- other communications from Ancor and QLogic to their respective
stockholders; and
- internal financial analyses and forecasts for Ancor and QLogic prepared
by their respective managements.
Goldman Sachs also held discussions with members of the senior management
of Ancor and QLogic regarding their assessment of the strategic rationale for,
and the potential benefits of, the merger and the past and current business
operations, financial condition and future prospects of their respective
companies. In addition, Goldman Sachs:
- reviewed the reported price and trading activity for the Ancor common
stock and QLogic common stock, which like many stocks have been and are
likely to continue to be subject to significant short-term price and
trading volatility;
- compared financial and stock market information for Ancor and QLogic with
similar information for other companies the securities of which are
publicly traded;
- reviewed the financial terms of recent business combinations in the
communications equipment industry specifically, and in other industries
generally; and
- performed other studies and analyses Goldman Sachs considered
appropriate.
The following is a summary of the material financial analyses used by
Goldman Sachs in connection with providing its opinion to Ancor's board of
directors on May 7, 2000.
THE FOLLOWING SUMMARIES OF FINANCIAL ANALYSES INCLUDE INFORMATION PRESENTED
IN TABULAR FORMAT. YOU SHOULD READ THESE TABLES TOGETHER WITH THE TEXT OF EACH
SUMMARY.
(1) Historical Stock Price Performance and Trading Volume. Goldman Sachs
reviewed the relationship between movements in the closing price of Ancor common
stock for the one-year period ended May 5, 2000 and movements in the closing
price of (i) QLogic common stock and (ii) an index of storage area networks, or
SAN, companies consisting of Crossroads Systems Inc., Gadzoox Networks, Inc.,
Brocade Communications Systems Inc. and Vixel
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Corporation for the one-year period ended May 5, 2000. Goldman Sachs also
reviewed the relationship between movements in the trading volume and closing
price of Ancor common stock with QLogic common stock for the ten-day period
ended May 5, 2000.
(2) Purchase Price Analysis. Goldman Sachs calculated the price Ancor would
receive in the merger based on the terms of the merger agreement and the $99.94
closing price per share of QLogic common stock on May 5, 2000. That price
implied a price per share of Ancor common stock of $52.72, which represented a
69% premium over the $31.19 closing price per share of Ancor common stock on May
5, 2000.
Goldman Sachs calculated the aggregate equity consideration paid by QLogic
as a multiple of Ancor's estimated revenue and net income in the years 2000 and
2001. This analysis indicated that:
- for the year 2000, based on Needham & Company, Inc. revenue estimates,
the multiple was 39.7x, and based on Ancor management revenue estimates,
the multiple was 27.7x;
- for the year 2001, based on Needham & Company, Inc. revenue estimates,
the multiple was 22.8x, and based on Ancor management revenue estimates,
the multiple was 12.2x; and
- for the year 2001, based on Ancor management net income estimates
including the benefit of net operating loss carry forwards, or NOLs, the
multiple was 61.3x, and based on net income estimates excluding the
benefit of NOLs, the multiple was 92.9x.
(3) Exchange Ratio and Price Premium Analysis. Goldman Sachs calculated (i)
the ratio of the market price of Ancor common stock to the market price of
QLogic common stock and (ii) the implied exchange ratio premium and implied
price premium being paid in the merger based on the ratio of the market price of
Ancor common stock to the market price of QLogic common stock on selected dates.
Goldman Sachs also calculated (i) the ratio of the average market price of Ancor
common stock to the average market price of QLogic common stock and (ii) the
implied exchange ratio premium and implied price premium being paid in the
merger based on the ratio of the average market price of Ancor common stock to
the average market price of QLogic common stock over selected time periods
ending on May 5, 2000. The results are shown below:
0.5275X EXCHANGE RATIO
-----------------------------
ANCOR SHARE QLOGIC SHARE IMPLIED EXCHANGE
PERIOD PRICE/AVERAGE PRICE/AVERAGE EXCHANGE RATIO RATIO PREMIUM PRICE PREMIUM
------ ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
May 5, 2000 Closing Price.... $31.19 $ 99.94 0.31x 69% 69%
52 Week High................. $85.88 $190.44 0.45x 17% (39)%
52 Week Low.................. $ 6.50 $ 18.25 0.36x 48% 711%
Last Ten Days................ $29.62 $ 89.40 0.33x 59% 78%
Last Month................... $27.86 $ 87.98 0.32x 67% 89%
Last Three Months............ $40.76 $119.70 0.34x 55% 29%
Last Six Months.............. $49.99 $ 94.94 0.53x 0% 5%
Last Year.................... $36.87 $ 65.81 0.56x (6)% 43%
Last Two Years............... $20.41 $ 38.62 0.53x 0% 158%
Last Three Years............. $16.10 $ 27.18 0.59x (11)% 227%
(4) Contribution Analysis. Goldman Sachs reviewed selected historical and
estimated future operating and financial information for Ancor, QLogic and the
combined company resulting from the merger. The information with respect to the
combined company did not take into account any possible effects of the merger on
Ancor or QLogic, or any possible synergies that may result from the merger. The
estimated year 2000 operating and financial information is based (i) on Ancor
and QLogic managements' forecasts and (ii) on street forecasts of Needham &
Company, Inc. for Ancor and Robertson Stephens research for QLogic. The
estimated year 2001 operating and financial information is based on Ancor and
QLogic
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managements' forecasts. The analysis indicated the following contributions by
Ancor and QLogic:
ANCOR QLOGIC
----- ------
<S> <C> <C>
Fully Diluted Proposed Ownership............................ 18.4% 85.6%
Fully Diluted Market Capitalization (May 5, 2000)........... 11.7% 88.3%
1999 Revenues (actual)...................................... 7.1% 92.9%
2000 Revenues (street estimates)............................ 14.7% 85.3%
2000 Revenues (managements' estimates)...................... 20.4% 79.6%
2001 Revenues (managements' estimates)...................... 31.8% 68.2%
1999 Gross Profits (actual)................................. 5.4% 94.6%
2000 Gross Profits (street estimates)....................... 10.8% 89.2%
2000 Gross Profits (managements' estimates)................. 15.8% 84.2%
2001 Gross Profits (managements' estimates)................. 26.1% 73.9%
2001 Operating Profits (managements' estimates)*............ 17.0% 83.0%
2000 Net Income (managements' estimates)*................... 0.8% 99.2%
2001 Net Income (managements' estimates).................... 24.6% 75.4%
2001 Taxed Net Income (managements' estimates).............. 17.7% 82.3%
---------------
* The results of the analysis of gross profits and net income for calendar year
1999 and 2000 were not meaningful.
(5) Pro Forma Merger Analysis. Goldman Sachs prepared pro forma analyses of
the financial impact of the merger to QLogic stockholders using both Ancor and
QLogic managements' estimates and Needham & Company, Inc. and Robertson Stephens
research estimates.
Goldman Sachs compared the 2000 and 2001 estimated earnings per share of
QLogic common stock on a standalone basis to the 2000 and 2001 estimated
earnings per share of the common stock of the combined company on a pro forma
basis excluding potential cost savings. Based on such analysis, the merger would
be dilutive to stockholders of QLogic on an earnings per share basis in 2000 and
slightly dilutive in 2001. The results of this analysis are summarized as
follows:
2001 MANAGEMENT
2000 STREET 2000 MANAGEMENT ESTIMATES
ESTIMATES ESTIMATES (AFTER TAXES)
----------- --------------- ---------------
<S> <C> <C> <C>
QLogic Earnings Per Share
Accretion/(Dilution)..................... (28.0)% (17.5)% (0.3)%
(6) Selected Company Comparison. Goldman Sachs reviewed and compared
selected financial information, ratios and multiples for Ancor to corresponding
financial information, ratios and multiples for five storage area networks
companies, three components companies, four enterprise storage companies and two
storage management software companies.
STORAGE AREA ENTERPRISE STORAGE STORAGE MANAGEMENT
NETWORKS COMPANIES COMPONENTS COMPANIES COMPANIES SOFTWARE COMPANIES
------------------ -------------------- ------------------ ------------------
<S> <C> <C> <C>
Brocade Communications Adaptec, Inc. EMC Corporation Legato Systems Inc.
Systems Inc. Emulex Corporation Network Appliance Inc. Veritas Software Corp.
Crossroads Systems QLogic Corporation Storage Technology Corp.
Inc. Sun Microsystems, Inc.
Gadzoox Networks, Inc.
JNI Corporation
Vixel Corporation
The selected companies were chosen because they are publicly-traded high
technology companies with operations that for purposes of analysis may be
considered similar to Ancor. The multiples and ratios were calculated using the
closing price for the common stock of Ancor and each of the selected companies
on May 5, 2000 and were based on the most recent
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publicly available information. Goldman Sachs' analyses of the selected
companies compared the following to the results for Ancor:
- May 5, 2000 closing share price as a percentage of 52-week high share
price;
- equity market capitalization, which is the fully diluted market value of
equity, as a multiple of estimated revenue according to various Wall
Street analyst research reports for calendar years 2000 and 2001;
- estimated 5-year growth rate (provided by Institutional Brokers Estimate
System, or IBES);
- estimated calendar years 2000 and 2001 price/earnings ratios (estimated
earnings per share provided by IBES); and
- ratio of calendar year 2001 estimated price/earnings ratio to IBES
long-term growth estimate.
The results of these analyses are summarized as follows:
STORAGE
STORAGE AREA ENTERPRISE MANAGEMENT
NETWORKS COMPONENTS STORAGE SOFTWARE
COMPANIES COMPANIES COMPANIES COMPANIES
-------------- ------------- -------------- ----------
ANCOR MEAN MEDIAN MEAN MEDIAN MEAN MEDIAN MEAN
----- ----- ------ ---- ------ ----- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
May 5, 2000 closing share price as a
percentage of 52-week high share
price............................. 36.3% 43.7% 40.0% 38.4% 33.9% 72.7% 72.2% 37.6%
Equity market capitalization as a
multiple of estimated revenue for
calendar year 2000................ 22.3x 30.8x 13.7x 15.5x 14.2x 13.6x 13.0x 22.2x
Equity market capitalization as a
multiple of estimated revenue for
calendar year 2001................ 12.8x 18.6x 9.9x 5.9x 5.9x 9.4x 9.5x 14.8x
Estimated 5-year growth rate........ 45.0% 37.0% 40.0% 26.7% 30.0% 27.5% 25.0% 49.5%
Estimated calendar year 2000 price/
earnings ratios................... NM 213.2x 192.2x 66.4x 75.8x 115.7x 88.8x 112.2x
Estimated calendar year 2001 price/
earnings ratios................... NM 157.4x 162.5x 32.5x 32.5x 82.9x 69.4x 78.3x
Ratio of calendar year 2001
estimated price/earnings ratio to
IBES long-term growth estimate.... NM 4.1x 4.2x 1.1x 1.1x 2.7x 2.9x 1.6x
(7) Selected Transaction Analysis. Goldman Sachs analyzed certain
information relating to thirty-three selected transactions in the communications
equipment industry since 1996, including:
- aggregate levered consideration as a multiple of last 12 months sales;
- aggregate equity consideration as a multiple of last 12 months net
income;
- aggregate equity consideration as a multiple of one year forward net
income; and
- the premium of the aggregate equity consideration over the closing market
value of the acquired company.
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The results of these analyses are summarized as follows:
COMMUNICATIONS EQUIPMENT
INDUSTRY TRANSACTIONS
(RANGE)
------------------------
<S> <C>
Aggregate levered consideration as a multiple of last
12 months sales.................................... 2.0x - 677.3
Aggregate equity consideration as a multiple of last
12 months net income............................... 34.5x - 414.6x
Aggregate equity consideration as a multiple of one
year forward net income............................ 19.1x - 470.3x
Premium of the aggregate equity consideration over
the closing market value of the acquired company
for the five trading days prior to announcement of
the merger agreement............................... -7.5% - 109.8%
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all such analyses. No company or
transaction used in the above analyses as a comparison is directly comparable to
Ancor or QLogic or the contemplated merger. |
