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

Presentation to: Illinois Business Valuation Association American Society of Appraisers – Chicago Chapter Steven M. Bernard, CFA January 20, 2011 Director of M&A Market Analysis

Factors Affecting the M&A Environment Mid 2000-200 2002-200 2008- Today 1990s-2000 2 7 Mid 2009 Economic Environment Stock Market Performance Credit Market Strength Investor Confidence CEO Confidence Corporate Scandals/ Bankruptcies Geopolitical Situation Political Landscape Shareholder Activism Valuation 1

M&A and Equity Market Trends Current M&A Activity Trends  The current M&A outlook continues to reflect a more favorable economic outlook and the on-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 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 Corporate M&A Activity Demand Supply  Industry consolidation  Corporate divestitures  Globalization  Going private transactions  Buy vs. build decisions  Family/small business succession issues  Attractive valuations  Increased shareholder activism  Stable balance sheets/cash flows  Bankruptcy and financially distressed situations Private Equity M&A Activity Demand Supply  Overall growth of asset class  Demand from strategic buyers  Record levels of fundraising, available capital  Aging investment portfolios  Add-on acquisitions  Desire to boost performance results  Relatively difficult IPO market for most potential candidates 4

Middle Market M&A Observations  Leverage multiples have jumped significantly over the past several months  There is much more liquidity and higher leverage available for companies with Credit more than $50 millions in EBITDA Markets  Strong preference for lower risk assets less susceptible to market downturns  Reduced number of lenders, lower appetite for risk  Financial bidders are less aggressive but continue to actively bid on high quality assets  Strategic buyers are winning more auctions Deal  International strategic acquirers remain very active Dynamics  Longer exclusivity periods  More extensive due diligence and contract negotiations resulting in longer completion times  Speculative excess of deal frenzied prices have come out of the market Valuation  Pricing is more sensitive to performance during a process Trends  Premium valuations for quality, high growth companies  Increased use of alternative financing – earn-outs, seller paper, cvr’s, etc. 5

U.S. Mergers & Acquisitions Activity  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% Deal Value Undisclosed Middle Market >$750M Deal Value Number of Deals ($ in billions) 15,000 $2,400 13,274 12,799 12,717 12,369 12,346 11,404 $1,800 10,059 10,082 9,905 10,000 9,271 8,927 8,776 $1,200 5,000 $600 0 $0 Number of Deals 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 >$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 Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis. 6

U.S. Mergers & Acquisitions Activity – Middle Market (1)  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 $250-750M Deal Value Deal Value Number of Deals ($ in billions) 6,781 7,000 $600 6,038 6,000 $500 5,344 4,535 4,742 5,000 4,626 4,521 4,459 4,514 $400 4,231 4,103 4,007 4,000 $300 3,000 $200 2,000 $100 1,000 0 $0 Number of Deals 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 $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 $441 $462 $279 $258 $291 $351 $364 $419 $465 $356 $235 $360 Deal Value (1) Transactions less than $750 million. Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis. 7

U.S. M&A Activity as a % of GDP and Equity Market Capitalization M&A volume is running above trend but remains well below the levels of the prior peak % of GDP 18.0% 16.0% 15.4% Average = 6.3% 14.3% 16.0% 13.3% 14.0% 12.7% 10.3% 12.0% 9.6% 10.0% 8.2% 8.3% 8.1% 7.7% 7.0% 6.8% 8.0% 4.9% 5.8% 5.5% 6.0% 2.8% 4.4% 3.8% 3.0% 3.4% 2.7% 2.7% 4.0% 2.2% 1.8% 2.0% 1.4% 1.3% 1.3% 1.4% 2.0% 0.0% % of US Equity Market Value 14.0% Average = 7.1% 12.5% 12.0% 10.3% 10.6% 8.4% 8.8% 9.4% 8.8% 10.0% 6.6% 7.3% 7.8% 7.4% 6.1% 8.0% 6.3% 6.7% 5.8% 5.1% 5.1% 4.8% 6.0% 4.4% 2.8% 3.2% 4.0% 2.0% 0.0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 8

U.S. EV/EBITDA Valuation Multiples  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 Middle Market Overall Market 12.0x 9.0x 6.0x 3.0x 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 8.6x 7.4x 6.6x 8.1x 7.2x 9.5x 11.0x 9.9x 9.8x 10.1x 7.0x 9.4x Middle Market 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 Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis. 9

U.S. EV/EBITDA Valuation Multiples (Cont.)  Transaction multiples for larger transactions have increased more dramatically than for transaction less than $50 million < $50M $50M-$250M $250M-$750M 12.0x 9.0x 6.0x 3.0x 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Transaction Size <$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 Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis. 10

Median Public Company Acquisition Premiums  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 1-Week Premium 4-Week Premium 60.0% 40.0% 20.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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% Source: Dealogic and William Blair & Company, L.L.C. Mergers and Acquisitions market analysis. 11