Reasons for Silver Lake's investment in Instinet IB and Inet/Nasdaq, Valuation of Instinet IB and Inet/Nasdaq, and the deal structure

This text discusses Silver Lake's investment in Instinet IB and Inet/Nasdaq, including the reasons for the investment, the valuation of the companies, and the deal structure. The investment in Instinet IB seems viable based on the discounted cash flow method, while the valuation of Inet/Nasdaq was computed using the cost of asset and a growth rate of 2%. The deal structure included convertible debt, term loan, and warrants to provide cushion to Silver Lake and pass on benefits to equity traders. The partnership met the needs of both Silver Lake and Nasdaq.

ASSIGNMENT FOR WEEK 8
Question 1
From Silver Lake perspective Investment in Instinet IB was on account of following reasons:
(a) Investing in new technology shall help company to regain its technology leadership position;
(b) It shall help the company to launch new products which includes more functional client
software;
(c) A latest technology platform for the international market;
(d) The business shall become more potentially attractive to investors;
(e) Customer base encompass 1020 institutional investor in US and 640 approx in Europe and
Asia as on December 31, 2004;
(f) It is one of the world’s largest provider of commission recapture services;
(g) Global Presence;
(h) Instinet IB offered a wide range of services to wide range of customers.
(i) Silver Lake primarily focussed on leading technologies and is one of the fastest growing
private equity firm.
From Silver Lake perspective Investment in Inet/ Nasdaq was on account of following reasons:
(a) Nasdaq was able to consolidate BRUT, Market Center and INET into a single trading platform
making it a market leader thus it shall be able to generate good return;
(b) There shall be technological and infrastructural synergy to company;
(c) Nasdaq shall gain opportunity to gain trading share in NYSE listed stocks;
(d) It shall create opportunity for OTC Equity trading with liquidity pool along with opportunity
to trade other stocks;
(e) There was a strong downside protection for Silver Lake.
Question 2
For computation of valuation of Instinet IB, growth rate has been stabilised at zero%. Further, the
cost of equity has been taken to be cost of beta and year 2010 value has been ignored for
computation as market is stabilised in 2009. On the basis of discounting cash flow method, the
valuation of company has been at 270.25 Million $ which exceeds the initial investment of $ 195
made. Hence the investment seems viable.
Further, for computation of Valuation of Inet/ Nasdaq Cost of asset has been used, instead of
segregating into debt and equity and then computing the weighted average cost of capital. Further,
the growth rate has been taken at 2%. On basis of the same, the valuation has come to combined
value of $ 2573.241 Mio.
Question 3
The total deal structure encompass convertible debt, issue of term loan and warrants. The structure
has been carried out in this manner to provide cushion to Silver Lake as it shall be able to reap the
benefit of increase in the value of equity along with fixed rate of interest in earlier stage. The rest of
the part has been funded by debt in order to pass on the benefit to equity traders.
It made sense in a manner there was no proposed bidder for Instinet Group as a whole and Instinet
IB. Further, the partnership met needs of both Silver Lake and Nasdaq. Thus, in this manner it makes
sense.

In a different manner, Nasdaq has acquired separately and valued it separately and similar activity
shall have been carried out by Silver Lake.