Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 1 of 37 0 MJCROSOll'T CORPORAT{ON ESTIMATION OF THE ItAJR MARKET VALUE OF CERTAIN ENTITIES OF MICROSOFT CQRPORAJJON 0 AS QFAPRIL30,2Q06 "AGREED REDACTIONS AT THE REQUEST OF MICROSOFT" US016_0001 0 Government Exhibit 45 _____________ 1 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 2 of 37 0 Mr. Brad Del Matto Senior Dirett:tor of Corporale Tax Planning Microsoft Corporation One, Microsoft Way Redmond, WA 980S2 June 19, 2006 Subject: ESTIMATION OF THE FAIR MARKET VALUE OF CERTAIN ENTITIES OF MICROSOFT CORPORATION_ Dear Mr. Del Mnft~: 0 Valu111ilm a1e") As per MicrosDfl Corponition man11ge1mmt (MM111111gemunl"), ii is our underslnnding thot mir co11clusions will be used by MMagcment for income tnx purposes. FAJR MARKET VALUE Fair Market V11lue is dcl\ned as "'lli-e amount 111 which an as$el. (or liability) could bo bought (or incurred) or sold tor aettlcd) in.a currant transection between willlng ponies. 1hat ls, other thlm in I! forced or lfquld11:t1on s_ ~le." ·In -estimating Fair Market Value, we Will'a»ume the Entilics' exi11ting busincs~cs to be ongoing. The procedures used in ~5!imating the Pair Market Value and the results .or our analysis 11re presented in the nccornp11nyins reporc and exhibha. uso1s_ooo2 0 2 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 3 of 37 0 TA RLE Ofr CONTENTS Page Section ~ 1.0 SCOPE ...............................t,t•••"n••··········"······..·..·•u••··•·'................~...............,...................".•'....... 1 2:0 SOURCES OF JNFORJ"1ATION ........-..........,"..,,..........~........................- ................_ ............ I 3.0 s,~NlFICANT MAN'~GEMENT REPRESENTATlONs......;...;.,:•.-....;.....,.;.-....,................ 3 4.!). PROCEDiJttKS-..................................................................................._,...........,........................... 4 5.0 HISTORY & NATURE OFBUSINESS .................................................._.,_.......................... 4 G.O INDUSTRY OUTLOOK .............................,.....................-.....- ..........................,....................; .. 5 7,0 VALUATION AP.PROACHES...,..,1,101•ou11n1,.., .........................., ....u ..,,................. ,n..,u!••·····..... 7 7.1 7.2 7.J JNCOMJ! AJ>J>R(),\CH.~,,,o •U••••·•··••~•t._,•hl••l•••~ u •• ••••..••'-'l••u-1• ••••u••• •••ot •• ••H- ~•,.•.,. •••1 1l••U••H• •t·••n••••••• , •.., ...u 7 MARKll'r Al'l'llOAdl-1 .......... . .................................. ....... ,,. ..............................., ........................., 7 Co\fr APPROACH ......... ......................~. ............................................... ....~..:...,....._ ............... .... R 8,0 VALUATION OF TIii!: LEGAL ENTITIES .................................._ ....._.,............................. 9 8.l ll'i 0 t-lllmw 8.3 9 11 •• .. •u • ..•• h••....••••luu•u•••..• ..••••.. u• •••.. o •·•• .. •••ui-••.. u r ...•t•;•H•U•••u•• '""•••••M·•••.. •••..•l••••••••....•••••.. ••••• 12 u,, ,, 11,uu , ,• .. •••• ••nuu••• u,uu·• •ur•UHnr •••••h• ..••••....,r_, , ,..,,...., ........••rrta~I • ,..,.,o,•• •h•rnn ••............-•• ' .... ........ ............ ... .. .. . . . . • N • •,o-." ••~ · ... .... . . . . .... . . ....... . ............ N•¥ •• ... .............. . ~ . ........ .... _ 9,0 CONCLUSION ...........................................................................................- ............................ 14 10.0 LIMITINC· CONDl1'JONS ....................................................................................................... 15 APPENDIX 1- DETERMINATION OF DISCOUNT RATE ......;.,........- ....................................... 16 ii US016_0003 0 3 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 4 of 37 0 INDEX TO EXHIBITS EXHIBIT 1.0 SIJMM/\RY OF VALUES EXHIBIT 2.0 MACSH - SUMMARY OF ENTERPRISE V AUJE EXHlBJT J.O MACSH - ENTERPRISE VAl.UE EXHIBIT 4.0 - - SUMMARY OF ENTERPRISE V Al .UE EXHIBIT 5.0 - - ENTF.RPRISF. V /\UJF. EXHIBIT 6. 0 - - Su1,,1MMYOF ENTERPRISE VALUE EXHIBIT7.0 - EXHIBIT 8.0 - ENTERPRJSEVALUE WEIGHTED AVERAGE COST OF CAPITAL 0 iii US016_0004 4 0 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 5 of 37 0 Mr. Bntd Doi M11110 Ltllor ll•purl Jun, 1!>, 20fJ6 1,0· SCOPE We estimated the Fair Market Value, 11r detlned nbove, of the Legal En!itics as ofthe Valuatfon Date, As per Ma,iagcn1enl, 1tis our understanllil1g lhat Management will use lhctesul\s of our val1-1a1ion for income 1ax· purposes. Pleui note that our indica1ion of value does not constitute.a li11irneas Opinion and sl1ould not be relied upon by M111111gcmcnt in connection with the pricing of any sccudtles, other than the intc~omp11ny lllX l!lnsaction~ contemplated in Microsoft's Proj>0s11l to Relitructurc.Forelyn Operations. One ornioreildditlonat issues may exist that could llffecl the Federal taxtroatment of the Legal Entlti~s that will be the subject of this report This repqn will not consider or provide 11 cnnolu~ion with resi\llCI to any of those i!isue~ . Wltli respec:t to any significant Fedl!l'al tax is~ue outside the scope of !hi$ report, this report is 1101 written, end cnnnot ht! u,ed, by anyone fpr the purpose or avoiding Federal tax pen11hies. 2,0 0 S.OURCES OF JNF'ORMATION Jn the course or our v11lu11tlon unidya!s, Wll relit:m ,2QP6ts, 20J1k 0 12, This report will nofbo. dltiributed to-or referenced In any. dooument supplied to any third party without exp~ wrlttth coi111cnt'from Duffl!G Phelp9i LLC; with tiic:exccptlon of Mlcroson Corporation's ind'epcndcnt auditors, tbe·Securldes and Exchange Commission, and the Internal R-evonue .Servl cc. J US016_0007 0 7 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 8 of 37 0 l\11•. Dn1tl Del l\Jlilln Lotter Repul J 1,np l!I, 21~ 4,0 PROCEDURES In general, our procedi1res lncludcd, but were not lhnfted to, the followlng: • Analysis of conditions in, and the economic outlook for, the software industry; • Discussions with Management concerning the history, eummr state, and future operations of the Legal Entities: • Discussions wit~ Management to obtain.an.explanation and clarification of data provided; • Analysis offlnanciAI and operating projection., incJ\ldihg tevc.nues, operating nmrgins (o.g., earningi'bci~oto lnt~rea1,and t!IXCS), workjns ~itil ~n.ve$ti"!Cf!lii, il!\d capital e11:petidllur~· based ot1 tbe°k,eg/d P..nthlell' hlstorh:aJ opcr111lng 'results, lndu&h'y resultund ~pectatlon•~ l!lld Mpnng~eqt-repre~ontiitlons(91Joh proje¢tlons formod.the bails fprthe lnoo1n.e Appl'Ollch); • Gatl,ering.and analysf• of ~nanoial data for publicly traded or private companies engaged ln, lhe aanio or similar lines of business as .~icroson:; and • Annlysls of other facts and dota considered pertinent to ttlls valuatiQn toarrive.11t a conclusion of F11ir Markel Value. 5.0 0 HJSTOR1;'.& NATUREOFBUSJNESS' MJcrosort .Corporation Mtcroson Corpora~on cng11gos_in the dcvolopmont, manufacture, llaonsfog. ai,d suppon of software p1·oducts·for Vlllious eompurins devices worldwide. Its Cticn1 segment offcra operallng sy$1oms for ICTV!!ll, PQB0_11al ·computers (''PC"), and intclllgonr dcvlocs. The compnny•, Server 1111d Tools :1egmcnt provides server appllc:atlona and developer tools, as well as tralnlng and certification services, Ifs pivduct1 provide m~ssaging·and. collaboration, dalabase management, e-commerce, and mobile infonnation access capablllllcs. It also offers consulting services. Microsoft's lnf°""ationWoJker SeQQleilt offe11 businenand personal productivity sof\ware npplicatlona, including c:ollaboration tools and dtJcumcnt manngcmcnt and messaging. 11pplications for pcrs.9nal compqtora. I~ Ml~rx>~oft:8\1,tnC)SS Solutions segme,nt o;\~ st1flw11~ solutions to mana~c flnancial1-CDstomer-relatlonshlp, and supply chain management funotion,. Its prod1tcts consist of buslh~s wl.ulions,_customer relationship mlii111gem~it soflw~ro, retail solutions, al)d.rclatcclsesvicc1, The company's MSN segment provide, online communication and.p~ium 1111d lnfdrmftlit>n service!!, iueludins email and inataht messaging, and online searcl1 I Source: Mk:lll501l 8EC Flllnj;s, MlcmJOfl Prcu RclClli;cs and 11'CbsUi:s, Ci!pitnl IQ, lllld dlsclwlon, wll11 Ml~son lllllllll(!CIIIOlll, 4 US015_0008 0 8 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 9 of 37 0 M'r. Bnid lld M,11111 uuerRepurt June 19;20~ conmnl. It 11lsQ pro.vidca Internet access, and Wob and rnobllcuorvlccs. Its Mobile and Embedded Devices sesrnc:nt Qffen mobile software.phitfcmn; cmbodiJetl ·tli,vice sQt\wan: 1>la1torms used In com1umer electronics ·devlccs·11nd onterprisc·devices; a llosted j,rogrammeble XML Web service; end sot\wan, platrom1 to create .tclcmatiCll solutions for vehlole9. · Microsoft's Home and E!nlertai nmcnt segment offers the Xbox video game -systC!)l; PC software games, 01ilh10 a,imes, and c011solc games; lclevision platform products for ~1e ihterRc~ve television lndustiy; .and consumer soflw,aro and hardwnr, pr9duc1s, •uch ·as l~aming products and servlces, appllciition software for Macintosh computers, and PC"pc!ripherals. Microaof\ was fOlin~ed in 19l5 by-William H. Gates m Tho company i11 headquartered in ltedmond, Washington. Jn the fiscal year elided June 30, 2005, Micro5oft ·scncrated S39.8'billlon In ttl\lenue and net lncome·.of $12.3 billion. As of the Valuation D111e, Microsoft's.market capitaliZ11tl011 w11s approximately $246.4 billion. Comp11tera1 ~~l'tw~rc 0 "!'b1= ~ey·f~~T dtfy!ng lhe overall sof\\'fare industry rs e~Oll)lc gro.-,yth. As ofOatob~r~S. Standard.,& Poor'·s ·Wiili foreca&tlng relll gross tlomestl.c prtllluot growth,of 3.4% in 2006-and a c_onti11uc;d,rccovecy In c_apil_al spending, as measured ih~oi1rc:sidc:n1l-l fiitc4 filvc:,11nent. After dkllning.by1,2o/o.in 2002, Investment has rebom1ded-.to increne.by 3,3% in 2003, 9AVcdn 2004,.8.S~ In .2pas, and Is projected 10 iucrease 12.G¾ in ~006. -A~.a ~s.11lt aflruir-!ia,cd i:1tpital spending, a strengthening economy, and o gradual loosening-of,lnConnalion tedtnl'IQSY.budget1 purse strings, analylll~ are projoctin'g low t9 mid-si!igle digit grow!Ji f~r *e':t;oft~rifindusiry. Although, tile overall 1101\ware lndu~try has ~egun to ,how l,mprqvlim~I following aignifl?J,t dt:clines in i.nfprmatlon teclinology spending, cxp~rts do not axpccrcntcrprisc:1 59fhvar1rto see the, growth of the late 1990's again, Prior cytles characterb;ed by boom 'arid.blist_spon~!nshavc,·, given way to an increa11lnsly disciplined aflproach to purchasing e11te111rho 1101\warue ~siomorJ hav~bog,,m to foc11s on key fin11rici11l mouic~·suoh asroMrioo iliv~tmenllind tolill· cost of ownership; in addition, low oost al tematlves; such l1S Linux or hosted EUstomer rel11!lor1ship ma_ri11ge1ncnt (''CRM") software. have.begun to.suctcHfully penetrate: the 1ot)w11re m11r~cl Analy1Js ~r~ projecting Worldwide Entcrprl$e App,licatioq Revenues to grow ·fro11111n esllma1et!'.S72l9 billion in 200s to $89.8 billion In 2009, repteserttlng a M% compounded annual 1!,l"QWih r!lte. The market lo11dei; in the cnterprlJe soflw11re ar.cna are.fiAP. AG, Oracle Corporation, Sage Group PLC. Micro,oft Corpomlion and SunGlird.Data Systetits. ~ o~t on SIHIIIIHrcl .t,Pour's Comp11tor: Sonw1n: hll!tllll>' Survey 3S or Ocu1\Jel" 27, 2005. s 0s01&_oooe 0 9 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 10 of 37 0 Mr. Bmd Del Matto I.ell~· R~pu11 Jun~ 19,lOllti Ente.:1priso aofiw11ro is alao evolving lo Web Services sonware which allow companica -to 11111ximlze thi, uau of current infn~slructure 11nd en11blc It ~mooth tnuui1ion lo fu1t1re 1cch11ologic11. The main advantage of Web Services i;oftware 15 th!IL lt provides a mei;hanism tor legacy systems and new software opplic11tions to Interact smoothly. The primary drivm or demand arc thu significant numbor of legacy hardware and software systems currently in place that cannot interact wilh new sonware a1>plic111ions, Aa companies continue to exercise a more disciplined spending nppro•ch, expert, bell~vc 1hal Web Services sot\warc pro~idos the highest return on inv&tmcnt and most cost-effective solutloo. Analyita i,rt1J~ct lhllt tho mllrlcct cnuld grow fl'om $2.3 blllion In 2004 to Sl4.9 billion in 2009, JI 4~%compomidcd. annual ·growth nte. 1 In consumer markets, personal computer ("PC' J sales ore the most Important indicator or consumer demand, Although worldwide PC •~les oxperi!=n~~·thali'·flmailnual decline if12001. PC unlt shipments Increased I'1.7% In 2004, ind 6ta1>"dltd-&.'Pot>r's projected year-end unit sala nt, and grciwth to .be 8% in 200S. ~xpcrts bel!eyc·that die c.qnvc~ct1ce of 111e<\ia, entertainme being nrea growth primary iho with software, lochnology will be II key !Actor driving coi1sumor sector. gftll'le video the Beginning in l11te 2005 and continuina lnto2006,thc next·genen11io11,gaming hardware cycle hM begun with Milll'Osoft's lnunch qf the Xbox 3'60 fellowed by- Sony C'orppmiion's el(pectcd launch of it• PlayS131iori 3 -c:onscilc and Ninlei>do COltipJln:i't .Lt~lls'cxp~ttfd h11in¢'1 of Revolution later this year Althou;h 1ntcracrive cnlertaioment 11nd vldco_pme eoftwa~ ·providers have been succ1.-J~ful during recent ye~. ar111ysts projec~ tliat)he seojqr will report 1:u111tively flat gains in 200s. dl10 lo the transition perl~d, totrowod by doublo,d·lglt growth in 2006. The top-selllng video con"ole games In 2004 wero Grand Thtn A\tto: San Andreu, Halo 2, Madden NFL 2005. ESJ>N NFL 2K5, 11nil Need ror Spoc:id Underground 2. 0 Vinally, Microsoft is expected to reemerge as II cRttdyet for industry srowth in 2006. Allh0t1gh Microsoft haR perfonncd bettor than its software peers during the recenl IT spending downturn, the company's.growth rate has stowed from 16% revenue growth in fiscal 2000 to 8% in fiscal 2005. Analysts ex peel tile slgniflc11nt num~er of-ptO(ll!ct cycles ahead fot· Mi ctospf\" to not only benefit the 001npnny but tho industry as well. Stirring in:2005 11nd continuing in 2006, Microsofl will introduce Xbox 360, the next version p}'if" op-.:nitln1uy1lem, 11.1,med.Windows Vista, the latost version-of Microsoft Ofrice,.ncw vel'al<>l\s ofSQL-~~ ot, Vhual Studio, Windowa Server, Windows mobilo:and lts customer rclatiorl'shi,P manas,orncnt s:.oiutiOli. While ana!1sts do not expi:ct growth rates !'f'the provious cyolc:, (hey,arc-preclloth.1g-1bim1 launcbes CQUI~ provide a 5lgnltlcant boost lo PC SAies. 6 USO16_0O1O 0 10 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 11 of 37 0 Mr. Dl'lld Del Mnllll Loll~1·.RUflllrl June l!I, 2006 7,0 VALUATION Al'PROACHES Oenerally-acei,ptcd valuation.practice indicate& tha11111 assets, including businesses end equity capi~I, should be-vnlu~·-usin&a·range ofmethodologios but th11t 1111 methodologies essentially reprosent vaoants or combinations-or elemepts of the following appto!l(:hes, which lbmnsclves 11re lntcm;l atcd. 7.1 111come·App1·01icli The JncomeApproach is a valua1ion technique that provides an e,timation ofthe.Fair Market Vah,10 of a bu,inc54 b11sed on·the cash flows that a business cnn be expected to gancratc over It$ remaining life. This approach. 1>03ins with an estim111ion of the annu1ll cash flaws a prudent investor would expect th!!. subject busincn to genmte over a discre1e projeelion period, The estimated casb,flowa for each of-the years in the discrete projection pariod are then converted to their present valuQ equiv11lcn1 usiog a rate of return BJ>prnpriatc for the risk of 110hioving lhe business' projected cash flows . The present value of tho carimntcd 011,h flows 11ro then aadcd to 1hc present v~foc egulvalcnt of tho residual val~c; c;,fthe buflin0$S at the end of the discrelc projection period to irrive 11t an estimate.of Fair Mftrket V11lue. We utillzed 1ho·lncome Approach In estimating 1heFair Markel Value of the enterprise,valuo;of th~ L.eP,1 ~ntli!:e,. . 0 7.2 Mni'kej Appl'111ich- The Market- Approacll lndlcates the Fair MarkerValue ofa business based 011 a coinpari&o11 of tho subject company·tocomparable firm!!.in· sirt1ilnr linos-ofbusii1CSs that are publicly traded or whicn arc,pai} of i ·piiblie or prlv111e transaction. '_l'ho Fail' Market. Value of a C;Otnpariy can -~ estimated through the Market Comparable.Method and-lhe M11rket Transaction Metf10li Market Comparab}o Method The Market Comparable Method indicates the Pair MIU'ket.Value of a &uslneas by-comparing it 10 publicly \ra'.dc~ cprnp1111l~ in siip.llar lines of business. 1111,.condition, and pro,pr:cls of companies-in aimllilr lines of'business,dcpcmfon common tae1on such as ovelllll demand.for their producus ·and'scrvitcs. An ciril\lysls cl the market multiplC8 or companies ougagt,d in simUat businesses ylelds-insisJ1t into Investor perceptions and, then,forc, the v11liJc of the subject company. After identifyillg B!ld selecllhg the comp11rablo pub1icly tradod companies, their b\\slness and fin1111cial profllcs are.a~lyZ!!d for re111!ive.shnih11ity. Consl~oratioM for factors such,, JI~, growth, profitability, risk, and return on lnvesbnent, etc. are nbo analyzed and compared to-the comparable buslnes3es. Once tbese-dl(rercnccs and slmilarides arc detennlned and.proper adjustments ~re made, price or market value ofinve~led capital c••MVIC") multiples {i.e., MVIC to revenue, MVIC to earnings before interest and lilxes~ MVTC to cash flow, etc.) of the publicly 7 US01&_0011 0 11 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 12 of 37 0 Mr. Orn~ l>tl MMIID Lener Rcptn1 June II>, 2411" lraded compnniCj arc calculated. These MVIC multiples are lhen applied to I.he :,ul,jcc1 1:omp1my's opunlling results lo a1Tive 11t nn ustlmate of val.lie. We did no, directly apply the Market Comparable Method In our analysis due to n l~ck of Ii t ed companies and significantly different tax structures between I • •' U • , I, 1 and other publicly 1radcd companies. However, we did compare our v11lue conclusions to the multiples of publicly traded' companies as a bench.nark, ~ M11rket Tmnsaction Mcchod One va1ia1ion oflho Market Approach includes indioatlng;.tho Fl!ir Markel Va,h1~·or 11- company liascd on exchange pr.li:e~·111 actual lransl\clio1111 and on asking price5 for companiell currently off~.red l°Qr aalc. the process eucntially involves cpmparisocund.~ _rrehriio11·0~1hiuubject· u0111p11ny-with oth·er-similar companies. AdJustm,frits fo,-difforences In factors described earlier (i.@., ;izc,, growth; prolllnbllity, risk, and return on invostmcnt) arc also considered. We did no\ apply the Market Tnins11ctlon .Method in. our analysis due.to a lack-of co111parablc publicly 11vaih\blo 1nins11ctions. 7,3 Cost A1,proach The Cost Approach Is a valuation approach thnt uses tho concept ofroplaccment cosi 1111n indicator or Fair M11rkc1 Value. The premise of the Cost Approach Is that a prudent investor would poy- no inoro for 1111 asset than the amount fbr which the asset could be replaced. Replacement cost now, which n:fers to 1he Cosl tn rcpl11cc the property with like utility using current motcrinl 11nd labor rates, cStabliahes the highest amount o prudent investor would pay. To lhe extent that an existing asset will provide leas utility than a new one, tlus value ofthal a~set is less. Accordingly, replacement cost new is adjlL'lfed fodoss in value due to physical deterioration, funttlonal -obsotescence, Rf\il economic ·ooliolesccnco. 0 We did not apply the Cost Approach in our analysis due 10 tho nature of the Legal El!lilie; being valued. 8 US015_0012 0 12 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 13 of 37 0 Mr. Dr•II.Otl M,urn lAtkr Rr1111r1 Jtinnt!>,lW. 8,0 VAl,UATION OF THE LEGAL lNTITIES April 200g, In d'f JO. We utilized the Income Approach to value the Legftl Entitles IIS of estimfltion of the l111lr Markel. Value of the Legal Entitles wev1lucd1111 1 11 11 1111 :;oparatDly. The following seclion details our primary as,umptions in the development of the Income Approach; 8.1 JI t I •...! I 1• l[ t • : .,!1 • • • 0 • • Cnsb 11o·w Adj11sllt1~111s • Dep,•e~~•liolf & C11pllAI Espelldlturtt-]?ep.~cl•~on.cxpensesand caplll!l expi,nditl!res,·as a percent&(IO ofrovenue, wen: aJ$UtnJSd to boqual ba~ on discussions wllh"Ma1111gemont. • Wt>rklng Cftpli.11I Jnves1n1cnt - Based on dlsouaslons with Manas.ement; We then 11pplied e present value factpr of 12'A based on tile overall expected n:tum for Microsoft Corpotatlon. 9 US0111_0013 0 13 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 14 of 37 0 Mr. Brad Del Matin LelterR•port June 19, 2006 • Residual C!llculatlun - The present value of the residual value represents the 11mount an investor would pay today for the rights to the cash flows of the business for years following the MACSH - Projection Period (2005 to 2020). In calculating the residual value, we used a capitaUzation rate of8 .6% based on the difference between the discount rate of 12.0% and the residual growth rate of3 4%. The capitaliution rate of 8.6% was applied to the residual year cash flows to calculate a residual value. We then applied a present value factor to estimate the present value of the residual value. Based on discussions with Management there is a JO% chllnce MACSH wilt continue to 1eccive a favorable tax rllte from the Puerto Rican tax authority after 2020. Management indicated MACSH would be shut down without the favorable tax rate. Therefore, we applied a 10¾ probability to the present value of the residual value to represent the amount an investor would pay today for the rights to the cash flows of the business for the years following the MACSH - Projection Period. We summed the present value of the residual value and the sum of the present value of available cash flows for the MAC SH - Projection Period to arrive at the value of the On-Going Operations ofMACSH. The value of On-Going Operations ofMACSH excludes the working capital adjustment required to determine the enterprise value ofMACSH, Other Adjustments We completed the following additional steps to estimate the Fair Market Value o f - 0 • Conclusion of Fnir Market Value - MACSH Based on the Income Approach as described above and es summarized in Exhibit 2.0, we estimated the Fair Market Value of the MACSH es of the Valuation Date to be approximately : MACSH S 30,403,215,000 10 US016_0014 14 0 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 15 of 37 0 Mr. Dr1NI Doi M11llt1 unc:i· nepnrt • June l!l,2fl06 8.2 0 C11sh·Flo~ Ad)11stment1 • Dep~cf~,ti~il & Cnplttd F;•pend!C"1~~- P.ep)'e¢~~10~-~~1,e• ill\~ capllal fJJCJ?-~i~.!'•;. ;;s a pcrc.enlage;of.reven\10, w~i::c •!;Sllmod,l o ~" eqf!al 6"~,on,d1sauas1ons·wf1h"¥an~e~erit. . . . . ~ ~ • ' Wo tliert ·•PP.'l~d:a:present·VBlui:, fRCtbr c~~lQi}. · ·. . or ,l~.4:basea.on-ihe·ov~n $tJleCted ntlunf.~li ~icmsiin . · • US016_0015 0 15 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 16 of 37 0 Mr. Drnd ~I Mnlln LtnarRerorr Jupd!J, 211116 · Other A~Ju1tn1e11(1 We completed tiie"foll'owlng1d~i~cmal .stept-to ~•~mi~ thd 0 I'2 US015_0016 0 16 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 17 of 37 0 Mr. Dntd Dtl Mlllhl IAll~r Rcpo11 Juno 1!1;10116 Cha.ta ·Flow Adjuatmenls • .. Oepretlatlon ~· C11plllil ~pe11dltu1·es -Depreciation• e,cj,euses imd capital expendlwres; as ..11:.p~rcc11111ge .of.~~11nue, 'w~.~.~u1,iod to be cqu~ ~ased Pll dl~cu.5'ions w]tlt Ma~11g.;me11L .. • • We ~ten ~pplie~ a, •preaont valt1e f~bt;2nor. 9,0 CONCLUSION 'Che following chat1 summarizes tbc'Fnir Market Value of the Legal Entitl~a as ofdu1 Valuation Dato. \lal11;1lio11 l•,1ir !\t:11 he! \':il11l' 'i11111111:1ry 0 • l US01S_0018 0 18 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 19 of 37 Mr. Drnd Dtl Mdllll tau~, ReJ>1111 Jync l!I, 2006 10,0 l,IMITING CONDJTJONS Thia document has been prepared solely for Management for the purpOllcs stated herein and should not be relied upon for any other purpose. Unless required by law, you shall nol provide such report 10 any third party requiring this Fair Market Value analysis, or refer lo us or our services without our prior written consent, which we may at ou1' di&~iun grant, withliold, or grnnt stibject to conditions. In no event. n,g11rdl!!ss of whether consent has been provided, shall we nssumeMy responsibility to MY third pany to which the teport ii. disclosed or otheiwiKe m11de availnblo. While our work haR involved 1111 analysis offinanoiaJ.in.fQrmation and.1ccounlln11 re'°rds, our engagement doe~ not include an audit in accordance with:senerally accepted· auditing standard& of the Company's exl$ting business·recorda. A~ordillSIY, we 11ssu1ne no resp,onslblllty and make no represent11tions with respect to tho accuracy or·completeness ofany information provided by and on behalfof'1h0Compli11y, Dudgets/projeclions/forec~s r~lii!.;1: tci_future evenle a.ad ere bued,o.n ass'-!niJ>f!ons, w~ic!i mlly . not rcmllin vnlltl for tho wholo·ofshneJevant-period·. Conset)ullnlly1 this information cannot be relied upon to the ~ame eic1cnt as tl1111 d~rlv,cil fronf audit~ 11~COUh.t~ror.cqmpletcd accounting p~riods. .We express rto opitilon-11a tohow:i)losely the attuid results will t:oinspond to-1hosl'projected/forecast by. the Comp~ny, 0 Full tenns and condition~ of our work~ lrtcludod in our Engagement Letter dated February 9, 2006. Yours very 1ruly, Duff & Phelps, Ll..C US015_0019 0 19 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 20 of 37 0 Mr. Dn1d Del Mnm, Lon~r ReJKlrl June 19, 2006 APPENDIX ·1 - PETERMJNATJON OF DISCOUNT RATE When 11pplylrig tlfc-·Dlscoont,:d Gasll Flow Method (a fonn of the Income Appro«ch); the cash f19ws expected ·to t,c gc11cra1~d by ·a bu~inessaro discounJed·to their,p(escnt 'Valua ~uivalent using~ rate of return th,u refl~ts the tel111ivc risk or the lnvcs~111cnt as well as·thc time value ofmo1tcy. This return is an over-all rate baaed upon the indivld_unl "!tes of return f6t inv~sted c11pitiJ (~\Illy a~ interest bearing debt). This retum, known as the weighted average cost of cnpitel, .Is calculalcd by weighting tho required returns op interest-bearing d~t. preferred equity capital, and common oquity· capiUII in propohion to their ~lintalcd pertentllgm in an expected capital struotlite. rn detennining a discount mte uiiina the WACC, we ulillzed the following gener11l formula for c11lculaling lho WACC: WACC .. Jmmon equity capiaal; and -= Co1nmon equity capltal as a percentage of d1e Total Invested Capltnl. where· Iital of 4.5%. J>roferred equity is not deductible against ta,: so the required rate on prefe!tred equity" capital Is the rate of return on debt capital of7.0½. Required R,ecurn 011 Eqully· Cnplt1d A,p:8f Pricing Model The r.atoofreium on equity cnpltal Is estimated uulng-the Cepitl\l Assel Pricing Model ("CAPM"). CAPM has been empirically tested and is widely awoptcd for tho. purpose·of. estimating e company's required 1et,1m on equity capit111.3 ln applying the CAPM, th~ ra~ or~tum on common equity is c&tim11t.ed 11:& tho turrcnt.risk:•frcc rate ofrcrum on US-Treasury bondJ, plus a m11rkct risk prc,m!um tlXpccie~ QYCi"_ qie ri sk-fule rate or return m~ltipllc~ bY, The "bet«" for the ,&tock, plUII a small stock'prc1nlum. Beta Is defined as a risk: .measure that reflects-11te,sen,1tlvity.ofa company's ·stock prlce-to thi: movements of the stock market ae awhol~. 0 The CAPM rote of return on equity capital Is c11lcul11\ed. using the formula:. Ke. = Rf+ B x (Rm • Rf) + Ssp Ke = Rate of return on equity c;apital; whero· nr a .. Risk-free r11te ofrelum; = Beta or 11ys111maric rlRk for this type ot'.equity lnve.'itine~_t; Rru-Rf • Market risk premium: The expected return on :a ·broad portfolio of&tocks in the market (Rm) hiss the .risk free rate (RI): -and .. Small ,tock pn,mium, Ssp The measures usod in the vah,ation ofth1 Legal ·Entlti03,wcrc 11s follo\\l_s: ----- 0\l'i\l lupnts .Risk-'frec·rate of return Projec:Ted Bein (Industry average): .Ml!rkot R!sk Premium: Small 511'.lCk Prenilum: t 5.3% 1.24 5,0%' 0.0% lnvi:sfmcnlS, W.f'. S1~,rpc. .rruntlc:o Hall: Euglc:woad Cllrfi, N~1• Jcncy (1985). 17 US015_0021 0 21 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 22 of 37 - ,.. 0 Mr. B11111 D~of MnUo L.c1tcrRopor1 June I!>, 2006 Ri.,k-Free Ra/11 ofll<'flmr For the risk-free ra1e of rcrum, we used the yield on long-term US Treasury bonds as or 1he Valundon D111c. IJeul Beta is a s111tis1icol measure of thci volatility of the jirice of a ,peclfic stock relative to rhe movement of n genernl group. Generally, bcla is considc~ to be indi011tive·of thc market's pcrcepiion of the relative risk of tho 1peclfic stock. We determined-the appropriate beta to be used in our analysis by evaluating the b1Ua! of comp11111ble uompagies of the Company. Practical npplic:ali"11 ·a]110 tclies on ai,. ~~male oftb~M)ttketru~k•Premium. Since the oxpoctations of 1he avornge investor 0111-not directly observable,< the.-MarkefRi sk Premium·must be infcrrod using one of several mctho'ds. On~ appt,Ol\ct;·i~'tq,~~c p!'OITiiOni& t.1!'1it.iJtve~tor,1.havc hlatorically ~•med over and above the returns.on.lo11g':torm Trcasurybontls. "Thl)l)remlum QbJnined-using the lu,torical approach is ~c11s1tivi, ('Q tlic'~info' p!lf!i;,d 9vor wlj\.cli ontibelculalcs tlie average, Depending on the ,time:~Qd cbosi:n1-thehl11torii:11) approach :rielda Jin.aver.age premium in a range of 5.0% 19 8,0o/o. S~cra! forw·~ .-.lqokin15:studi~.Ipt1lciitc,a'ra11,s~ of3.0"/o percent to 8.0% an~ varfous surveys of practitionerta u11ageJndfc11te 4.l>"iti to 7.0%, l'hus, consldeting a range of 3.0% to 8.0"/o from the various Ppproachei (i.e,.hi.torical, forward-looking, a11d pmctitioner's usnge)-wc then 11pplicd 11 5.0% premium. 0 Prl!tni11111.fi11· Small Si=a Tho CAPM 1111c or rctum can be adjuslcd by a premium that retlccts·tbe extra ri,k of 1111 investment in a small company. Thi~ prcmlu/11 iA derived froin historical diffcrences'in ret1.1ms between small comp11nies Rnd large CC!tnP.11nie.1, u&ing dam p~bllahed by lbbonio11.-A,s~O~l\tC$, Bnsed on the si1.e or Microsot\, a small s1ock !)feml'um.was not applied in calculatlns the CAPM rate of return, WACCConduslon Based on the method described above, we estimated 1hat typical invcsto,s may rc thnxpbeted 'return-for Microsot, on a consolidated besi11 nnd is consis1euf with thi, hideperid~ntly c~lctilatcd WACC. an~ ' AU \lalll:t o~ctl iu lhu mullytiiti 11111 proJcc:ttd b<:(115 pruvWtd by BARRA, Jue. 18 US016_0022 0 22 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 23 of 37 0 MlC:RO!IOIIT CORPORATION VI\LUATIOH ornm PI\IR.MMKIIT Vt'IL1JDOI' Ll!RTI\IN Dn'ITIBSOl'MJL"ROSOl'TCUIU'ORATJON All Of I\PRIL31i,,ioo,, . . SIIMMAIIYOI' VAUl!S l!XIIIDIT 1,0 ~A~ll lOf'I "IO(lfllllT 10 --0 uso1s:...002s 0 23 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 24 of 37 0 l!XH111IT2.ll M\CRQSOPT CORPORATlON PAOlllOl'I VAI.UATJONOl'TIII! l'AIR.Mi\ftl(J!T VAJ.UD Ol'CllkTAl)l'll>rfflll!SOI' MK.'ROSOFl'COAl'UMTION MOl'Al'ftlLlll,JOQfo IIUSIKll.'!5 IOO'EIIPRISII VAI.UATION OP sooo, IHDICAffD VAt.111: II> INC'OMI! Al'PIIOACII \vtlGUT WEl'Gln'ID VAl,IIJ 111111,rr 1,0 111/lllNESS ENffRl'llt9E YALU£ (ftl.\KKCTABLE, t'ONTROI.J.1NG11ASIS) ll) hlo~llblt, C:-onrro1111111i!iil• 0 0 24 Case Document 146-45 Filed 10/12/16 Page 25 of 37 I rI-I'Iruuln um" ?mum I-?h?lh mn?n?I? U801 5_0025 25 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 26 of 37 0 . - - -J---.;,·~-:·.·- .--:~.~11;-r-J; . , , .•- ,--,· ;:.;-,a;.o..- .;~.~. . - . ~ . . . . . . - : ~ 1 - - ~•.;--.::;.a-::: 0 US016_0028 0 26 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 27 of 37 0 MICROSOFT CORPORAT.ION Vi\LUATIUN OI' Tllll l1AIR MJ\llKl.t r VAI.UI! 011 CURTI\IN l?Nltnes Of? MICROSOM' CORPORATION AS oi• Al'lUI, 311, ~pc, , mfSJNf:S!l l!N'J'EllPRISll VAl.UATION 01' sc/(Jll,. . r:JWW'r~ 0 0S016_0030 0 30 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 31 of 37 0 MICROSOFT CORPORATJON VJ\I.U/\"flON UI' nm 1:11nt MJ\IIK1!l' VAi.UP. or: .cmtri\JN IM'J'l1t'8 OI' MICllOSOl'T CORJ'ORI\TION AS OJ' l\l'IUL ~U, 2006 nt/SINl!S8 F.N'W.IU'IUSli V/\1.Uh'On•Ulml unu1mod l'CM:IUIO Ollu...- long•lon!I iiohilllioa Totnl ,tockholddrll' 11'1\iily 'rotnl llabllldcv:&. lli11ckhnlik(a oquily Net Worllln11 Cllpltll Caldllallnn L"urrenl /\,ll INC'OMI! IIPPIIOI\Cll WBlmtT 100,C. WEIGIITED VAl.1111 IX1DIIT 7.11 IVSlNltSS INnRl'RISI VALUE (~lARK£TAII U, COHTl!Ot,l.11ffi SIISIS) 0 US016_0032 0 32 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 33 of 37 0 =~~=z1::i·~- MK;1Kat1N t"(191l.... A11D.'I \ll'lll;N'r Y"Ur.C•rr.ff~IWT11"11tl'Yl'•tWllwtratlffl.lff'a-; nar«n1r,.'ffM1=1f1'1\'..UM,l'CNCr. .-~ .--:-.::-:an.,11.-,:i.·."':"':X,~.- .,:'."j.· ;·:-r---·.,.... :.: - , i ;_,_ _ - =•- ·-' 0 US016_0033 0 33 Case 2:15-cv-00102-RSM Document 146-45 Filed 10/12/16 Page 34 of 37 0 r,m:11risnrr Q>RNlRATICIN . VAUJA110Nn,'flri '·"" MAk~ln' \'AUAI OPl!IIIITAIN lfflfflU Ol'MICIIIISm'fmllNIIIAnnN ~K Of',\PIUL It. 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