Breakout Session #910 Jill Mitchell, Contracts Operations Manager, Raytheon Company Steffen Jacobsen, Contracts Manager,

2. Mergers & Acquisitions for Contracts Professionals: How we fit into the puzzle Breakout Session #910 Jill Mitchell, Contracts Operations Manager, Raytheon Company Steffen Jacobsen, Contracts Manager, Raytheon Company Date 16 April 2008 Time 1:30 pm – 2:30 pm

3. Acquirer … How We Fit into the Puzzle BD Ex/ Im PMO security CONTRACTS legal finance engineering HR treasury legal HR SCM BD executives insurance finance CONTRACTS PMO Acquiree

4. Disclaimer and Non-attribution • Disclaimer • The views in this presentation are those of Jill and Steffen only and are not to be construed as the views of the Raytheon Company • Non-attribution • Do not attribute the discussions today to the speaker or those in the audience

5. Scenario for this Presentation • Industry Contracts Manager’s Viewpoint • Federal and DoD Contracting • Practical “How-To” Guidance • Checklists / Tools

6. Learning Objectives Background The Challenge: How do I…? 1. Identify an opportunity for M&A 2. Contribute to a successful due diligence 3. Ensure successful transition and integration

7. Background: Mergers or Acquisitions Merger • A transaction that results in a wholly new organization formed due to the merging of two or more organizations Acquisition • A transaction in which one firm is taken over by another firm. • Alternatives not covered in this presentation but always worth considering: • Asset acquisitions • Technology acquisition / technology licensing with partial or total exclusivity

8. Mergers and Acquisitions Today Saab Acquires UAV Maker Seaeye Dubai Aerospace Buys Standard Aero, Landmark for $1.9B BAE to Acquire Armor Holdings for $4.53B GE Buys Smiths Aerospace for $4.8B Raytheon Acquires Oakley Networks

9. Mergers and Acquisitions Today “Defense spending remains at historic highs, and the commercial aerospace marketplace is at full stride. Industry players are flush with cash, and private equity money is pouring into the marketplace. In 2007 we could see the 1999 record finally eclipsed. Deals worth $25 billion have already been announced or completed—by far the fastest start we've seen this decade.” * * Stuart McCutchan quoted on www.defenseindustrydaily.com article Defense & Aerospace M&A Hit 370 Deals & $40B in 2006 at http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/04-17-2007/0004567449&EDATE= (emphasis added)

10. Defense and aerospace companies completed 370 transactions of M&A deals worth more than $40 billion in 2006* Firms are poised and eager to divert cash to M&A opportunities that allow them to: Meet ambitious investor expectations for year-to-year growth Build and strengthen existing product lines Diversify their portfolio to compete more effectively in a marketplace that can only cool off Mergers and Acquisitions Today www.defenseindustrydaily.com article Defense & Aerospace M&A Hit 370 Deals & $40B in 2006 referencing InfoBase/DACIS' “DefenseMergers & Acquisitions ” report

11. The Government Customer’s Perspective • Two options for excess cash: • Wall Street: pay cash out through larger dividends and stock repurchases • Pentagon: spend more on basic military research and further acquisitions that would streamline the industry even more* •  potentially reducing costs and eliminating excess capacity * Wayne, Leslie “Arms Makers Find Being Cash-Heavy Is Mixed Blessing” New York Times May 12, 2005: http://www.nytimes.com/2005/05/12/business/12cash.html?pagewanted=1&n=Top/Reference/Times%20Topics/Organizations/D/Defense%20Department&_r=1

12. The Government Customer’s Perspective • Concerns: • National security concerns associated with M&As by foreign firms • Competition • Vertical integration risks: acquiring contractors will – • prefer newly acquired suppliers over external suppliers even if the external suppliers are superior • increase barriers to market entry for their competitors • compromise proprietary information obtained on competitors through acquisition of their competitors’ supplier(s) • refuse to use suppliers owned by their competition • reduce competition at the subcontractor level • Horizontal integration • Reduced private R&D investment to develop new and innovative technologies

13. The Government Customer’s Perspective • Concerns: • Spares availability • Weapon system support • Interruption to on-going activities • Erosion of smaller, cheaper, more agile companies and competitors

14. Initial OM/Info Review Candidate In-Process Candidate Unsolicited Indicative Offer Due Diligence Negotiations Closing Integration Contracts Professionals Play a Crucial Role in the M&A Process:

15. Opportunity Identification

16. Identifying an Opportunity Reasons to M&A (i.e., what to look for) Good press Public Profile Reputation Access to new customers Complementary technologies Adjacent growth markets Advanced processing technologies Benefit from lower rate structures Expand product offerings Focus on areas where the acquirer can integrate into the acquiree’s product capability and vice versa Acquire past performance and backlog of acquired companies to help you go after prime contracts

17. Government “Hot Topics” are for acquisition focus: Military readiness and logistics Intelligence operations and analysis Network-centric solutions Information interoperability Base realignment Military health care modernization Cybersecurity Identifying an Opportunity From Richard Knop’s article To Stay on Top, Make Sound Investments in Washington Technology; 06/11/07 issue; Vol. 22 No. 10

18. Business Size Considerations Large Business vs. Small Business M&As • Large businesses: • Size allows acquirers to get more of what they are looking for in terms of revenue, contractors or employees • Usually have less customer concentration and more administrative support than small businesses but…

19. Business Size Considerations • Small business: • May be more nimble and, until recently*, had some advantages in obtaining certain government contracts • “The Small Business Administration’s new size recertification rule could radically change the landscape for small businesses interested in being acquired and their potential buyers. Any small business will need to recertify its small-business status after being acquired, and if it is no longer small, its contracts will no longer count against the congressionally mandated targets for small-business contracts… Although the new rule’s effects won’t be apparent for some time, many observers fear that it could lead to agencies terminating contracts. The value of those contracts would therefore be diminished when potential acquirers assess the acquisition target.” From Matt Swartz’s article Small Businesses on the Block Should Explore ESOPs in Washington Technology; 06/11/07 issue; Vol. 22 No. 10 Contract portfolios may not be as valuable as they once were

20. Brainstorming • Wall Street Journal • Industry magazines • Industry associations • Get input from others • Other employees • Friends • Family • Customers • Don’t ask who they think we should acquire, rather  • Ask what we are aren’t doing well; follow-up by asking who does it well Think outside the box - growth will come from adjacent market opportunities

21. Factors to Consider Alignment with Strategy • Greater corporate strategy • Strategy and future state • Mission Support • International • Competitive Pursuits • Individual P&L strategies • Adjacent markets or whitespace Solid Operating History • Business operating history 3+ years • Strong leadership • Desirable customer relationships, technology, contract, etc. Financial Hurdles • Robust revenue growth outlook • Operating margin is not dilutive • Positive cash flow • High ROIC business

22. Gap Closure by M&A Most Likely Solution Gap Closure method in development could be by M&A Gap Closure by Partnering / Internal Actions Most Likely Legend: Summary of Prioritized Gaps

23. Summarize Once you’ve identified the opportunity, collect as much data on its financials, strategy, and synergies and summarize it for management…

24. Key Candidate Target Summary Overview: Summary Financials: (FYE = 6/30) • Public company established in 1977 • Headquarters in San Francisco, 123 people • Provide information connectivity solutions that capture, analyze and present real-time information • Provide solution for lifecycle support with program, financial, test and logistical services and training Information Strategic Rationale: Synergy Opportunities: • Audubon Networking Capabilities; visual realization; mapping and modeling • Interoperable tracking software • Sensors, digital video broadcast and • surveillance technologies • Complex decision-making algorithms • Total Asset Visibility • Logistics Situational Awareness • Expand customer relationships: ABC, NOP, XYZ • Access to new programs: Seagull, Bluebird, Goldfinch • Adds a leap forward in imaging • Adds credentials in ID/IQ arena • Supports our recent win on Sparrow with network solutions and decision support systems • Supports our effort in Condition Based Maintenance

25. Why Do M&As Fail? In a study by Watson Wyatt: • 66% of companies failed to meet their profit goals following a merger • 54% did not meet their cost cutting goals In a study by A.T. Kearney: • 58% of mergers failed to achieve their stated goals • 58% of global mergers managed to outperform competitors after two years *From Why Do Mergers Fail? What Can Be Done to Improve Their Chances of Success in Key Strategy, January 2006.

26. Why Do M&As Fail? • Lack of Communication • Lack of Direct Involvement by Human Resources • Lack of Training • Loss of Key People • Loss of Customers • Cultural Differences • Power Politics • Inadequate Planning

27. Why Do M&As Succeed? • Extensive and Regular Communication • Following announcement of the M&A, maintain open lines of communication with middle management and lower level employees on the going-forward plans • Be clear and consistent, even if the message isn’t always positive • Effective Planning at All Stages • Realistic goals and timeframes • Only 1 out of 5 companies that have acquired another has developed a clear and satisfactory implementation plan • Retain Key People • 25% of top performers leave their company within 3 months of a major organizational event • 47% of senior managers leave within the 1st year • Manage Cultural Differences • Training and Development • Train everyone • Managers overseeing the M&A process • Employees of the M&A company • Post M&A Integration Teams

28. Due Diligence

29. Contracts role is fact finding only Review the contractual documentation and provide input on risks and issues No negotiating; no decision making Trust is critical The team must be composed of members that are mature and trustworthy enough to remain silent on the entire fact of M&A discussions (this protects against turnover and maintains moral) Expect ¾ to full time support for 30 to 45 days Recognize the due diligence team’s effort, regardless of whether the the acquisition is made Due Diligence

30. Q&AFormat • Questions and answers are processed through the intermediary (e.g. bank) • Demand same day responses

31. The seller (or intermediary) should establish a virtual collaboration environment / data warehouse Populate it with all contractual documentation Contracts and modifications Non-disclosure agreements Current proposal efforts Allows for “virtual” due diligence from the comfort of your own office Availability of documentation is critical! Each folder in the collaboration environment should contain a 1-2 page synopsis describing the documents that are housed in that folder e.g.: contract, period of performance, value, type, deliverables, and status The collaboration environment should be constantly updated with all new modifications, RFPs, etc Due Diligence

32. Work in close cooperation with the company you’re acquiring – an adversarial posture will always backfire The due diligence process may seem excessively intrusive, but it builds relationships and provides the opportunity for the acquiree to better understand his own company while at the same time pleasing the acquiring company Hesitancy or hostility during due diligence is often a sign that a deal’s value will be more difficult to realize than originally expected Due Diligence Be Patient – Don’t be Disappointed if the Decision is Made to “No Go”

33. Due Diligence – Document Review Checklist Evaluate every current contractual document the acquiree has as if you were reviewing one of your own contracts for risks and opportunities: Contracts Non-standard terms and conditions (i.e. H-clauses, special T’s and C’s, etc) Non-Disclosure Agreements Who are they with? What is their duration? What proprietary data is outstanding that would be important to request returned or destroyed? Teaming Agreements Look for exclusivity or conflicts of interest with your own company’s pursuits and teammates List teaming agreement and exclusivity

34. Due Diligence – Document Review Checklist • Small Business Innovation Research (SBIR) contracts • Current and upcoming RFPs that the company is responding to • Requests for Equitable Adjustment • Agreements granting or obtaining rights to intellectual property or the use of intellectual property • Offset agreements: what are the company’s obligations • Government Terminations • Debarment • Waiver of claims agreements

35. Due Diligence – Document Review Checklist • Ratings • Contractor Performance Assessment Report (CPARs) • Evaluations and complaints by customers during the past 5 years • Consider approaching customers directly to understand how well the company manages them • Award fee ratings • Organizational Conflicts of Interest (OCI) • Mitigation plans currently in effect and for the past 3 years • Correspondence relating to OCI matters • IDIQs, GSA schedules, and any other task-order contract vehicle-based business • Identify roles, prime and sub, and experience • The extent of the company’s utilization of the IDIQs • Assess the rates used on the IDIQs

36. Review contracts, modifications and RFPs for key terms and obligations: Insurance requirements Does the acquiring company maintain sufficient umbrella insurance or will additional insurance coverage be required? Liquidated Damages The company’s liabilities and probabilities of incurring those liabilities Consider schedule and on-going performance Limitation of Liability Quantifies the company’s exposures List dollar-limits of liability w/ time-frame limits Due Diligence – Contract Review Checklist

37. Assignment and novation clauses and restrictions Indemnification Intellectual Property terms Have restricted/limited rights been asserted? Licensing agreements negotiated? Commercial vs. non-commercial-but-restricted-use technologies? Was IP developed at company expense or using government funds? List all rights asserted by contract List 3rd party software license requirements, such as reporting, royalties, and payment obligations Small business re-certification requirements Due Diligence – Contract Review Checklist

38. Due Diligence – Contract Review Checklist • Deployment terms and liabilities when deploying for military operations • Does the company have any deployed personnel? If so, what are the contract’s Defense Base Act (DBA) requirements? Is DBA coverage provided for war zone deployment? • Organizational Conflicts of Interest (OCI) • For each contract that contains an OCI clause, process an OCI sweep through your company to confirm there’s no conflict • Where programs are similar or related to your company’s programs, ensure there’s no conflict

39. Due Diligence – Contract Review Checklist • Warranty exposure: List all outstanding warranties and quantify liabilities associated with them • Be on the lookout for: • Warranty claims, lawsuits, recalls, or post-manufacturing remedial measures from the preceding 5 years for any products or services • Written materials or documents that may create implied warranties • Oral warranties • Defects or other potential problems with products or services that could give rise to a warranty claim • Is warranty expense “pay as you go” or reserved in the P&L and balance sheet?

40. Due Diligence – Tracking Checklist • Record and catalog all agreements and identify any terms and conditions that may raise a red flag • Look for: • Items (risks, liabilities) that may affect the purchase price of the company • Items that may change once the company is purchased. This cataloging and categorizing is critical!

41. Tracking Use Template for Tracking Organization

42. Due Diligence – Reporting Checklist Submit a weekly report to the due diligence lead summarizing progress and flagging issues and recurring themes • Summary of Diligence Scope (# of contracts in review/already reviewed by contract-type by sales) • Key findings (% of contracts as prime; % of contracts as subcontractor; next-year contract projections/back-log; list of customers; etc.) • Outstanding Issues / concerns (intellectual property, export, OCI, Safety Act issues) • Mitigation Plans • Financial Impact • Integration Concerns • Outstanding Data Items • Recommendations

43. Due Diligence – Out-brief Checklist Prepare a final out-brief for the decision makers containing: • Due diligence results from all functional reviews • A schedule of accomplishments and items remaining to be accomplished • The major due diligence tasks concluded by the Contracts function • The top due diligence issues • A color-coded status with key comments from the weekly reports

44. Transition and Integration

45. Transition and Integration Smoothness of integration largely depends on: How friendly/hostile the merger/acquisition process has been thus far Whether the employees played a role in the decision making Whether the company is employee-owned such that they stand to benefit financially from the deal Utilize the due diligence team, though at a much reduced frequency, to take advantage of existing relationships

46. Transition and Integration • Do not guarantee “no change” • Stress that there will always be change - but good change • Recommended reading: Who Moved My Cheese by Spencer Johnson, about adjusting and embracing changes and transitions at work with an open mind and motivated spirit • Quick read • Buy it for all employees

47. Form a Mentor-Mentee relationship with the contracts manager(s) of the acquired organization Host face-to-face staff meetings with the acquired company contracts managers to socialize with the rest of the team Be available and responsive to phone calls and questions from the acquired company It makes a great impression and leaves them excited about joining your team Transition and Integration

48. Transition and Integration • Be a salesman: sell them on working for/with you and the company • Be flexible: let the integration process happen gradually in certain areas • Communicate which policies and procedures are critical • Particular terms and conditions • Proceeding on contracts at risk • Teaming agreements • OCIs • Signing Authority • Gating • … and which policies and procedures are less critical • Filing requirements • Specific NDA language

49. Integration Checklist Share: How and where to search for company data online Listings and copies of applicable policies and procedures Certifications and Representations Copies and examples of weekly and monthly reports A list of policies and procedures that must be followed immediately Scenarios that require higher-level approval Metrics Company, Business Unit, and Contracts specific organizational charts A list of common acronyms Descriptions of key program, pursuits, and initiatives the acquiring company is involved in

50. An appropriate level of delegated signature authority “Empowered official” status for purposes of export/import and the Directorate of Defense Trade Controls (DDTC) Administrative support – where the acquirer has centralized administrative services Details on IDIQs (GSA schedules, GWACs, etc) – opportunity for two-way synergies Terms and conditions guidelines for contracts Copies of standard teaming agreement and NDA formats Pertinent leadership and training development programs Past performance data Integration Checklist