M&A 2015 CONFERENCE M I N N E A P O L I S N O V E M B E R 1 - - PowerPoint PPT Presentation

M&A 2015

M I N N E A P O L I S ▼ N O V E M B E R 1 8

CONFERENCE

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Welcome!

Bruce Engler, Faegre Baker Daniels

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Market Update: Current Deal Activity, Valuations and Outlook

Robin Engelson, Sapphire Financial Group Kurtis Fechtmeyer, Northland Capital Markets Sima Griffith, Aethlon Capital, LLC Dan Gulbrandson, Piper Jaffray & Co. Lisa Kro, Mill City Capital Moderator: Morgan Burns, Faegre Baker Daniels

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The Boom is Back… But What’s Ahead???

►High valuations in middle market driven by tight supply and other

factors

►Supply-demand imbalance in credit markets continues to push

leverage levels to new highs

►Equity markets open, BUT ►Lots of uncertainty globally ►Less stable equity markets of late ►Overall MM deal volume down in Q3, particularly in certain sectors

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Domestic Transactions – Annually

► After a significant lull in 2009, M&A activity rebounded in 2010-2015 ► Activity in 2015 has continued to increase, driven by strong economy, balance sheet cash and

favorable credit market dynamics

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Annual Domestic M&A Transactions

For the Years Ended December 31, 1990 – 2014 and YTD 2015 ($ in billions)

Source: Thomson Financial. Year-to-date figures as of September 30, 2015. Includes transactions with the target and the acquiror based in the United States. Excludes minority stake purchases, acquisitions of remaining interest, self-tenders, and repurchases. $124 $104 $138 $219 $293 $465 $551 $827 $1,353 $1,237 $1,364 $619 $371 $496 $731 $1,031 $1,293 $1,136 $635 $651 $568 $872 $576 $888 $1,021 $309 $435 4,069 3,891 4,307 4,944 5,917 6,959 7,988 8,870 9,656 8,478 8,431 5,943 5,687 6,313 7,226 7,808 8,561 8,802 7,205 5,715 6,073 6,306 6,616 7,583 7,502 4,628 5,227

2,000 4,000 6,000 8,000 10,000 12,000 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1Q-3Q 2014 1Q-3Q 2015

Number of Deals Aggregate Deal Value ($ Billions)

Aggregate Deal Value ($ Billions) Number of Deals

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Middle Market M&A Observations

► Middle market M&A transaction volume is still well below 2005 - 2007 peak ► Significant activity in 2012 driven by capital gains increase ► Pitch activity accelerated in 2H 2013 into 2014, driving the notable increase in 2014 deal volume that

has cooled somewhat in 2015

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Source: Thomson Financial. Year-to-date figures as of September 30, 2015. Includes transactions with the target and the acquiror based in the United States. Excludes minority stake purchases, acquisitions of remaining interest, self-tenders, and repurchases

Quarterly Announced Domestic Middle Market M&A Transactions

For the Periods Ended 1Q04 through 3Q15 (Transactions valued between $25 - $500 million)

$34 $43 $35 $39 $35 $43 $49 $43 $46 $51 $49 $48 $42 $51 $41 $46 $33 $33 $32 $17 $14 $19 $21 $29 $24 $31 $36 $37 $32 $40 $38 $32 $33 $37 $33 $42 $29 $30 $39 $44 $33 $42 $47 $42 $32 $32 $16 293 313 288292281 331 372 355 328 398 351343 298 334323314 257 238251 152 119 159149 220 167 207 256251 227 261 245 221212 252 220 323 225226 279 308 245 282291 307 236229 148

50 100 150 200 250 300 350 400 450 $0 $10 $20 $30 $40 $50 $60 $70 $80 $90

Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 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 Q2 2015 Q3 2015

Number of Deals Aggregate Deal Value ($ Billions)

Aggregate Deal Value ($ Billions) Number of Deals

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Historical Breakdown by Transaction Value

► Deals less than $500 million historically represent nearly 90% of all transactions

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93.2% 92.2% 88.9% 88.8% 85.5% 84.9% 88.7% 88.9% 88.4% 85.6% 83.4% 81.2% 79.9% 87.2% 88.8% 80.7% 80.4% 79.1% 78.2% 77.0% 81.0% 3.0% 3.5% 4.9% 5.0% 6.0% 6.4% 4.8% 5.7% 5.8% 6.0% 6.8% 8.2% 7.7% 5.5% 4.7% 7.3% 8.9% 8.9% 8.6% 9.9% 8.2% 3.8% 4.3% 6.1% 6.2% 8.5% 8.7% 6.4% 5.4% 5.8% 8.4% 9.7% 10.6% 12.4% 7.3% 6.5% 12.0% 10.7% 11.9% 13.2% 13.1% 10.8%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD 2015 $0 - $249 Million $250 - $499 Million $500 Million +

Source: Thomson Financial. Year-to-date figures as of September 30, 2015. Includes transactions with the target and the acquiror based in the United States. Excludes minority stake purchases, acquisitions of remaining interest, self-tenders, and repurchases; based on number of deals.

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M&A Seller Trends

►M&A activity has been fairly consistent across industries

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Source: Thomson Financial. Based on number of deals as of September 30, 2015.

M&A Transaction Breakdown by Industry

For the Years Ending December 31, 2011 – 2014 and the Year-to-Date Period Ended September 2015

17.6% 10.5% 24.5% 7.9% 5.7% 8.5% 14.2% 0.2%

YTD 2015

Consumer Financials TMT Real Estate Energy & Power Healthcare Industrials Other 16.8% 21.6% 24.2% 6.0% 7.3% 9.2% 14.8% 0.2%

2011

Consumer Financials TMT Real Estate Energy & Power Healthcare Industrials Other 17.4% 22.1% 23.2% 6.9% 6.0% 8.4% 15.9% 0.1%

2012

Consumer Financials TMT Real Estate Energy & Power Healthcare Industrials Other 19.4% 20.0% 24.2% 8.8% 5.6% 7.9% 13.9% 0.3%

2013

Consumer Financials TMT Real Estate Energy & Power Healthcare Industrials Other 23.1% 12.5% 32.3% 9.0% 8.9% 11.2% 19.9% 0.1%

2014

Consumer Financials TMT Real Estate Energy & Power Healthcare Industrials Other

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Middle Market M&A Pricing Trends

► Valuation multiples have increased steadily from 2009 levels.

► 2015: Spreads in valuations between “A” companies and “Less than A” companies have continued

to decrease

► 2015: Competition for assets and improved fundamentals driving strong valuations ► YTD 2015: average Enterprise Value / EBITDA multiple for all middle market transactions was

14.2x

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Average U.S. Middle Market Purchase Price / EBITDA Valuation Multiples

Source: Thomson Financial; Year-to-date figures as of September 30, 2015. 11.3x 9.2x 10.3x 10.2x 9.2x 13.7x 11.0x 13.9x 13.1x 8.7x 10.1x 9.8x 10.4x 14.6x 13.0x 14.5x 10.5x 9.6x 11.8x 11.7x 10.4x 13.4x 10.5x 13.6x 11.7x 9.1x 10.5x 10.3x 9.9x 14.1x 11.1x 13.7x

0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 16.0x 2008 2009 2010 2011 2012 2013 2014 YTD 2015 Less than $100 million $100 - $499 million $500 million - $1 billion Less than $1 billion

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Leveraged Finance Market Highlights

Commentary

• 2015 YTD Total volume reached ~$347

billion, a ~25% decrease from 2014 YTD

• Liquidity in financing market drove significant

refinancing activity in 2015

• Refinancing activity is further constraining

M&A volume as refi dividend is seen as interim liquidity alternative for PE sponsors

Total New Issue Loan Volume and Use of Proceeds High Yield Bond Volume Use of Proceeds – High-Yield Bonds (YTD 2015)

Source: S&P LCD; Year-to-date figures as of September 30, 2015 Source: S&P LCD; Year-to-date figures as of September 30, 2015. Source: S&P LCD; Year-to-date figures as of September 30, 2015.

220.2 255.9 243.4 184.7 138.7 139.4 165.6 265.2 295.4 480.1 535.2 156.8 76.6 235.9 376.9 465.5 606.9 528.1 474.8 347.3 $0B $100B $200B $300B $400B $500B $600B $700B Institutional Pro Rata

Total ($347.25B)

$0B $100B $200B $300B $400B

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LBO Purchase Price Multiple & Equity Contribution – Middle Market

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 Purchase price multiples reached a record high Q3 2015  Equity contribution % continues a steady rise as multiples rise

5.9 6.7 7.0 7.2 8.5 8.1 9.3 8.3 6.6 8.4 8.2 7.9 8.8 9.6 10.7 12.1 0x 4x 8x 12x

Purchase Price Multiple

Senior Debt/EBITDA Sub Debt/EBITDA Equity/EBITDA Others 0% 10% 20% 30% 40% 50% 60%

Equity Contribution

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LBO Purchase Price Multiple & Equity Contribution – Large Corp

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 Purchase price multiples at a 15-year high of 10.7x, 1.4x lower than MM multiples

6.1 6.5 7.1 7.4 8.2 8.6 9.8 9.5 7.9 8.5 9.1 8.9 8.8 9.8 10.2 10.7 0x 4x 8x 12x

Purchase Price Multiple

Senior Debt/EBITDA Sub Debt/EBITDA Equity/EBITDA Others 0% 10% 20% 30% 40% 50%

Equity Contribution

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Pro Forma Credit Statistics of Middle-Market LBO Transactions

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 Credit Stats have begun to weaken

Period Debt/EBITDA Senior Debt/EBITDA EBITDA/Cash Interest EBITDA-Mainten Capex/Cash Interest EBITDA – Capex/ Cash Interest 1997 4.77 3.52 2.62 2.26 2.01 1998 4.71 3.55 2.57 2.22 1.97 1999 4.12 3.45 2.89 2.42 2.17 2000 3.98 3.20 2.59 2.17 2.00 2001 3.38 2.82 3.70 3.11 2.97 2002 3.85 3.14 3.95 3.55 3.39 2003 3.76 2.98 3.80 3.23 3.12 2004 4.24 3.47 3.57 3.16 2.97 2005 4.69 4.27 2.81 2.45 2.22 2006 4.72 4.16 2.64 2.30 2.21 2007 5.61 5.26 2.03 1.80 1.79 2008 4.53 3.73 2.51 2.31 2.25 2009 3.25 2.86 3.41 3.17 3.17 2010 4.25 3.40 2.92 2.62 2.61 2011 4.30 3.77 3.31 3.06 2.90 2012 4.53 3.77 3.01 2.59 2.55 2013 4.81 4.63 3.71 2.82 2.63 2014 5.28 5.14 3.41 3.03 2.81 1Q-3Q15 5.35 5.09 3.29 2.72 2.62 3Q15 5.91 5.77 2.94 2.22 2.06

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Current Equity Market Environment

Dow Jones Industrial Average S&P 500 14 Volatility Index

15,000 15,500 16,000 16,500 17,000 17,500 18,000 18,500 1,700 1,800 1,900 2,000 2,100 2,200 5 10 15 20 25 30 35 40 45

Source: Thomson Financial. Year-to-date figures as of September 30, 2015. DJ Industrial Average S&P 500 Nasdaq Composite Russell 2000 52 Week High 18,312.4 2,130.8 5,218.9 1,295.8 52 Week Average 17,551.8 2,049.8 4,843.3 1,202.7 Current 16,284.7 1,920.0 4,620.2 1,100.7 % of Average 92.8% 93.7% 95.4% 91.5% % of High 88.9% 90.1% 88.5% 84.9%

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Abundance of Available Investable Capital

► The market is flush with capital that needs to be deployed. Financial investors have

nearly $500 billion in dry powder

► Strategic acquirers (made up of the S&P 500) are holding an additional $1.7 trillion in

investable cash

► Fierce competition to invest this staggering amount of “dry powder” is one of the

primary factors that has driven valuations

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Source: Prequin and Capital IQ

Private Equity “Dry Powder” S&P 500 Companies Cash Balance

$0 $100 $200 $300 $400 $500 2007 2008 2009 2010 2011 2012 2013 2014 YTD 2015

$ in billions

$0 $400 $800 $1,200 $1,600 $2,000 2007 2008 2009 2010 2011 2012 2013 2014 YTD 2015

$ in billions

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Buyer Trends – Private Equity Capital Invested Approaches 2007 Levels

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Source: PitchBook; as of September 30, 2015

Annual U.S. Private Equity Deal Activity and Capital Invested ($ in billions)

$79 $148 $222 $307 $483 $846 $357 $158 $362 $374 $376 $489 $647 $393 $777 912 1,291 1,764 2,149 2,692 3,193 2,382 1,520 2,114 2,273 2,272 2,791 3,930 2,097 2,871

500 1000 1500 2000 2500 3000 3500 4000 4500 $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1Q-3Q 2014 1Q-3Q 2015 Number of Deals Aggregate Deal Value ($ Billions) Capital Invested ($ billions) Number of Deals

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Quarterly Private Equity Exits By Type

Breakdown by type shows recovery in equity markets from 2008-2009 lows and then recent uncertainty due to increased volatility

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Quarterly Private Equity Exits by Corporate Acquisition, IPO and Secondary Sale

For the Periods Ended 1Q06 through 3Q15

Source: PitchBook, as of September 30, 2015. 93 65 81 91 88 61 80 40 43 38 32 56 72 78 78 96 72 86 93 100 127 96 82 132 73 101 93 125 91 93 83 179 131 152 199 8 17 10 14 4 5 2 3 1 5 4 17 14 9 17 9 9 8 9 16 11 11 5 11 20 8 22 12 17 14 6 6 4 1 61 71 55 43 47 33 43 29 19 16 13 20 41 34 34 85 38 62 64 81 65 82 83 134 59 63 90 98 80 99 96 40 50 58 50

• 50

100 150 200 250 300 Corporate Acquisitions IPO Secondary Buyout

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Private Equity Portfolio Company Inventory

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Inventory of U.S.-based, private equity-backed companies continued to grow in 2015, reaching a new high of 9,989

Source: PitchBook, as of September 30, 2015.

Current Inventory of Private Equity-Backed Companies

3,702 4,438 5,291 5,928 6,241 6,630 6,970 7,272 8,520 9,445 9,989 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD 2015 2010-YTD 2015 2005-2009 2000-2004 Pre-2000 Year of Investment

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Q&A

Robin Engelson, Sapphire Financial Group Kurtis Fechtmeyer, Northland Capital Markets Sima Griffith, Aethlon Capital, LLC Dan Gulbrandson, Piper Jaffray & Co. Lisa Kro, Mill City Capital Moderator: Morgan Burns, Faegre Baker Daniels

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Keeping the Spirit Alive: General Mills and Hormel Become “Entrepreneurs” in the Organic Space

Michael Clausman, Hormel Foods Corporation Jana Gaffaney, General Mills Nicholas Rhoads, General Mills Moderator: Michael Stanchfield, Faegre Baker Daniels

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Q&A

Michael Clausman, Hormel Foods Corporation Jana Gaffaney, General Mills Nicholas Rhoads, General Mills Moderator: Michael Stanchfield, Faegre Baker Daniels

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The State of Private Equity: Trends, Challenges & Opportunities

Jason T. Brass, Goldner Hawn Johnson & Morrison Incorporated Jeffrey P. Greiner, Northern Pacific Group Glenn Gurtcheff, Harris Williams & Co. Christina Miller, Norwest Equity Partners Moderator: Ryan Miske, Faegre Baker Daniels

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Overview

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U.S. MIDDLE MARKET DEAL FLOW

200 400 600 800 1000 1200 1400 1600 1800 2000 $0 $50 $100 $150 $200 $250 $300 $350 $400 $450 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Billions

Capital Invested ($B) # of Deals Closed

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SOURCE: PitchBook U.S. Middle Market Report - 2015. NOTE: Middle-market transactions defined as U.S. - based companies acquired through private equity-sponsored buyout transactions for between $25 million and $1 billion. Note that minority deals are not included.

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PURCHASE PRICE AND EQUITY CONTRIBUTION

0.0x 6.0x 12.0x 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1H15 2Q15

Senior Debt/EBITDA Sub Debt/EBITDA Equity/EBITDA Others 25

Source: S&P Capital IQ, 2Q 2015 High-End Middle Market Lending Review. Defined as Issuers with EBITDA of $50 Million or Less. Total Sources/adjusted Pro Forma Trailing EBITDA. Prior to 2003 Media, Telecom, Energy and Utility Deals, were excluded. Now all outliers, regardless of the industry, are excluded.

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Private Equity Market Overview Ample Dry Powder to Support M&A Activitiy

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Winning Deals

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Competitive Advantage

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Family Offices

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Q&A

Jason T. Brass, Goldner Hawn Johnson & Morrison Incorporated Jeffrey P. Greiner, Northern Pacific Group Glenn Gurtcheff, Harris Williams & Co. Christina Miller, Norwest Equity Partners Moderator: Ryan Miske, Faegre Baker Daniels

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Employment Issues in M&A: 5 Things Every Dealmaker Should Consider

Stephanie Kent, Target Corporation Jonathon T. Naples, Polaris Industries Inc. Kathy Noecker, Faegre Baker Daniels Mark O’Sell, UnitedHealth Group Moderator: Jon Nygren, Faegre Baker Daniels

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The Team

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The Risks

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The Business Plan

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The People

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The Communications

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Q&A

Stephanie Kent, Target Corporation Jonathon T. Naples, Polaris Industries Inc. Kathy Noecker, Faegre Baker Daniels Mark O’Sell, UnitedHealth Group Moderator: Jon Nygren, Faegre Baker Daniels

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Representation and Warranty Insurance:

Updates on This Important and Rapidly Changing Industry

Linda Crow, Faegre Baker Daniels Jay Rittberg, AIG Craig Schioppo, Marsh USA Inc. Moderator: Kate Sherburne, Faegre Baker Daniels

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Overview

Protects against unknown and unforeseen losses arising from a breach

• f the representations and warranties in a purchase agreement.

Why it is used:

►Remove or reduce escrow or holdback in the transaction;

extend survival periods

►Provide recourse when no seller indemnity possible ►Distinguish bid in competitive auction ►Protect key relationships or passive investors ►Distribute sale proceeds faster

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Types of R&W Insurance Policies

►Buyer-Side Policy (85+% of policies issued)

► Insurance replaces sellers’ potential indemnification liabilities ► Can enhance indemnification terms

► Extended survival periods, increased cap, materiality scrape

► Covers fraud by sellers ► Limited subrogation rights against sellers and management team

►Seller-Side Policy

► Sellers backstop their potential indemnification liabilities ► Mirrors indemnification terms in agreement ► Typically excludes fraud of sellers ► Knowledge between sponsors and management sellers can be severed

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Insurance Market Evolution

►Broader coverage and better alignment with underlying agreement ►Speed of execution – more streamlined underwriting process ►Significantly increased limits of liability available ►Material reduction in premium rates and deductible levels – enhanced

competition

►Greater market awareness ►Claims experience

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How You’ll Encounter It

►Private equity has been the early adopter ►Strategic encountering as a Seller-imposed requirement in an auction ►Middle market M&A emphasis and application, but growing in upper

middle markets

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Market Growth

►Already an established product in certain markets, has seen significant

growth in North America over past 5 years:

►AIG expects approximately 2,000 submissions and 300 policies in

2015

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215 335 525 1150 500 1000 1500 2011 2012 2013 2014

Number of Submissions

35 59 95 230 200 400 2011 2012 2013 2014

Number of Policies Bound

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Pricing

►Diligence Fee: generally $20K - $40K depending on nature of deal ►Premiums

► Typically 3.5% – 4% of limit insurance (lower outside of U.S.; higher for smaller policies) ► Either party can pay

►Deductibles

► Typically 1% - 2% of transaction value (no indemnity deals may be higher) ► Buyer-side policies often use escrow account as deductible ► Seller-side policies use a negotiated amount ► Drop-downs available and erosions available for loss outside coverage

►Limits

► Up to $500M of limits available in global market ► Hard to insure a deal with a limit lower than $5M ► Can be used effectively in transactions from $25M - $3B+

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The Broker

►How to choose a Broker ►What the Broker should do for you ►What information the Broker needs to obtain quotes

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The Insurer

► Preliminary information submitted to insurer: ► Acquisition agreement, financial information, offering memo ► Underwriting considerations: ► Identity of the buyer, seller and their advisors ► Sector of target business and location ► Quality of the transaction process ► Quality of due diligence/disclosures ► Value of transaction ► Scope of the warranties – buyer or seller friendly? ► Seller’s liability under the agreement ► Gap between signing and completion? ► Why do they want insurance? ► Do both parties know about the insurance?

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The Process

►Give yourself at least 2 weeks to be comfortable (can be done faster, if

needed)

► Engage Broker ► Broker delivers quotes; Negotiate NBIL (2-4 days) ► Diligence; pay underwriting fee (5-10 days)

► High level review of due diligence process (if buyer-side) or disclosure process

(if seller-side)

► Access to legal, financial, tax, other DD reports (if buyer-side) ► Conference call(s) with deal team

► Negotiate policy (a few days, runs concurrent with end of diligence period)

►Works on a parallel track to purchase agreement ►Can incept at signing or closing

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The Policy

►Conform coverage to your purchase agreement ►Common Exclusions

► Known issues identified in disclosure schedules and environmental reports ► Asbestos claims ► Losses covered in purchase price adjustments ► Issue known to a member of the insured’s deal team ► Breaches of covenants ► Claims for non-monetary relief ► Criminal fines or penalties ► Fraud of seller (if a sell-side policy)

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The Policy (Cont.)

►Exclusions that may arise depending on industry/facts:

► Product liability claims ► Underfunded benefit plans ► Healthcare billing practices ► California wage and hour law issues ► Big pharma issues ► FCPA

►Can expand coverage from purchase agreement:

► Materiality scrapes ► Survival periods ► Consequential and multiple damages

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The Purchase Agreement

►Could be silent ►Might be “fully baked” (covenants, closing conditions, etc.) ►Indemnification provisions might reference as a first recourse ►May specify that escrow is only available for claims not covered by

insurance

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2 0 1 5 M & A C O N F E R E N C E

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Claims Experience

►Industry-wide, claims payments have ranged from $500K - $25M ►Insurers have dedicated claims professionals and law firm relationships

to offer claims solutions

►Brokers and independent advisors serve as advocates for insureds ►Examples of claims:

► Financial Statements: Recently paid $25M for a financial statements-

related claim

► Accounts Receivable: Seller-side policy responds to claim brought by buyer

for breach of financial statement R&Ws related to target’s issuance of over $1M of unrecorded gift certificates

► Patent Infringement: Seller-side policy responds to third-party patent

infringement claim

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2 0 1 5 M & A C O N F E R E N C E

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Frequently Made Claims

►Financial statements, compliance with laws, taxes, and undisclosed

liabilities are the most frequently alleged breaches.

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0% 5% 10% 15% 20% Type of w arranty breach

Financials;AR;Inv. -18%

• Comp. With Laws/Lit. -17%

Tax -14%

• No. Undisc. Liab. -10%

IP -8% Contracts -5% Full Disc. -4%

• Emp. Ben. -4%

Real Prop. -3% Other -16%

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Timing of Claims

►More than half of all claims notices are received within the first 12

months of the policy’s issuance.

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Q&A

Linda Crow, Faegre Baker Daniels Jay Rittberg, AIG Craig Schioppo, Marsh USA Inc. Moderator: Kate Sherburne, Faegre Baker Daniels

2 0 1 5 M & A C O N F E R E N C E

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Financial Considerations Driving Deals:

Quality of Earnings, Adjusted EBITDA & Projections

Craig Arends, CliftonLarsonAllen Peter Erickson, Triple Tree Brent Johnson, Grant Thornton Steve Soderling, Tonka Bay Equity Partners Moderator: Keith Radtke, Faegre Baker Daniels

2 0 1 5 M & A C O N F E R E N C E

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Quality of Earnings

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EBITDA

$ in thousands

• Ref. No.

Fiscal 13 Fiscal 14 TTM 15 Pre-tax income 11,687 16,820 18,952 Add-backs Interest expense 1,684 1,231 1,003 Depreciation and amortization 7,110 6,960 7,591 Unadjusted EBITDA 20,481 25,011 27,546 Management adjustments Owner compensation MA-01 215 215 215 Personal expenses MA-02 154 113 91 Gain on sale of assets MA-03 (152) (32) (116) Stock appreciation rights expense MA-04

• 2,113

Total management adjustments 217 296 2,303 Management adjusted EBITDA 20,698 25,307 29,849 Due diligence adjustments Bonus accrual adjustment DD-01

• 251

Legal and professional fees DD-02

• 50

95 Out-of-period volume rebate income DD-03 75 25 35 Accrue vacation pay DD-04 (25) (35) (37) Total due diligence adjustments 50 40 344 Adjusted EBITDA 20,748 25,347 30,193 Pro-forma adjustments Discontinued foreign operation PF-01 1,255 652 211 Price increase PF-02 2,421 1,459 857 Total pro-forma adjustments 3,676 2,111 1,068 Pro-forma adjusted EBITDA 24,424 27,458 31,261 Unadjusted EBITDA % 13.2% 14.5% 14.1% Management adjusted EBITDA % 13.3% 14.7% 15.2% Adjusted EBITDA % 13.4% 14.7% 15.4% Pro-forma adjusted EBITDA % 15.7% 15.9% 16.0%

Sources: 1. Brent Johnson's imagination

Accrued vacation pay

2 0 1 5 M & A C O N F E R E N C E

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Typical Adjustments

► Owner Compensation and Perks ► Family Compensation and Perks ► Non-Arms-Length Revenue or

Expenses (Usually related parties)

► Rent of Facilities at Prices Above or Below

Fair Market Value

► Capitalizing vs. Expensing Items (No

threshold for capitalization of Fixed Assets)

► Non-Recurring Expenses ► Lawsuits, Arbitration Proceedings,

Insurance Claim Recoveries, and One- Time Disputes

► Professional Fees ► Recruiting Expenses ► Severance Expenses ► Inventory Write-downs (need to understand

period impacted)

► Restructuring Charges ► Non-cash Stock Compensation Expense ► IT, Finance Department costs required to

improve financial reporting and decision making

► Adjustment for excess or insufficient

capacity

► Cash received not deposited in the bank

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Q&A

Craig Arends, CliftonLarsonAllen Peter Erickson, Triple Tree Brent Johnson, Grant Thornton Steve Soderling, Tonka Bay Equity Partners Moderator: Keith Radtke, Faegre Baker Daniels

2 0 1 5 M & A C O N F E R E N C E

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H.B. Fuller’s Transformational China Deal: A Real Life Case Study

Timothy Keenan, H.B. Fuller Jim Giertz, H.B. Fuller Sally Qin, Faegre Baker Daniels Moderator: George Martin, Faegre Baker Daniels

2 0 1 5 M & A C O N F E R E N C E

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Tonsan Adhesives Acquisition – Overview & Strategic Rationale

Extending into an attractive adjacent market –

►Acquired technology platform and application knowledge to

address markets we currently do not serve Building critical mass in China –

►Doubled our revenue in China and enhanced our mix of

business toward higher value segments

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2 0 1 5 M & A C O N F E R E N C E

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Core Market Segments

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Hygiene Baby Diapers, Feminine Products, Adult Incontinence Packaging Consumer Packaging, Labeling, Flexible Packaging, Packaging Integrity Durable Assembly

Automotive, Water Filters, Panel Assembly, Electronic & Assembly Materials, Engineered Textiles, Insulating Glass

Construction Products

Residential, Remodel, Commercial and Industrial Construction, including Ceramic Tile and Flooring Installation

2 0 1 5 M & A C O N F E R E N C E

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Engineering Adhesives Market Overview

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CHEMISTRIES $12.8 Billion market APPLICATIONS MARKET SIZE & GROWTH 30% of $42.6 Billion global adhesive market Highest profitability segment Growing at 8% per year

2 0 1 5 M & A C O N F E R E N C E

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Dragon

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Founded in 1993 Four main shareholders 550 employees 2014 Financial Results:

$100 million Revenue 18% EBITDA margin

Majority of sales to regional Chinese customers

Manufacturing facilities in Beijing and Suzhou Largest independent player in photovoltaic and engineering adhesives in China

2 0 1 5 M & A C O N F E R E N C E

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Tonsan Technology Application Examples

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2 0 1 5 M & A C O N F E R E N C E

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Synergy Opportunity

►Sell Tonsan products to Multi-Nationals ►Sell HBF products through Tonsan channels ►Globalize Tonsan technology

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2 0 1 5 M & A C O N F E R E N C E

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I. Final Deal Terms and Deal Structure

►Purchase Price; and 95/5 final ownership structure ►Call Option and related mechanisms ►Hystic ►Key closing issues and conditions

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2 0 1 5 M & A C O N F E R E N C E

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II. Dissecting the Deal

►PRC M&A Regulations – key limitations of structuring cross-border deals ►Tonsan Transaction Process ►Key “watch-outs”

► Financial due diligence

► Legal due diligence ► Keys to successful FCPA due diligence ► Key business and legal negotiating issues and obstacles

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III. Post-Closing Integration Lessons Learned & Recommendations

►Internal Controls ►Key Position Appointments and Challenges ►Training ►Oversight

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Q&A

Timothy Keenan, H.B. Fuller Jim Giertz, H.B. Fuller Sally Qin, Faegre Baker Daniels Moderator: George Martin, Faegre Baker Daniels

2 0 1 5 M & A C O N F E R E N C E

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Current Trends in M&A Deal Terms and Tactics

Chrisanne Corbett, KPMG Corporate Finance LLP Brian Holcomb, Greene Holcomb Fisher Scott Richardson, Houlihan Lokey Steven Kennedy, Faegre Baker Daniels Moderator: Chris Hofstad, Faegre Baker Daniels

2 0 1 5 M & A C O N F E R E N C E

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Q&A

Chrisanne Corbett, KPMG Corporate Finance LLP Brian Holcomb, Greene Holcomb Fisher Scott Richardson, Houlihan Lokey Steven Kennedy, Faegre Baker Daniels Moderator: Chris Hofstad, Faegre Baker Daniels