M&A 2015 CONFERENCE D E S M O I N E S A U G U S T 6 - - PowerPoint PPT Presentation

M&A 2015

D E S M O I N E S ▼ A U G U S T 6

CONFERENCE

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Welcome

Bruce Engler Partner | Faegre Baker Daniels Mike Abbott Partner | Faegre Baker Daniels

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Conference Information WI-FI ACCESS Network ► Marriott Conference Password ► FaegreBD CONFERENCE MATERIALS & SPEAKER BIOGRAPHIES Access the conference materials and speaker biographies at: FaegreBD.com/IowaMA15

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Conference Information CHARGING STATIONS Need to charge your mobile device or laptop? Charging stations are available near the registration desk. NEED ASSISTANCE? Stop by the registration desk if you need any assistance throughout the day.

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Market Update: Current Deal Activity, Valuations and Outlook

Moderator: Mike Abbott, Partner, Faegre Baker Daniels Mike Clausman, Hormel Foods Corporation Adam Claypool, Bridgepoint Merchant Bank Scott Hebbeler, Lincoln International Melanie Wadsworth, Faegre Baker Daniels

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Conference Information

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Middle-Market M&A Overview

Average EV/EBITDA in U.S. Middle-Market Transactions

Market multiples now exceed peak levels while M&A volume continues to build

Middle-Market M&A Transaction Count

Source: Factset Mergerstat Note: Reflects deals up to $500mm with disclosed values Source: Factset Mergerstat Note: Reflects deals up to $500mm with disclosed values

1,797 2,047 2,107 1,845 1,279 873 1,415 1,625 1,488 1,494 1,768 1,804 500 1,000 1,500 2,000 2,500 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 LTM Mar-15 9.4x 9.5x 9.9x 7.9x 9.0x 8.9x 10.0x 9.6x 10.2x 9.7x 10.1x 9.9x 10.2x 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015

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Middle-Market M&A Valuations

Source: GF Data, M&A Report May 2015 *Note: middle market is $10 -$250mm

► The chart illustrates valuation multiples of private equity-sponsored, middle-market* M&A transactions by transaction size since 2011. ► Transaction multiples are at their highest levels since 2011, with the $100-250mm transaction size range leading the way at 8.3x. 5.3x 5.7x 5.9x 5.4x 5.9x 6.0x 6.1x 6.9x 6.3x 7.7x 7.2x 6.8x 6.7x 7.5x 7.9x 7.5x 7.4x 7.1x 7.6x 8.3x 5.0x 5.5x 6.0x 6.5x 7.0x 7.5x 8.0x 8.5x 2011 2012 2013 2014 1Q 2015 TEV/EBITDA

Valuation Multiples by Transaction Size

$10-25mm $25-50mm $50-100mm $100-250mm

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Middle-Market M&A Valuations by Industry

4.0x 6.0x 8.0x 10.0x 12.0x 2011 2012 2013 2014/1Q 2015 TEV/EBITDA

Manufacturing

$10-25mm $25-50mm $50-100mm $100-250mm 4.0x 6.0x 8.0x 10.0x 12.0x 2011 2012 2013 2014/1Q 2015 TEV/EBITDA

Business Services

$10-25mm $25-50mm $50-100mm $100-250mm 4.0 6.0 8.0 10.0 12.0 2011 2012 2013 2014/1Q 2015 TEV/EBITDA

Healthcare Services

$10-25mm $25-50mm $50-100mm $100-250mm 4.0 6.0 8.0 10.0 12.0 2011 2012 2013 2014/1Q 2015 TEV/EBITDA

Distribution

$10-25mm $25-50mm $50-100mm $100-250mm ► The charts below illustrate valuation multiples of private equity-sponsored, middle-market* M&A transactions by industry and

transaction size since 2011.

Source: GF Data, M&A Report May 2015 *Note: middle market is $10 -$250mm

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M&A Drivers

Corporate Cash On Hand Private Equity Buyout Fundraising / Investing

Source: Pitchbook Source: Federal Reserve, represents the S&P 500 companies

$117 $192 $293 $269 $128 $91 $114 $129 $220 $189 $535 $0 $100 $200 $300 $400 $500 $600 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 PE Capital Raised Cumulative Dry Powder $2,100 $0 $500 $1,000 $1,500 $2,000 $2,500

($ in billions) ($ in billions)

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M&A Drivers

Source: Pitch Book & Renaissance Capital *YTD 2015

Private Equity U.S. Fundraising by Quarter Private Equity U.S. Investments-to-Exits Ratio

$34 34 $32 32 $25 25 $21 21 $33 33 $37 37 $26 26 $32 32 $36 36 $78 78 $31 31 $78 78 $43 43 $52 52 $41 41 $61 61 $38 38 20 40 60 80 100 $0 $25 $50 $75 $100 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2011 2012 2013 2014 2015 Capital Raised ($B) # of Funds Closed 3.2x 2x 3.1x 1x 3.6x 6x 3.7x 7x 2.6x 6x 2.3x 3x 1.9x 9x 2.1x 1x 1.9x 9x 1.6x 6x 0.0x 1.0x 2.0x 3.0x 4.0x 500 1,000 1,500 2,000 2,500 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* Investments/Exits # of Investments (excl. add-ons) # of Exits ► Private equity capital raised has increased from a total of $112B in 2011 to $223B and $197B in 2013 and 2014, respectively.

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• Midwest M&A

transaction volume in Q2-15 rebounded nearly 20% from Q1-15

• Midwest M&A

transaction volume has been very stable 7 of the last 10 quarters

• Midwest activity doesn’t

necessarily track national activity over the same time period represented by this chart

Bridgepoint Midwest M&A Quarterly Update, Q2-15

262 288 271 281 293 274 303 369 329 269 328 318 312 307 284 309 261 312

50 100 150 200 250 300 350 400

Source: Bridgepoint Merchant Banking, Capital IQ (07/23/15), www.axial.net, www.bloomberg.com, www.qz.com, www.themiddlemarket.com

Quarterly Midwest M&A Transaction Volume

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• Midwest M&A deal

size grew to $19.0mm in Q2-15, up from $16.5mm in Q1-15

• After recording one
• f the lowest median

deal size in Q1-15, Q2-15 saw Midwest deal sizes increased to above average level of the past 4 years

$11.5 $13.0 $10.0 $20.5 $12.0 $14.9 $17.6 $29.8 $9.7 $13.8 $17.5 $31.4 $22.7 $22.9 $15.3 $20.6 $16.5 $19.0

$0.0 $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 $35.0 Median TEV ($mm)

Source: Bridgepoint Merchant Banking, Capital IQ (07/23/15), www.axial.net, www.bloomberg.com, www.qz.com, www.themiddlemarket.com

Quarterly Midwest M&A Median Deal Size

Bridgepoint Midwest M&A Quarterly Update, Q2-15 14

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• Median Valuation

(TEV/EBITDA) in Q2-15 was significantly higher than both the prior sequential quarter and the year-earlier quarter

• Q2-15 multiples are at

historically strong levels, the highest since Q2-13

• Corporates and

sponsors have shown a willingness to pay a premium to close deals

Source: Bridgepoint Merchant Banking, Capital IQ (07/23/15), www.axial.net, www.bloomberg.com, www.qz.com, www.themiddlemarket.com 7.6x 10.8x 10.1x 8.5x 5.4x 8.5x 9.7x 10.4x 13.6x 14.6x 10.8x 7.0x 9.1x 8.5x 11.3x 8.4x 8.0x 12.4x

0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 16.0x

Quarterly Midwest M&A Median Valuations (TEV/EBITDA)

Bridgepoint Midwest M&A Quarterly Update, Q2-15 15

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• Quarterly M&A

transactions with Midwest buyers increased from 145 in Q1-15 to 166 in Q2-15

• The number of

transactions with Midwest targets increased as well with 135 announced or closed transactions in Q2-15 vs. 97 in Q1-15. The figures reiterate the strong buyer appetite for Midwest companies

Source: Bridgepoint Merchant Banking, Capital IQ (07/23/15), www.axial.net, www.bloomberg.com, www.qz.com, www.themiddlemarket.com

50 70 90 110 130 150 170 190 210 230 Midwest Buyers Midwest Targets

Quarterly Midwest M&A Buyers & Sellers

Bridgepoint Midwest M&A Quarterly Update, Q2-15 16

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• Core industries

(including Industrials, Materials and Consumer) accounted for 39% of total Midwest M&A transaction volume in Q2-14, a slight 1% decrease from Q1-14

• The Consumer sector

rebounded with the biggest increase in Q2- 14, up 3% from Q1-14. The Material and Industrial sectors saw the biggest decreases in Q2-14, down 2% from Q1-14

Source: Bridgepoint Merchant Banking, Capital IQ (07/23/15), www.axial.net, www.bloomberg.com, www.qz.com, www.themiddlemarket.com

Financials 28% Consumer 24% Industrials 16% Healthcare 9% Info Tech 9% Energy 7% Materials 3% Telecomm / Utilities 4%

Q2-15 Midwest M&A Transaction Volume by Sector

Bridgepoint Midwest M&A Quarterly Update, Q2-15 17

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Borrowers with less than $15mm EBITDA Borrowers with at least $15mm EBITDA Pricing Multiples Pricing Multiples Asset Based Senior

• L + 175 – 275
• LIBOR Floor: none
• N/A
• L + 150 – 250
• LIBOR Floor: none
• N/A

Cash Flow Senior

• L + 475 – 575
• LIBOR Floor: 100
• 2.75x – 3.25x EBITDA
• L + 425 – 525
• LIBOR Floor: 100
• 3.00x – 4.00x EBITDA

Senior Stretch

• Unlikely
• N/A
• L + 500 – 600
• LIBOR Floor: 100
• 3.75x – 4.75x EBITDA

Unitranche

• L + 750 – 850
• LIBOR Floor: 100
• 4.00x – 5.00x EBITDA
• L + 700 – 800
• LIBOR Floor: 100
• 4.00x – 6.00x EBITDA

2nd Lien Loans

• Unlikely
• 4.00x – 5.00x EBITDA
• L + 850 – 1000
• LIBOR Floor: 100
• 4.00x – 6.00x EBITDA

Sub Debt

• Cash of 11.0% – 13.0%
• PIK of 1.0% – 2.0%
• All-in of 12.0% – 14.0%
• 4.00x – 5.00x EBITDA
• Cash of 10.0% – 11.0%
• PIK of 1.0% – 2.0%
• All-in of 11.0% – 13.0%
• 4.00x – 6.00x EBITDA

Equity

• N/A
• Approximately 35%
• N/A
• Approximately 30% – 35%

Overview of U.S. Middle Market Debt Pricing and Terms

As regularly published in:

Lincoln’s View on Pricing and Terms 18

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Current Trends in Senior Debt Structure

Pre 2008 2008 - 2009 2015 Hold Levels $50 million $25 million max $50 million + Stretch Pieces Aggressive Nonexistent Yes Term Loan Amortization Little or none Nearly a prerequisite Little or back-end loaded Covenants Limited to 1 or 2 and loose Full package, much tighter 1 to 2 covenants; looser Advance Rates Aggressive (ABL-Lite) Conservative (ABL-Heavy) Aggressive (ABL-Lite) Rate Floors Rare Standard Rare Rate Protection Language Minimal Robust and complex Robust and complex Prepayment Penalties Rare Standard Rare Bank Commitment Fully underwritten Best efforts Best efforts Market Flex Language Limited, if any Required Required Bank Group Syndications Relationship driven "Club Deals" Syndications 19

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$0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5

Favorable Debt Financing Environment

Middle-Market M&A Loan Volume

Source: Standard & Poor’s Leveraged Commentary and Data

Middle-Market Leverage Multiples

2009: $1.4 2010: $4.4 2011: $6.3 2012: $5.6 2013: $4.8 2014: $9.5

Competition among lenders have driven the strongest lending markets since 2007

($ in billions)

4.1x 3.3x 2.5x 3.2x 3.6x 3.5x 4.0x 4.3x 4.4x 5.6x 4.5x 3.3x 4.2x 4.3x 4.5x 4.8x 5.3x 4.9x 0.0x 2.0x 4.0x 6.0x 2007 2008 2009 2010 2011 2012 2013 2014 Q1'15

• Sr. Debt

Other

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Source: Bridgepoint Merchant Banking, Capital IQ (07/23/15), www.axial.net, www.bloomberg.com, www.qz.com, www.themiddlemarket.com

• Since 1949, the

average length of bull markets has been 42.5 months

• The current bull

market has lasted 47 months to date

• Historically, bull

markets end due to:

• High equity

valuations

• Tight monetary

policy

• Unforeseen

geopolitical events

Historical S&P 500 Index Relative to Federal Funds Rate Bull vs. Bear Markets

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Historical S&P 500 Index Relative to M&A Transactions Presidential Election Years

Source: Bridgepoint Merchant Banking, Capital IQ (07/23/15), www.axial.net, www.bloomberg.com, www.qz.com, www.themiddlemarket.com

• Since the 1968

election, 6 out of 12 election years were followed by a bear market within one year

• Average M&A

transactions during Republican terms are 20,346

• Average M&A

transactions during Democratic terms are 8,553

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Predictions for 2015-2016

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M&A 2015

D E S M O I N E S ▼ A U G U S T 6

CONFERENCE

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Success Indicators / What Goes Wrong: Growth Opportunities Or Canaries In The Coal Mine

Moderator: Roger Rhoten, Faegre Baker Daniels Ty Doggett, McGladrey LLP Adam Hertzke, Faegre Baker Daniels David King, Iowa State University College of Business Amanda Rusin, Polaris Industries, Inc. Shane Slominski, Tonka Bay Equity Partners

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M&A Performance

►Various studies suggest that 70%-90% of M&A transactions fail to meet

expectations

►What goes wrong?

► Inadequate planning and advance integration preparation ► Failure in due diligence ► Identifying the wrong targets ► Customer issues due to changes in people and process ► Pro forma assumptions too optimistic

►What works?

► Repetition and consistency…if you have learned to repeat what is working, and not

just a process that continues to achieve mixed or negative results

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Case Study: What would you do?

►Two concurrent company-changing initiatives

► Split the board into groups or full board attention for both? ► Bypass committee review if time and resources are restricted?

►How important is the “target” date for major announcements or

milestones?

►Do due diligence reports go through CFO or another executive (such as

head of business development)?

►How much weight should CFO dissent to a major transaction carry?

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Case Study: What would you do?

►If due diligence uncovers allegations or complaints by one or more

target executives of financial impropriety, what do you do?

► Does it matter if the independent accountants assure you that the

matter was investigated and determined to be without merit?

►How much diligence is enough, and how much comfort is taken in the

fact that a target is a public company issuer?

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Keys to Better M&A Outcomes

►Stick to a well-defined strategy

► A formal but flexible “charter” setting forth your growth strategy and

the role of M&A in that strategy is valuable

► What is your growth strategy?

► Consider level of board involvement

► Does this opportunity fit into that strategy? ► How does this opportunity expand or complement your core

business?

► Expand the core / grow market share ► Become a stronger competitor

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Keys to Better M&A Outcomes

►Plan for selection of the right targets

► Identify potential targets that may fit your growth strategy well in

advance of any intended acquisition

► Start to build the investment case for each identified investment ► Build important relationships with high priority targets on a selective

basis

►Building a foundation now with high priority targets may result in a

competitive advantage in a subsequent deal process and in the ability to appropriately craft an integration plan and strategy

►Easier to do with businesses that are more complementary

that competitive

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Keys to Better M&A Outcomes

►Improve the integration process (including through effective planning)

► Formalized integration plans are critical ► Consider level of board involvement in integration plan for key acquisitions ► Where possible, avoid letting antitrust concerns slow down information flow ► Clean teams, etc. can often be used to share competitively sensitive

information during the period between antitrust filings and the transaction closing

► Use firm target dates for reaching goals; keep score ► Empower a strong project management office ► Communicate across functions and throughout organization ► Update the integration plan regularly (including after the transaction closes)

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Keys to Better M&A Outcomes

►Identify critical due diligence topics

► Business should identify key concerns and value drivers for advisors conducting

due diligence

► “Off the shelf” due diligence will not be as effective as a process that includes

informed advisors

► Understanding the key value drivers is not only essential in the underlying due

diligence, but also in constructing meaningful transaction documents

► Identify and continuously update potential synergies ► Keep advisors informed of these key business drivers throughout the process ► Be cautious in overreliance on the target’s publicly available disclosures for SEC

issuers

► Focus on quality of earnings, tax implications and deal-related liabilities or potential

liabilities

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Price Isn’t Everything (or the Only Thing): Addressing the Intangibles

Moderator: Keith Radtke, Faegre Baker Daniels Jeremy Atencio, Agrium Terry Bressler, Prairie Capital Advisors, Inc. Eric Lohmeier, NCP Investment Bank Mike Taylor, Midwest Growth Partners

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M&A 2015

D E S M O I N E S ▼ A U G U S T 6

CONFERENCE

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The Auction Process: Tips and Tactics

Moderator: Trevor Belden, Partner, Faegre Baker Daniels Joe Caruso, Franklin Partners Steve Jacobs, BCC Advisers Patrick Jensen, Prairie Capital Brian Zaversnik, McCarthy Capital

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“Barbarians at the Gate”

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Auction Defined A structured process in which a business owner seeking to sell a business works with investment banking advisors to market the business for sale, to solicit bids from multiple potential purchasers, to assess bids and to negotiate and complete the transaction.

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Why an Auction Process?

►Why would a seller want to conduct an auction to sell the business? ►Under what circumstances does an auction not make sense? ►How can a buyer avoid an auction process?

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Auction Timeline

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• Conduct due diligence
• Refine financial projections
• Develop marketing strategy and buyer list
• Prepare Confidential Memorandum

4 -8 Weeks

SELECT BUYER

• Evaluate final offers
• Further negotiate terms
• Select preferred buyer(s)

NEGOTIATION & CLOSE

• Negotiate and execute definitive

agreement

• Buyer conducts final due diligence

6 -8 Weeks

MARKETING – PHASE II

• Establish ground rules for Phase II
• Develop management presentations
• Conduct company visits
• Support potential buyer due diligence
• Distribute draft of purchase agreement (optional)
• Solicit final offers

6 Weeks

MARKETING – PHASE I

• Contact full list of pre-approved potential buyers
• Distribute Confidential Memorandum subject to signed NDA
• Solicit indications of interest
• Select Phase II buyers

6 Weeks 2 Weeks

PREPARATION

M&A 2015

D E S M O I N E S ▼ A U G U S T 6

CONFERENCE

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Closing Remarks

Mike Abbott Partner | Faegre Baker Daniels

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Cocktail Hour