Presentation to: Illinois Business Valuation Association American - - PowerPoint PPT Presentation

Presentation to:

January 20, 2011

Illinois Business Valuation Association American Society of Appraisers – Chicago Chapter

Steven M. Bernard, CFA Director of M&A Market Analysis

Factors Affecting the M&A Environment

Mid 1990s-2000 2000-200 2 2002-200 7 2008- Mid 2009 Today Economic Environment Stock Market Performance Credit Market Strength Investor Confidence CEO Confidence Corporate Scandals/ Bankruptcies Geopolitical Situation Political Landscape Shareholder Activism Valuation

1

Current M&A Activity Trends

• The current M&A outlook continues to reflect a more favorable economic outlook and the
• n-going rebound in equity prices
• This increased optimism and improved environment will likely drive an acceleration of

announced M&A activity in 2011

• There has been a significant increase in deals above $750m
• Strategic buyers – public companies with high stock prices, clean balance sheets, and stable

cash flows continue to make opportunistic transactions (Avis Budget Group/Dollar Thrifty, Duke Energy/Progress Energy, Caterpillar/Bucyrus, Nicor/AGL Resources, etc.)

• Private Equity – has experienced a significant increase in deal activity over the past several
• months. In addition, there is an estimated $400 billion of uncommitted capital still available,

which should help drive increased deal activity

• Take private transactions rose 56%, dollar volume rose almost 400%
• Hostile deal activity continues to increase as activist shareholders and hedge funds target

underperforming companies

• The number and volume of bankruptcy and distressed transactions will likely decline from

recent near record levels

• Acquisition multiples continue to rise

M&A and Equity Market Trends

2

Review of 2010 M&A Activity

• 2010 represented the first increase in M&A activity in three years
• Number of U.S. deals rose 33.0%, dollar volume rose 24.7%
• Highest number of transactions and dollar volume since 2007
• Middle-market activity was even stronger than the overall market
• Strongest middle-market segment was transactions between $250 million and $750 million, up 70%
• Average disclosed deal size was $174.0 million vs. $207 in 2009 and $218 in 2008
• Virtually all industry categories had increased deal activity
• Technology was the most active sector based on deals – 23.0% of total
• Healthcare was the most active based on dollar volume – 23.9% of total
• Divestiture activity slowed considerably as a percentage of transaction activity – 23.6% of targets in

2010 vs. 30.4% in 2009

• U.S. private equity increased significantly – deals rose 22.5% and dollar volume rose 63.7%
• Leverage compared with 2009
• Less than $50 million EBITDA 4.1x vs. 3.4x
• More than $50 million EBITDA 5.2x vs. 4.8x
• Average equity contribution for LBO’s declined to 43.8% (EBITDA less than $50 million) and 38.3%

(EBITDA greater than $50 million)

• U.S. private equity funds raised just $86.3billion, down 16% from the prior year

3

Deal Drivers

Demand

• Industry consolidation
• Globalization
• Buy vs. build decisions
• Attractive valuations
• Stable balance sheets/cash flows

Supply

• Corporate divestitures
• Going private transactions
• Family/small business succession issues
• Increased shareholder activism
• Bankruptcy and financially distressed situations

Supply

• Demand from strategic buyers
• Aging investment portfolios
• Desire to boost performance results
• Relatively difficult IPO market for most potential

candidates Demand

• Overall growth of asset class
• Record levels of fundraising, available capital
• Add-on acquisitions

Corporate M&A Activity Private Equity M&A Activity

4

Middle Market M&A Observations

Credit Markets

• Leverage multiples have jumped significantly over the past several months
• There is much more liquidity and higher leverage available for companies with

more than $50 millions in EBITDA

• Strong preference for lower risk assets less susceptible to market downturns
• Reduced number of lenders, lower appetite for risk

Deal Dynamics

• Financial bidders are less aggressive but continue to actively bid on high quality

assets

• Strategic buyers are winning more auctions
• International strategic acquirers remain very active
• Longer exclusivity periods
• More extensive due diligence and contract negotiations resulting in longer

completion times

Valuation Trends

• Speculative excess of deal frenzied prices have come out of the market
• Pricing is more sensitive to performance during a process
• Premium valuations for quality, high growth companies
• Increased use of alternative financing – earn-outs, seller paper, cvr’s, etc.

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12,799 12,717 10,082 8,927 8,776 9,905 10,059 12,369 13,274 11,404 9,271 12,346 $0 $600 $1,200 $1,800 $2,400 5,000 10,000 15,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Deal Value ($ in billions) Number of Deals

U.S. Mergers & Acquisitions Activity

Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis.

• 2010: First increase in M&A activity in three years
• 2010: Deals 32.4%, dollar volume 24.7%
• 2009: Deals 18.7%, dollar volume 19.0%
• 2008: Deals 14.1%, dollar volume 38.1%

Number of Deals >$750M 334 275 190 128 146 233 281 361 462 229 154 297 Middle Market 5,344 6,781 4,626 4,007 4,231 4,521 4,459 4,535 4,514 4,742 4,103 6,038 Undisclosed 7,121 5,661 5,266 4,792 4,399 5,151 5,319 7,473 8,298 6,433 5,014 6,011 Deal Value $1,720 $1,609 $871 $567 $687 $992 $1,298 $1,645 $1,753 $1,086 $879 $1,098 Undisclosed Middle Market Deal Value >$750M 6

5,344 6,781 4,626 4,007 4,231 4,521 4,459 4,535 4,514 4,742 4,103 6,038 $0 $100 $200 $300 $400 $500 $600 1,000 2,000 3,000 4,000 5,000 6,000 7,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Deal Value ($ in billions) Number of Deals

U.S. Mergers & Acquisitions Activity – Middle Market(1)

(1) Transactions less than $750 million. Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis.

• 2010: Deals 46.5%, dollar volume 52.3%
• Biggest rebound was in the upper middle-market ($250-$750): Deals 71.9%, dollar volume 74.9%
• 2009: Deals 13.5%, dollar volume 33.9%

<$50M $50-250M Deal Value $250-750M Number of Deals $250-750M 528 512 296 289 314 403 424 534 624 420 263 452 $50-250M 1,419 1,580 1,010 889 1,065 1,217 1,268 1,293 1,331 1,196 783 1,087 <$50M 3,397 4,689 3,320 2,829 2,852 2,901 2,767 2,708 2,559 3,126 3,057 4,499 Deal Value $441 $462 $279 $258 $291 $351 $364 $419 $465 $356 $235 $360 7

U.S. M&A Activity as a % of GDP and Equity Market Capitalization

% of GDP % of US Equity Market Value

1.4% 1.3% 1.3% 2.2% 2.7% 3.0% 2.8% 4.4% 3.4% 2.0% 1.4% 1.8% 2.7% 3.8% 5.5% 7.0% 9.6% 15.4% 16.0% 14.3% 7.7% 4.9% 5.8% 8.1% 10.3% 12.7% 13.3% 8.2% 6.8% 8.3% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%

M&A volume is running above trend but remains well below the levels of the prior peak

5.1% 2.8% 3.2% 4.4% 6.6% 7.3% 7.8% 8.8% 12.5% 10.3% 10.6% 6.3% 5.1% 4.8% 6.1% 7.4% 8.4% 8.8% 9.4% 5.8% 6.7% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Average = 6.3% Average = 7.1%

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3.0x 6.0x 9.0x 12.0x 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

U.S. EV/EBITDA Valuation Multiples

Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis.

• Overall median EBITDA multiples have rebounded significantly over the past 12 months, although they

remain well below 2007/2008 levels.

• Multiples for middle-market transactions have expanded more than multiples for the overall market

Overall Market Middle Market Middle Market 8.6x 7.4x 6.6x 8.1x 7.2x 9.5x 11.0x 9.9x 9.8x 10.1x 7.0x 9.4x Overall Market 9.1x 8.1x 7.1x 8.0x 8.2x 9.5x 11.0x 11.1x 11.8x 10.4x 8.0x 9.9x 9

3.0x 6.0x 9.0x 12.0x 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

U.S. EV/EBITDA Valuation Multiples (Cont.)

Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis.

<$50M 8.1x 6.4x 5.8x 7.2x 7.9x 9.0x 5.0x 9.9x 7.6x 7.2x 5.3x 7.1x $50M-$250M 8.4x 7.5x 7.0x 7.7x 6.3x 9.2x 11.3x 9.9x 11.9x 11.3x 7.1x 9.4x $250M-$750M 8.9x 8.2x 8.3x 9.1x 8.8x 10.0x 11.2x 11.0x 9.8x 11.6x 7.7x 10.9x < $50M $50M-$250M $250M-$750M

• Transaction multiples for larger transactions have increased more dramatically than for transaction less than

$50 million

Transaction Size 10

20.0% 40.0% 60.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Median Public Company Acquisition Premiums

Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis.

• Acquisition premiums have begun to decline from recent highs as equity prices continue to increase
• Acquisition premiums rose significantly in 2008 and 2009 as equity prices declined

Premium 1-Week 38.7% 41.2% 46.9% 45.0% 35.2% 26.4% 32.0% 27.4% 29.6% 38.2% 50.7% 48.3% 4-Week 46.9% 49.0% 52.7% 47.5% 41.7% 29.8% 35.9% 30.3% 31.7% 42.8% 54.3% 51.6% 1-Week Premium 4-Week Premium 11

U.S. Middle-Market M&A Activity by Acquiror(1)

(1) Includes middle-market and undisclosed transactions. (2) Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis.

• Public companies have dramatically increased their share of acquisitions over the last 12 months
• Private companies have experienced a decline as public company activity has rebounded
• Acquisitions by foreign acquirers has slowed after increasing sharply over the past two years

Percent of Deals Private 23.1% 32.6% 28.3% 29.2% 32.4% 29.2% 27.5% 36.8% 38.3% 37.5% 45.8% 42.2% Public 59.7% 46.5% 48.9% 46.8% 43.6% 44.7% 40.3% 32.2% 30.1% 30.0% 24.7% 28.4% Private Equity 7.9% 9.2% 8.2% 10.7% 13.9% 15.3% 17.8% 17.3% 16.3% 14.6% 13.1% 13.0% Foreign 9.3% 11.8% 14.6% 13.3% 10.1% 10.8% 14.3% 13.7% 15.3% 17.9% 16.4% 16.5% Private Public Private Equity Foreign 0.0% 25.0% 50.0% 75.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Percent of Deals 12

U.S. Middle-Market M&A Activity by Target(1)

(1) Includes middle-market and undisclosed transactions. (2) Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis.

• Private companies continue to account for approximately two-thirds of all acquisition targets
• Divestiture activity slowed dramatically as companies complete previously announced restructurings

Percent of Deals Private 61.4% 63.9% 49.6% 48.9% 43.0% 52.5% 64.0% 67.1% 69.2% 64.4% 61.0% 66.1% Public 9.4% 8.8% 7.4% 6.2% 6.3% 4.2% 3.9% 3.3% 3.7% 4.3% 3.8% 4.7% Private Equity 1.3% 2.1% 3.3% 3.8% 5.3% 6.5% 6.9% 5.8% 5.7% 4.7% 4.6% 5.7% Divestiture 28.0% 25.1% 39.6% 41.1% 45.7% 37.1% 25.2% 23.6% 21.4% 26.4% 30.4% 23.6% Private Public Private Equity Divestiture 0.0% 25.0% 50.0% 75.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Percent of Deals 13

1,052 1,304 1,056 1,117 1,362 1,842 2,068 2,491 2,582 1,979 1,521 1,863 $0 $100 $200 $300 $400 $500 $600 $700 500 1,000 1,500 2,000 2,500 3,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Deal Value ($ in billions) Number of Deals

U.S. Private Equity Activity

• 2010: Deals 22.5%, dollar volume 63.7%
• Private equity deals greater than $750 million 147%, dollar volume 73%
• 2009: Deals 24.9%, dollar volume 24.9%
• 2009 activity was lowest since 2003

Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis.

Number of Deals >$750M

32 29 21 26 34 74 92 120 164 50 40 99

Middle Market

533 769 554 613 700 991 974 1,101 909 862 776 847

Undisclosed

487 506 481 478 628 777 1,002 1,270 1,509 1,067 705 917

Deal Value

$129 $133 $86 $97 $132 $249 $333 $582 $651 $215 $176 $289

Undisclosed Middle Market Deal Value >$750M 14

1,825 1,896 1,433 1,090 989 1,275 1,373 1,622 2,077 2,121 1,440 1,882 858 1,075 1,015 839 619 780 1,044 1,266 1,466 1,424 1,062 1,215 $0 $20 $40 $60 $80 $100 $120 500 1,000 1,500 2,000 2,500 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Deal Value ($ in billions) Number of Deals

U.S. Cross Border M&A Activity

Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis.

• 2010 U.S. cross border activity was up from 2009 levels for both deals and dollar volume
• Outbound transactions represented 60.7% of the total, up from 57.6% in 2009
• Outbound dollar volume was 58.3% of the total, up from 57.0% in 2009
• Total U.S. cross border activity increased 23.8% in 2010
• Inbound deals 14.4%, dollar value 38.2% compared with 2009
• Outbound deals 30.7%, dollar value 38.2%

Number of Deals Inbound Middle Market 460 680 569 435 361 424 527 516 625 744 556 627 Undisclosed 398 395 446 404 258 356 517 750 841 680 506 588 Value $45.3 $65.2 $38.2 $29.4 $23.7 $37.5 $42.4 $56.6 $65.4 $51.0 $35.6 $49.2 Outbound Middle Market 833 857 672 541 511 674 727 826 1,066 1,089 725 876 Undisclosed 992 1,039 761 549 478 601 646 796 1,011 1,032 715 1,006 Value $76.3 $69.9 $48.3 $34.2 $37.4 $55.9 $57.8 $71.9 $102.3 $89.3 $47.1 $68.8

Outbound Inbound Outbound Deal Value Inbound Deal Value

15

U.S. Cross-Border M&A Activity

Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis.

2008 2009 2010 2008 2009 2010 2008 2009 2010 Middle Market 744 556 627 1,066 1,089 725 1,833 1,281 1,503 > $750M 53 19 52 63 38 26 91 45 102 Undisclosed 680 506 588 1,011 1,032 715 1,712 1,221 1,594 Total 1,477 1,081 1,267 2,140 2,159 1,466 3,636 2,547 3,199

INBOUND OUTBOUND TOTAL

2008 2009 2010 2008 2009 2010 2008 2009 2010 Middle Market $51,036 $35,556 $49,160 $89,269 $47,078 $68,787 $140,304 $117,947 $117,947 > $750M $232,911 $41,788 $156,995 $86,460 $69,784 $114,881 $319,371 $271,876 $271,876 Undisclosed ‒ ‒ ‒ ‒ ‒ ‒ ‒ ‒ ‒ Total $283,947 $77,344 $206,155 $175,728 $116,862 $183,668 $459,675 $389,823 $389,823

INBOUND OUTBOUND TOTAL

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66 42 163 323 330 194 45 47 73 120 394 273 $0 $20 $40 $60 $80 $100 50 100 150 200 250 300 350 400 450 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Deal Value ($ in billions) Number of Deals

Distressed U.S. M&A Deals

(1) YTD as of 12/31/10. Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis.

(1)

• Distressed M&A activity deal flow slowed in 2010, although dollar volume was at record levels

Undisclosed Middle Market Deal Value >$750M Number of Deals >$750M 5 1 10 10 13 13 2 2 5 11 20 12 Middle Market 37 25 102 231 246 132 27 22 32 48 179 118 Undisclosed 24 16 51 82 71 49 16 23 36 61 195 143 Deal Value $16.5 $4.0 $31.7 $49.3 $46.0 $30.0 $8.7 $6.0 $18.1 $43.1 $81.3 $91.6 17

69 61 63 55 72 38 41 67 65 30 34 53 $0 $50 $100 $150 $200 $250 $300 30 60 90 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Deal Value ($ in billions) Number of Deals

U.S. Take Private Activity

(1) YTD as of 12/31/10. Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis.

(1)

Number of Deals >$750M 7 2 2 4 3 9 15 31 33 6 2 20 Middle Market 62 59 61 51 69 29 26 36 32 24 32 33 Deal Value $25.7 $11.1 $6.9 $10.0 $8.3 $28.0 $54.3 $263.7 $259.9 $11.3 $11.7 $55.2

• Take private transactions rebounded sharply in 2010 following two years of virtually non-existent activity
• Rebound was especially strong for larger, billion dollar plus transactions

18

Average Total Equity Contribution for LBOs

(1) LTM data as of 11/30/10. Source: S&P’s Leveraged Lending Review.

• The average equity contribution declined in 2010 after record levels in 2009
• Smaller deals have not seen as dramatic a decline, reflecting less favorable debt markets for

smaller transactions

(1)

Less than $50 million EBITDA More than $50 million EBITDA

[Update]

34.2% 36.1% 36.3% 40.8% 37.9% 39.7% 35.4% 34.1% 32.1% 40.2% NA 43.8% 30.0% 29.6% 31.0% 36.7% 32.4% 31.5% 29.9% 29.2% 30.3% 38.3% 46.5% 38.3% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 19

3.8x 4.0x 3.6x 3.5x 3.9x 4.1x 4.4x 5.0x 4.9x 5.3x 4.4x 3.4x 4.1x 3.1x 3.2x 3.0x 3.3x 3.4x 2.4x 3.9x 4.4x 4.8x 4.6x 3.3x 3.1x 3.4x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(1) (1)

Average Pro Forma Adjusted Credit Statistics of Middle-Market LBO Loans (Issuers with EBITDA of Less Than $50M)

(1) As of November 30, 2010. Source: Standard & Poor’s.

• Leverage multiples continue to rebound, reflecting better credit market liquidity
• Total debt to EBITDA has increased to 4.1x from 3.4x at the beginning of the year
• Senior debt is currently 3.4x, up from 3.1x at the end of 2009
• Total leverage still remains well below the peak levels experienced in 2007-2008

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Average Pro Forma Adjusted Credit Statistics of Middle-Market LBO Loans (Issuers with EBITDA of More Than $50M)

• Leverage multiples for larger transactions have risen significantly from previous lows
• Currently, total leverage is 5.2x with senior debt at 4.6x. This compares to 4.8x total and 3.9x senior a

year ago

(1) As of November 30, 2010. Source: Standard & Poor’s.

4.9x 4.1x 3.9x 3.8x 4.5x 5.0x 4.6x 5.7x 5.6x 5.8x 4.0x 4.8x 5.2x 3.7x 3.2x 3.3x 2.8x 2.8x 2.9x 3.2x 4.4x 5.2x 5.8x 3.4x 3.9x 4.6x 1/1/99 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

(1) (1)

21

$101.2 $116.5 $183.6 $117.1 $66.7 $53.8 $99.2 $168.1 $254.7 $316.8 $299.3 $102.2 $86.3 $0.0 $50.0 $100.0 $150.0 $200.0 $250.0 $300.0 $350.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 ($ in billions)

Capital Commitments to U.S. Private Equity Funds

• 2010 private equity fund raising declined for the third straight year
• Buyout funds accounted for 61.8% of the 2010 total, up from the 56.1% in 2009
• Despite the lack of fundraising, there remains an estimated $400-$500 billion of committed but

uninvested capital

* 2010 Totals are 9 month results annualized. Source: Dow Jones and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis. (1) Other consists of funds of funds.

Mezzanine Other Venture Capital Buyouts

Other(1) $14.9 $18.6 $25.4 $14.8 $10.4 $10.1 $14.4 $24.2 $29.7 $30.2 $32.7 $26.9 $15.2 Venture Capital $21.0 $49.1 $74.0 $39.7 $11.3 $9.5 $17.6 $26.5 $27.0 $33.1 $28.7 $13.5 $11.6 Mezzanine $4.2 $5.0 $4.5 $5.1 $2.4 $4.6 $5.9 $4.8 $20.9 $8.9 $42.4 $3.4 $6.2 Buyouts $61.1 $43.8 $79.7 $57.5 $42.6 $29.6 $61.3 $112.6 $177.1 $244.6 $195.5 $58.4 $53.3 22

Steven M. Bernard, CFA

Steven M. Bernard, CFA Biography

Director of M&A Market Analysis

Joined Blair: 2008 Prior Work Experience: Robert W. Baird & Co. U.S. Bancorp Piper Jaffray First Union Securities/ EVEREN Securities Education: Washington University (B.S.)

Steven joined William Blair & Company in May 2008 to develop and direct the firm’s M&A research effort. His work involves researching and analyzing the state

• f the M&A and capital markets, as well as providing insight and analysis of

consolidation activity in a variety of industries. Before joining William Blair, he was most recently director of M&A market analysis at Robert W. Baird & Co. for the past six years; vice president in charge of M&A research at U.S. Bancorp Piper Jaffray; and a sell-side equity research analyst for 12 years. Steven has been widely quoted in the media, appearing on CNBC, Bloomberg Radio and Television, CBS MarketWatch, and The Nightly Business Report on PBS, and has been widely quoted in leading national business publications, including The Economist, Investor’s Business Daily, Forbes, Business Week, American Banker, and The Wall Street Journal Online as well as numerous M&A-related

• publications. He graduated from Washington University in St. Louis with a B.S. in

business administration, is a chartered financial analyst, and is a member of the Association for Investment Management and Research, the CFA Society of Chicago, and the Association for Corporate Growth (ACG). He also served as a member of the ACG Intergrowth Planning Committee. .

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