Legen Dairy Consulting

Spyder Active Sports, Inc. April 22, 2010

Spyder is a successful family owned company that currently has the
following three options: sell to a financial buyer via an LBO, sell to a Recommendation:
strategic buyer, or hold the company and sell at a later date. Sell to Strategic
Assuming 2008 projections become reality, the best financial option
for the CEO is to hold the company and increase ownership to
Acquirer
experience greater growth before selling the company. However,
consideration of the CEO’s personal interests and objectives, a
strategic acquisition would be ideal.

Exit Options
Option 1: Sell to Financial Buyer
A financial buyer like a private equity firm, would likely engage in
a LBO. Spyder currently has low existing debt and strong cash
flows, making it ideal for a LBO. The PE firm would seek to
finance the purchase of the firm through debt, devote a few years
to increase operational efficiency in order to sell the company to a
strategic buyer. Furthermore, LBOs are becoming increasingly
popular. Given the speed at which a LBO can take place and the
general industry trends, selling to a financial buyer is an attractive
option. However, because a financial buyer would most likely engage in a LBO, Spyder would
be highly levered.

Option 2: Sell to Strategic Buyer

Spyder could sell its business to a larger company of a similar line of business like Nike that is
seeking to develop its presence in this niche market. The strategic buyer would not use debt to
acquire Spyder. It would gain from Spyder's proprietary designs, brand equity, and established
cstoumer base. As a result, it would be willing to pay a premium for the synergies it would hope
to achieve. Spyder has achieved success, but would benefit from the support a large company
would provide. The large strategic buyer will have additional expertise in marketing, product life
cycle management, and new market entry. As Spyder continues to grow and Jacobs seeks a less
active role, the strategic buyer would have the resources and capabilities to steer Spyder toward
greater success. A strategic buyer typically maintains current management, reducing integration
concerns. As a result, Jacobs would have confidence in the strategic buyer's ability to steer the
Spyder toward success and ensure job security for his sons.

Option 3: Become Sole Owner of Spyder

Jacobs also has the option to buy out the shares of his partner, Shimokubo. In order to have
majority ownership of the company, he would borrow to purchase an additional 37.9% of the
company. The result of this additional stake is complete decision-making power. Given Spyder's
strong financial performance and positive economy indicators, Spyder will have a higher
valuation and be in a good position for acquisition, offering Jacobs many acquisition decisions.
In addition to the issue of financing the additional stake, Jacobs' desire to end his involvement in
Spyder makes this option unattractive.

Potential IRR
Buyers would require an IRR of at least 40% because CHP used an IRR of 30%, which included
contractual benefits. Therefore, any external buyers would require an even higher IRR,
potentially around 40%.

Method of Calculating WACC

Tax Rate When calculating WACC, we assumed a constant corporate tax rate of 35% because
varying tax rates would lead to inconsistencies. We also assumed that the deferred tax rates and
liabilities would ultimately average to 35%.
Cost of Debt Based on 20-year Treasury bond rate and the Reuter Corporate Spread, we
calculated the cost of debt as 6%.
Cost of Equity We used the given risk free rate of 4.77%. Because Spyder is a large company
with inconsistent earnings, we assumed that Spyder would have a high MRP of 6%. We used an
unlevered beta of 0.824 by evaluating comparables and averaging the unlevered betas. We
omitted Adidas and Nike because of their size and extremely differing market cap and lines of
business. We kept all other comparables because we sought to avoid a slippery slope situation of
finding issues with each comparable and ending with only one comparable.
We then relevered the beta with three different capital structures: (1) Financial LBO Buyer:
Assuming 80% debt, result in 22.6% cost of equity (2) Strategic Buyer: Assuming no debt, result
in 9.7% cost of equity (3) Gain complete ownership of company by buying partner’s share:
Assuming Jacobs raises debt to buy out remaining 37.9% share, result in 11.7% cost of equity
WACC With our method, we calculated a WACC of 7.6% for a financial LBO buyer, 9.7%
WACC for a strategic buyer, and 8.7% WACC for complete ownership.

Method of Calculating Multiples

We used the lowest average and the highest multiple when calculating each multiple. For
strategic acquirers, we calculated the sales multiple, but omitted the VF Corp acquisition of The
North Face and the Nike acquisition of Converse because both acquisitions used have sales
multiples that were extremely different from the other comparable acquisitions. When
considering financial acquirers, we used the average EBITDA multiple, but eliminated only one
the Cerberus Partners acquisition of Fila Holding because among the other comparables, it was
an outlier. We did not eliminate any others so not to fall into a “slippery slope” of using
comparables.

Method of Calculating Terminal Value

We calculated terminal values for financial LBO and holding situations by multiplying the 2008
EBITDA by the range of TV exit multiples. For the strategic buyer situation, we multiplied the
2008 Expected sales by the second range of TV exit multiples.

The End of Spyder’s High-Growth Period

Over the four year period, Spyder’s implied growth rate in TV slows down considerably. From
about a 28% implied growth rate, it slows down to 7.08% in the most ideal situation. Thus, it
becomes increasingly clear that Spyder’s high-growth period ends in March 2008.
Recommendation to Jacobs
From a financial perspective, the best option is to hold the company and increase ownership by
purchasing Shimokubo’s share. By riding out the high growth until 2008, Jacobs could
potentially double his investment. However, given Jacobs’ current life stage and personal
interests, selling to a strategic buyer would be most advantageous. A strategic buyer would offer
a strong premium and retain current management. Thus, Jacobs can ensure not only a wise
financial choice for himself, but also for his sons. Since his son already worked for Nike, he
would probably be kept on or even promoted to business manager.

Recommendation to CHB
CHB should sell the company. The original investment was meant to be a short term investment.
However, the pre-2004 economic environment did not make sale of the company ideal. At this
point, given the high return CHB has already experienced, and Spyder’s anticipated growth,
CHB should take the return from its investment in Spyder and pursue other investments that have
higher growth potential.

Final Recommendation
If Spyder is acquired, whether by a strategic or financial buyer, Spyder will experience a period
of integration. Organizational structures will be heavily impacted, impacting employees, and
subsequently, corporate culture. Thus, it is imperative that after the acquisition, management
devote time to integrate the two cultures and ensure strong communication among management,
so not to alienate any employees.

After evaluating Spyder, it would be in Jacobs’ best financial interest to hold the company and
increase his ownership. However, given Jacobs’ age, interests, goal to offer his son job security,
the possibility that the growth rate between 2005-2008 decreases and if there are no interested
buyers in 2008, Jacobs should sell to a strategic buyer.