MERGERS & ACQUISITIONS
MERGERS & ACQUISITIONS INSIGHTS
MIDDLE MARKET M&A OUTLOOK 2008
DECEMBER 2007
Blake I. Cunneen Erik C. Franks 312 920-3273 312 920-2153 [email protected] [email protected]
David P. Briedis Jeffrey S. McIntosh 312 920-2134 312 920-3292 [email protected] [email protected]
head of m&a: Jeff A. Rosenkranz 312 920-2133 [email protected] December 2007
TABLE OF CONTENTS
Executive Summary...... 3
Section I: M&A Activity – “A Macro Look” Introduction ...... 5 Worldwide M&A Activity ...... 5 Domestic M&A Activity ...... 6 Middle Market M&A Activity ...... 8 European M&A Activity...... 10 Emerging Market M&A Activity ...... 13
Section II: Capital Markets Introduction ...... 16 Debt Markets...... 16 Initial Public Offering Activity ...... 20
Section III: Private Equity/Leveraged Buyouts Introduction ...... 24 LBO Volume...... 25 Portfolio Company Hold Periods ...... 26 Private Equity Fundraising ...... 28 Uninvested Equity Capital...... 30 Competitive Environment ...... 30
Section IV: Strategic Buyers Introduction ...... 32 Capital Structure...... 33 Cash Levels...... 34
Section V: Conclusion ...... 36
Appendix: 2007 Piper Jaffray M&A Sector Analysis
Business Services - Environmental Services ...... 37 - Facilities Services ...... 38
Clean Technology & Renewables - Biofuels ...... 39 - Solar...... 40
Consumer - Consumer Products...... 41 - Food Processing & Distribution ...... 42 - Hardlines & Specialty Retail...... 43 - Restaurants...... 44 - Softlines Retail, Footwear & Apparel...... 45
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 1 December 2007
Financial Institutions - Asset Management...... 46 - Broker-Dealer ...... 47 - Depository Institutions ...... 48 - Insurance...... 49 - Specialty Finance ...... 50 - Technology & Services ...... 51
Health Care - Biopharmaceuticals...... 52 - Health Care Services ...... 53 - Info-Driven Health Care ...... 54 - Life Sciences Tools & Diagnostics...... 55 - Medical Technology ...... 56
Industrial Growth - Building Products...... 57 - Janitorial and Sanitation...... 58 - Packaging ...... 59 - Specialty & Industrial Distribution ...... 60 - Specialty Chemicals ...... 61 - Specialty Vehicles...... 62
Technology - Communications Equipment...... 63 - Hardware & Semiconductors...... 64 - Internet...... 65 - IT Services ...... 66 - Software ...... 67
Restructuring - Distressed M&A Outlook...... 68
Information contained in this publication is based on data obtained from sources we deem to be reliable; however, it is not guaranteed as to accuracy and does not purport to be complete. Nothing contained in this publication is intended to be a recommendation of a specific security or company nor is any of the information contained herein intended to constitute an analysis of any company or security reasonably sufficient to form the basis for any investment decision. Nothing contained in this publication constitutes an offer to buy or sell or the solicitation of an offer to buy or sell any security. Officers or employees of affiliates of Piper Jaffray & Co., or members of their families, may have a beneficial interest in the securities of a specific company mentioned in this publication and may purchase or sell such securities in the open market or otherwise.
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EXECUTIVE SUMMARY
In our Middle Market M&A Outlook 2007, we predicted the M&A markets would remain hot throughout the first half of the year yet likely cool in the second half, comparing the upcoming M&A market to a typical Chicago Cubs season. While the Cubs managed to delay their disappointment until early October, our prognostication of the M&A markets proved quite prophetic. In short, we nailed it.
The first half of the year saw record levels of M&A activity, as overall deal volume and value were up across the board. LBO activity was especially strong as the trend of large take-private transactions continued from 2006. Strategic activity over the first three quarters of 2007 also grew, bolstered by increasing participation from foreign buyers; however, in the second half of the year, the financing markets dried up, spurred by deterioration in subprime mortgages and a needed correction to overly aggressive financing terms. Despite the downturn, the middle market continues to be active, largely insulated from the credit influences associated with the mega-deals.
While we strive to replicate the forecasting accuracy of last year, the indicators unfortunately are not offering the same clear direction. We believe the key term used to describe 2008 will be “volatility,” Major economic and geopolitical factors affecting the 2008 forecast are as follows:
• Housing—Will the subprime market continue to deteriorate with delinquencies increasing in the face of adjustable rate resets, forcing banks to book additional write-offs of loans and asset-backed securities? Or, will the government’s plan to freeze rate resets halt the downfall?
• Interest rates—Will the Federal Reserve Board find comfort in continued rate cuts to support the equity markets and overall growth? Or, will inflationary conditions cause Fed officials to halt the decreases, regardless of the effect on stocks?
• Unemployment—Perhaps the strongest indicator of economic health, unemployment has remained steady at historically normal rates. Should an increase in unemployment occur, will it precipitate an economic tailspin, causing the economy to slip into a recession?
• Election year—Typically the economy performs well in an election year, and forecasts for a Democratic White House beginning in 2009 should only add to that performance as deals are pushed through prior to the switch. Given the magnitude of economic instability, however, will those effects carry less weight in 2008?
In general, we feel M&A activity in 2008 will represent more of a correction of 2007 than a recession. The pendulum reached its apex in the second quarter of 2007, highlighted by covenant lite and PIK-toggle loans as well as $152 billion in LBO volume—a level of volume not reached in the years 2003-2006…combined. Given the uncertainty highlighted above and barring any disastrous events— natural or man- made—we feel M&A activity in 2008 will cool from the previous year, yet not dip to the recession levels of 2002 and 2003. Large deal activity will likely be the hardest hit, as the “mega-buyouts” will have difficulty securing financing, particularly in the first half of the year. Yet overall, private equity firms are still willing buyers with plenty of capital to put to work. Foreign buyers will continue to play an increasing role,
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 3 December 2007
boosted by overall global growth, a weak dollar and the increasing prominence of sovereign funds. Domestic middle market M&A activity will likely remain steady, possibly weakening slightly due to overall economic instability and expanding holding periods by private equity investors. Overall, the key to the 2008 M&A market will be the health of the economy—if we begin to see real economic weakness, deal activity will slow across the board.
An informative and in-depth review and preview of the M&A market is included herein. Further, please see the appendix for analyses of select Piper Jaffray focus sectors. We hope you enjoy our insights, and we welcome your questions and comments.
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SECTION I: M&A ACTIVITY — “A MACRO LOOK”
Introduction The feverish pace of M&A activity continued unabated during the first two quarters of 2007, as mega-LBO transactions dominated the news headlines. The M&A market then seemed to hit a brick wall over the summer with the tightening of financing markets. The deterioration in subprime credit quality and concerns about aggressive lending terms finally caused investors to pause, quickly slowing deal flow. Despite the credit slowdown and renewed concern over the direction of the U.S. economy, the middle market has proven to be resilient, with total deal volume down only slightly from the previous year period through the first nine months of 2007.
We expect 2008 to continue the volatility that we currently see in the market. The large pools of uninvested capital held by private equity firms, significant cash holdings among corporates and the increasing aggressiveness of foreign buyers, coupled with a weak dollar, will provide underlying strength to the U.S. market. Conversely, unfavorable financing conditions and economic uncertainty in the U.S. will weigh on the market. Worldwide, the view is much more favorable, as emerging economies become more familiar with capital markets dynamics and continue to see GDP growth exceeding that of developed markets. Many of the aforementioned drivers of the U.S. market will play key roles in worldwide M&A activity.
Worldwide M&A Activity Through the first three quarters of 2007, global M&A totaled almost $3 trillion, a 27% increase over the comparable period in 2006. This dramatic increase in deal values can be attributed to the large number of mega-deals that were announced in the first six months of 2007, before the turmoil in the credit markets slammed the door shut on this market. M&A deal volumes were also strong, with 30,679 deals announced through the first three quarters of 2007, an 11% increase over the comparable period in 2006.
For the second year in a row, the financial sector led the charge with $523 billion in total announced deal values, which represents a 26% increase over the comparable period in 2006. This also represents more than 17% of total deal value. The three strategic mega-deals which contributed in large part to this included ABN AMRO and its sale to Royal Bank of Scotland, Fortis and Banco Santander for $99 billion; the sale of Capitalia to UniCredit for $30 billion; and the sale of ABN AMRO North American Holding Company to Bank of America for $21 billion. To put these deals in perspective, the first was the largest global deal announced during the first three quarters, while the second and third fell into the sixth and twelfth spots, respectively. The energy and power sector came in second place, with just less than $430 billion in total deal value, led by the fifth largest announced global deal as TXU Corp. was acquired by KKR and Texas Pacific Group for $32 billion. The real estate sector rounded out the top three with almost $296 billion in total deal value.
The most improved player award goes to the consumer staples sector—the industry with the lowest deal value and fifth lowest deal volume in the same period of 2006— after seeing total deal value jump 199% and volume increase 8.1% in the first nine months of 2007 (see Exhibit 1). From a volume perspective, the industrials sector edged out the high-tech sector with 4,045 announced deals compared with 4,042 announced deals. This prevented high-tech from claiming the highest volume award for the third year in a row. The high-tech volume increase of almost 28% puts technology M&A activity at its highest levels since the bubble days of the late 1990s.
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 5 December 2007
Exhibit 1
WORLDWIDE M&A INDUSTRY ANALYSIS — YTD Q3 2007 ($ in Billions)
$600 4,500
4,000 $500 3,500
$400 3,000
2,500 $300 2,000
$200 1,500
1,000 $100 500
$0 0
e ls s at a als e ail ces ri ri care logy et i st t h rv Power E te inment Stapl no R e al a a alt S e M ndus nications e ch Financials y & R I u H g umer Te er s n E on igh & Entert C H elecomm a T er Products & Medi m
Consu
2007 YTD Total Deal Value Number of Deals Source: Securities Data Corporation
Through the first three quarters of 2007, European M&A activity topped U.S. dealmaking in terms of volume, but the U.S. came out on top in terms of value. However, in the third quarter, with the onset of the credit crunch, European M&A prevailed in both metrics. European M&A activity is expected to outpace the U.S. in the near term as economic uncertainty and unfavorable credit markets are expected to keep U.S. dealmakers in check.
We believe worldwide M&A activity will likely remain robust through 2008, with Europe and emerging markets leading the push as their economies are expected to continue chugging along in 2008. Mega-funds in the U.S. continue to raise record amounts of capital. As a result, these mega-funds are expected to continue putting money to work offshore—albeit not at the transaction sizes they have recently become accustomed to—as they seek opportunities in emerging markets to escape the economic uncertainty and tight credit markets at home. Rising global consumer power and persistent demand for natural resources will continue to drive M&A activity, with financials, energy and power, and materials leading the way as buyers look to create enterprises with global scale.
Domestic M&A Activity Despite the credit crunch that has curtailed dealmaking for large buyouts since mid- 2007, M&A activity in the U.S. continues to be strong. Through the first nine months of 2007, M&A activity (as measured by the number of transactions with U.S. targets) increased 7% over the same period in 2006 (see Exhibit 2). Further, the total value of 2007 transactions through the third quarter was $1.11 trillion, 30% more than the $857 billion in transaction value over the same period in 2006. Over the past ten years, the number of transactions has averaged approximately 8,750 per year with a combined average annual value of approximately $1.08 trillion. Annual transaction value in 2007 is projected to greatly exceed the 10-year average, despite the magnitude
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of the slowdown in the third and fourth quarters, as a result of the high-profile dealmaking in the first half of the year. M&A transaction volume is also projected to exceed the 10-year average, though by a smaller margin. Surprisingly, the deal volume in the third quarter of 2007 was actually 6% higher than the same period in 2006. This can be attributed to the desire to complete dealmaking, much of which was actually underway before the mid-summer credit crunch, and economic uncertainty.
The large increase in total transaction values in 2007 was primarily driven by large deals. There were a whopping 212 deals over $1 billion, 78 more than in 2006. These transactions created a 42% increase in aggregate value (to $845 billion) for the first nine months of 2007 versus the prior year, according to Securities Data Corporation (SDC). Despite the large number of mega-deals announced through the first nine months of 2007, the aggregate value of the ten largest transactions, totaling $221 billion, was actually down from $250 billion through September 30, 2006. Unlike in past years, the largest domestic transaction in 2007 was a private equity deal: the $32 billion buyout of TXU Corp. led by KKR and Texas Pacific Group, which closed in October.
The private equity community was extremely active in the first half of 2007; however, the fallout from the credit crunch has resulted in a significant decline in mega- buyouts. The bull run, which peaked in the first half of 2007, increased the velocity of the M&A market due to substantially shortened sponsor hold periods (see Section III for a further discussion of private equity activity). Sponsors are now able to fish in just about any size pond, as the size of private equity funds continues to grow—ten firms have or are targeting funds with $10 billion or more. This is a key factor helping drive mega-deal activity, as funds need to put massive amounts of capital to work. With the downturn in the credit markets in the second half of the year, however, these mega-deals all but went away. We believe there will only be a handful of these mega- deals in 2008, with most funds focusing on smaller, safer transactions. Interestingly, through the third quarter of 2007, private equity-backed deals accounted for seven of the ten largest transactions and 76% of the aggregate value. This compares with only eight sponsor-backed transactions ranking in the top 10 transactions during the preceding 12 years. After a short reign of less than a year, the Blackstone Group acquisition of Equity Office Properties relinquished its trophy as the largest LBO ever to the aforementioned KKR and Texas Pacific Group buyout of TXU Corp. for $32 billion in October. This deal allowed KKR to regain the top spot, which it loaned to Blackstone Group for a mere eight months. Add First Data Corp., Alltel and Hilton Hotels to the mix, and 2007 has been another historic year in terms of private equity deals. However, KKR is set to give the top spot away again, as that title could be taken by Teachers’ Private Capital, Providence Equity Partners and Madison Dearborn Partners with their buyout of Bell Canada Enterprises for $51 billion in a transaction expected to close in the first quarter of 2008, if the financing is not derailed by credit conditions.
In the fallout from the credit crunch, strategic buyers became increasingly competitive with financial buyers in their pursuit of M&A opportunities, especially in the period between July and August 2007, when corporates accounted for more than 91% of deal volume and 75% of deal value. Today, strategic buyers are in a position of strength, as strong internal operations have left them with significant cash balances to pursue acquisitions (see Section IV for a further discussion of strategic buyer activity). As of the third quarter 2007, the median cash balance for the companies in the S&P 500 was at a healthy 9.3% of revenue. This suggests that large companies still have money to spend. There was also significant offshore capital employed by strategic buyers going after U.S. targets. Notable in-bound deals included the Basell acquisition of Lyondell Chemical Company, the Saudi Basic Industries Corporation acquisition of GE Plastics, the BBVA
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 7 December 2007
S.A. acquisition of Compass Bancshares and the TD Bank Financial Group take-out of Commerce Bancorp. These four transactions brought more than $42 billion into the U.S. in 2007. With the weak dollar and increasing interest in buying into the U.S. market by foreign buyers, this trend is likely to continue.
Exhibit 2
U.S. M&A ACTIVITY ($ in Billions) $1,600 15,000
12,000 $1,200
9,000
$800
6,000
$400 3,000
$0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD YTD Q3 Q3 Total Reported Deal Values Number of Deals 2006 2007 Source: Securities Data Corporation
Middle Market M&A The domestic middle market—which we define as transaction values in the range of Activity $50 million to $500 million—again was an active segment of the broader M&A market through the first three quarters of 2007, as depicted in Exhibit 3. The number of announced deals in the middle market through the third quarter of 2007 decreased 4% from the same period last year, with 839 announced transactions compared with 869 transactions in 2006.
We believe this activity was essentially flat largely as a result of five factors that are pulling in opposite directions:
• An uncertain economic environment that is affecting operating results, especially for companies involved in the housing market, and the outlook of both buyers and sellers;
• Oil prices flirting with $100 per barrel;
• Weakening of the U.S. dollar;
• A large pool of uninvested private equity capital that funds are eager to put to work; and
• The continued interest of strategic buyers that are better able to compete with financial buyers as a result of normalization of leverage multiples by lenders.
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These key factors will continue to simultaneously encourage and disrupt M&A market momentum through 2008. Private business owners who are able to show strong historical and projected performance will still be able to benefit from the current M&A environment and take advantage of an attractive exit opportunity at valuation multiples that remain rich compared with historical levels.
Exhibit 3
U.S. MIDDLE MARKET M&A ACTIVITY ($ in Billions) $250 2,000
$200 1,600
$150 1,200
$100 800
$50 400
$0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD YTD Q3 Q3 Total Reported Deal Values Number of Deals 2006 2007 Source: Securities Data Corporation
The significant M&A activity witnessed in 2007 clearly has not led to excess supply, as private equity firms continued to be aggressive buyers in the middle market, putting record levels of capital to work while also taking advantage of an accommodating fundraising environment (see Section III for a further discussion of private equity activity). Despite all the transaction volume in the middle market, deal multiples continued to rise to their highest level yet (see Exhibit 4). For reported transactions, the median EBITDA multiple reached double digits at 10.0x through the third quarter of 2007, one-fifth of a turn higher than 2006, despite the fact that leverage multiples have declined slightly due to the turmoil in the credit markets and economic uncertainty.
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 9 December 2007
Exhibit 4
EBITDA MULTIPLES FOR DEAL SIZES $50 MILLION – $500 MILLION
11.0x 10.0x 10.0x 9.8x
9.0x 8.5x 8.1x 8.2x 8.0x
7.0x 6.6x 6.7x 6.3x 6.0x
5.0x
4.0x
3.0x
2.0x
1.0x
0.0x 2000 2001 2002 2003 2004 2005 2006 YTD Q3 2007
Source: Securities Data Corporation
European M&A Activity M&A activity in Europe (defined as acquisitions of European-based companies) actually outpaced that of the U.S., with 8,241 transactions through the first nine months of 2007, an increase of 13% over the prior year period (see Exhibit 5). Deal values for the period were up a staggering 34%, reaching $971 billion, according to SDC. The most active industries for M&A activity have been financials, energy and industrials, which collectively account for nearly 50% of total European M&A activity.
There have been a number of key catalysts of the growth in both intra-European and cross-border M&A activity:
• Solid earnings and cash reserves by European companies;
• Relatively healthy credit markets;
• Strong growth rates in the Central and Eastern European emerging markets;
• Privatization of entities within the former Soviet bloc; and
• An increasingly receptive political environment.
The high end of the M&A market in Europe had its own share of announced mega- deals, with the Royal Bank of Scotland-led bank consortium’s $99 billion acquisition of ABN AMRO as the largest deal, followed by UniCredit’s $29 billion purchase of fellow Italy-based bank, Capitalia. Private equity firms got in on the action with large deals as well, including the fourth-largest European deal—the $19 billion buyout of Alliance Boots plc by KKR. The mega-deals are expected to return to normalized historical levels in 2008, with a renewed focus on dealmaking in the middle market.
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M&A momentum in Europe is likely to continue, as slow domestic growth in some European countries has prompted many companies to look outside their own borders for expansion opportunities. The disparate European governments have become far friendlier to cross-border M&A over the last several years. The Royal Bank of Scotland-led consortium’s take over of ABN AMRO, despite strong competition from Barclays, serves as a clear example that markets within Europe are truly open and industries once protected by strong nationalism no longer have a big brother protecting them from bullies from other neighborhoods. As corporate consolidation across European borders has intensified, a race has begun among competing companies to acquire prime targets.
Furthermore, the private equity community has solidly established itself as a high profile, driving force of M&A activity in Europe. Unlike the U.S., the United Kingdom passed legislation changing the taxation of carried interest which will take effect on April 6, 2008. As a result, we expect to see a slight pickup in M&A activity in the UK, with firms that were going to sell portfolio companies accelerating the sale process to take advantage of a more favorable tax treatment. We do not foresee extended effects from this new tax, but expect to see changes to fund organization and deal structures as firms find alternative ways to minimize tax obligations. While we generally expect M&A activity in Europe to continue to be strong, it will be tempered by concerns that the economic uncertainty in the U.S. will spread across the pond.
With the expansion of the European Union and economic growth in Central and Eastern Europe, an increasing number of U.S. and European corporate and private equity investors are directing their funds toward investments in developing European countries. Countries such as Russia, Poland and Serbia offer U.S. and European investors the opportunity to acquire recently privatized companies— particularly in the material, energy, industrial and building sectors—for very attractive multiples, although the largest wave of privatization is in the rearview mirror. Companies in these markets offer strong growth prospects and better risk profiles than other developing markets. With strong corporate balance sheets, large pools of uninvested U.S. and European private equity capital and attractive acquisition targets in Europe, there is little question that both the means and the opportunities exist for expansion in this increasingly important market.
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 11 December 2007
Exhibit 5
EUROPEAN M&A ACTIVITY ($ in Billions) $1,200 18,000
$900 13,500
$600 9,000
$300 4,500
$0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Q3 Q3 Total Reported Deal Values Number of Deals 2006 2007 Source: Securities Data Corporation
Activity in the European middle market was strong in 2007 as well. Volume increased 3% to 815 announced deals through the third quarter of 2007 (see Exhibit 6). Deal values were up a solid 3% at just over $142 billion. While these percentage increases are modest, it is important to keep in mind that 2006 was a record year for M&A activity.
There are numerous near-term drivers of middle market M&A activity in Europe. Similar to the U.S. firms, the European strategic buyers have emerged with strong balance sheets and large cash reserves that they can use to fund acquisitions. Furthermore, private equity firms remain highly active in the middle market. These include Archer Capital Pty Ltd and BENCIS Capital Partners, which each completed five reported acquisitions, and Barclays Capital, which added four European middle market companies to its portfolio for approximately $1 billion. As a result of the economic uncertainty and credit difficulties domestically, U.S. private equity will continue to aggressively increase its presence in Europe as firms look to invest their vast war chests of capital, especially in Central and Eastern Europe. This trend is illustrated by KKR’s purchase of Turkish cargo shipper, U.N RO-RO for $1 billion and Blackstone Group’s acquisition of a 51% stake in Latvian telecommunications group, Lattelecom for $178 million. While the 2006 M&A market set new high water marks, 2007 will likely push the bar even further into record territory, both in terms of total deal value and number of deals, as 2006 deal value and volume have nearly been eclipsed through the first nine months of 2007.
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Exhibit 6
EUROPEAN MIDDLE MARKET M&A ACTIVITY ($ in Billions) $200 1,400
$160 1,050
$120
700
$80
350 $40
$0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Q3 Q3 Total Reported Deal Values Number of Deals 2006 2007 Source: Securities Data Corporation
Emerging Market M&A Emerging economies have always carried significant political and economic risk, yet Activity both corporations and private equity have become far more adept at entering these markets over the last ten years. This is practically a result of the explosive interest in high growth emerging market economies, which for analysis purposes, we define as Brazil, Russia, India and China. GDP growth among the G7 is currently averaging 2.2%, which is comparatively uninteresting when Brazil, Russia, India and China are expecting growth in 2008 of 4.7%, 7.2%, 8.0% and 11.5%, respectively, according to The Economist. These attractive growth rates and access to a huge, largely untapped portion of the world’s population make these markets very attractive for investment.
Since 2001, total emerging market deal value has jumped from approximately $24 billion to $90 billion, an astonishing five-year CAGR of nearly 30%. Over the same time period, deal volume leapt 17% with 2,408 closed transactions in 2006, according to SDC. Through the third quarter of 2007, there have been 2,116 transactions announced with an aggregate deal value of $143 billion, which is incredible when compared with 1,742 transactions totaling $66 billion for the same period in 2006, according to SDC (see Exhibit 7). The staggering increase in aggregate deal values for year-to-date 2007 was largely influenced by M&A activity in Russia with 14 of the 20 largest emerging market transactions taking place there. The largest 2007 year-to-date transactions in the emerging market were the purchase of Hutchinson Essar Ltd. in India by Vodafone Group Plc for $13 billion, Neft-Aktiv purchasing two parts of YukosSibneft Oil Company in Russia for an aggregate transaction value of $13 billion and Italian company, EniNeftegaz, purchasing Gazprom Neft in Russia for $6 billion.
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 13 December 2007
Exhibit 7
EMERGING MARKET M&A ACTIVITY ($ in Billions)
$150
$135
$120
$105
$90
$75
$60
$45
$30
$15
$0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD YTD Q3 Q3 2006 2007 Brazil China India Russia
Source: Securities Data Corporation
The desire for first-mover advantages created a frenzied race to capture market share, especially among the large corporates and, increasingly, private equity firms. The sense of urgency has resulted in a reliance on acquisitions as the preferred entry method. The most active acquirors in Brazil, Russia, India and China are Perdigao S.A., OAO Gazprom, Specialty Papers Ltd. and MAT-International Trading Group, respectively. This growth in M&A activity within emerging markets is being exacerbated by declining protectionist sentiment, increasing privatization and financial reforms, which serve to lower volatility and risk premiums. Joint ventures and minority stakes were the early vehicle of choice for entry into emerging markets, and remain an attractive structure. There is no denying, however, the strong growth in pure M&A activity as measured in both volume and aggregate deal value metrics.
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Exhibit 8
EMERGING MARKET EBITDA MULTIPLES
14.0x
12.4x 12.0x 10.5x 10.0x 9.6x 8.7x
8.0x 7.0x 7.2x 6.1x 6.0x
4.0x
2.0x
0.0x 2001 2002 2003 2004 2005 2006 YTD Q3 2007
Source: Bloomberg and Securities Data Corporation
While it is tough to forecast exactly where multiples will head, private equity firms have put their money to work in these markets, and we expect them to continue to do so. This will drive deal multiples toward even loftier levels barring a financial, economic or political disaster like the hyperinflation in Argentina. Since 2001, multiples steadily increased from 6.1x in 2001 to 10.5x in 2006, a five-year CAGR of 11.3%. We are expecting an even more dramatic increase in 2007 as the multiples are close to 2.0x higher through the first nine months of 2007 than 2006. Despite total deal value growth volatility, multiples have exhibited consistent growth since the turn of the century. We attribute much of this growth to the increasing presence of private equity firms in the less saturated emerging markets and believe this presence will only continue to grow in 2008.
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 15 December 2007
SECTION II: CAPITAL MARKETS
Introduction The debt and equity capital markets have a significant impact on M&A activity, as both play a key role in providing investors a source of capital to use for M&A activity. The debt markets continued to be readily accessible in the first half of the year, providing plenty of capital to support corporate and private equity buyouts, but dried up quickly once the July credit crunch hit. The equity capital markets enjoyed an equally impressive run until early August, when the Dow lost more than 300 points in a single day. Since then, the equity markets have been marked by volatility. IPOs are an alternative way for investors to exit, which lowers M&A supply. The capital a company raises through an IPO, along with the stock itself, can be used to acquire other companies down the road, potentially providing an increase in M&A. IPO activity in 2007 has outpaced 2006 through the first three quarters and a strong backlog of issuances indicates the latter part of 2007 and the early part of 2008 will continue to be active.
Debt Markets The debt markets stayed strong through the first half of 2007, but went south with the subprime mortgage market fallout that began in late July. Many of the alternative investment vehicles that were so popular in 2006 and through the first half of 2007 have evaporated. Some hedge funds, especially those heavily invested in mortgage- backed securities, have had to shut down or incur huge write-downs, limiting their ability (and desire) to provide capital for M&A. The aggressive and competitive lending environment that characterized 2006 has been replaced by a hesitant, risk- averse group of debt providers. Due to the recent weakness of the financing environment, we believe that strategic buyers will dominate the M&A landscape (even more than usual), and private equity firms will look for smaller, less risky deals in 2008. While both average total debt and senior debt multiples remained at historically high levels through the first three quarters of 2007, 4.8x EBITDA and 4.5x EBITDA, respectively, these numbers were significantly lower in the third quarter (see Exhibit 9).
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Exhibit 9
LEVERAGED LENDING EBITDA MULTIPLES
6.0x
5.0x 0.3x 0.5x 1.1x 0.3x 0.4x 4.0x 1.1x 0.8x 0.6x 0.9x 0.8x 0.9x 3.0x 0.9x
4.5x 2.0x 4.0x 4.0x 4.1x 3.7x 3.5x 3.3x 3.5x 3.1x 3.0x 2.7x 2.8x 1.0x
0.0x 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD YTD Q3 2006 Q3 2007 Senior Debt/EBITDA Non-Bank Debt/EBITDA
Source: Portfolio Management Data LLC
The credit crunch that has defined the second half of 2007 has devastated the current M&A market. Available capital dries up more and more each day. An increase in subprime mortgage defaults resulted in the devaluation of most asset-backed securities, especially the popular collateralized debt/loan obligation funds (CDOs or CLOs). These diminished securities, in addition to a falling stock market, a dried-up lending market and investment banks frantically looking for buyers of debt on their balance sheets, have heavily weighed on the M&A market. Risky high-yield bonds have become expensive and unattractive with their yields rising to their highest levels since 2002. Banks have tightened their lending standards and companies, especially small businesses, are finding it increasingly difficult to secure growth capital.
In recent years, alternative providers of debt capital, including hedge funds and private investors, have become prominent lenders. Over the last half decade, there has been a significant increase in CDOs and CLOs that have created a liquid market for otherwise illiquid bank loans. In fact, during this time period, they financed nearly three-fifths of institutional new-issue flow, according to Standard & Poors. Unfortunately, the market for these vehicles collapsed with the subprime mortgage debacle. These products have become impossible to sell and banks have had to take massive write-downs to mark them to market. The write-downs, and subsequent need to set aside capital for future problems, have caused a lending market drought. In the absence of these CLOs and CDOs, secondary prices fell and arrangers were forced to reduce new issues. CLO volume in the third quarter dropped to its lowest level since the second quarter of 2005 and much of this was based on deals that were underwritten earlier in the year. Hedge funds have traditionally purchased around one-sixth of new issues and, with many of them suffering write-downs and losses, it will be telling to see how active they are in 2008. As a result of all of this, financial sponsors looking to do large deals will need to add more equity (thus using less leverage), come up with new ways to raise money and/or go to a broader group of investors. Though middle market deals will face these same pressures, club deals will be a more viable option. The state of the housing market will also have an enormous impact on the debt
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 17 December 2007
markets. After all, it was subprime mortgage defaults that started the credit crisis in the first place. Falling housing prices and rising default rates (though still near historic lows) continue to put pressure on mortgage-backed securities and force banks to take write-downs. Another important note is that some 2 million adjustable rate mortgages worth more than $350 billion are scheduled to reset to higher interest rates in early 2008, according to The Wall Street Journal. While the Federal Open Market Committee has lowered interest rates in 2007, most of these mortgages are based on LIBOR, not the federal funds rate. In effect, lowering the federal funds rate does nothing to ease the pain of these mortgage holders. LIBOR increased in the month of November and, though it is usually very close to the federal funds rate, is seeing its largest spread over the federal funds rate (64 bps) since the funds rate was lowered 50 bps on September 18, 2007. The Bush administration has stepped in, acting as a liaison between lenders and subprime mortgage holders. The Bush administration unveiled a plan to freeze mortgage rates at low introductory rates with no resets for five years for qualified borrowers. The plan is voluntary; however, and its terms were set by Wall Street firms and the mortgage industry. That the government has intervened is a sign that this is a serious problem, but it remains to be seen what exactly it can do to help. The fact remains that these borrowers have overstretched themselves and, as a result, default rates will remain comparatively high. Clearly, falling housing prices and mortgage rate resets will affect the ability of banks to lend money to businesses.
These problems have put enormous strain on lending banks. Many have started to stockpile cash and reduce lending, bracing for future losses due to off-balance sheet vehicles. Banks are also preparing for calendar and fiscal year ends when they like to hold cash, as trading is light and the markets are closed. Combined, these factors equate to less available debt, as banks reduce their supply of capital.
The second-lien loan market has taken off since 2002, and we believe that, even with the recent quarter’s slowdown, it will pass the $29 billion mark before the New Year (see Exhibit 10). The strength of the second-lien market helped drive M&A in 2006 and into the first half of 2007. These loans are attractive to borrowers because of their favorable repayment terms and pricing. Second-lien creditors sit between the typical mezzanine and senior-secured lenders by taking a junior lien in exchange for more favorable pricing. The second-lien tranche effectively increases the amount of senior debt available, and therefore reduces the need for mezzanine debt. Second-lien loans, however, totaled only $2.6 billion in the third quarter, down from $11.2 billion and $14.1 billion in the first and second quarters, respectively. This is the lowest volume since the third quarter of 2005. Consequently, mezzanine lenders will likely play an increasing role in future deal flow. As senior debt pricing dropped in 2006 and the beginning of 2007, mezzanine providers experienced both their lowest level of participation in the capital structure in a decade and historically low returns. With banks hoarding their money and large high-yield spreads, however, mezzanine debt will be thrust back into the spotlight.
18 ⏐ PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008
December 2007
Exhibit 10
SECOND-LIEN ISSUANCES ($ in Billions)
$30 $28.3 $27.9
$25
$20
$16.3
$15 $12.0
$10
$5 $3.1
$0.2 $0.7 $0.4 $0.1 $0.1 $0.6 $0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD Q3 2007
Source: Standard & Poor’s LCD Report
The high-yield debt market made a strong comeback in the first half of 2007, with volume of more than $80 billion in the first two quarters combined. However, as a result of the credit crunch, high-yield bond spreads have risen to their highest level since 2002, a sign of growing default risk. It is important to note, however, that default rates remain close to historic lows. Relative to 2006, the number of issues and the amount raised has increased by 26% and 65%, respectively, for the first three quarters of 2007, compared with the same time period in 2006 (see Exhibit 11). The Economist reports, however, that some $160 billion in leveraged loans will come due in 2008, and banks will be reluctant to dole out more, so firms will have difficulty refinancing.
Unfortunately for financing providers, the write-downs may not be over. In fact, there could be tens of billions of dollars worth of further subprime losses still to come. If this is true and firms still want to keep their capital reserves at a comfortable level (which presumably they will), financing will be severely stifled. If this happens, we would expect a further drop in the M&A market throughout 2008.
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 19 December 2007
Exhibit 11
HIGH-YIELD ACTIVITY ($ in Billions) $140 800
700 $120
600 $100
500 $80
400
$60 300
$40 200
$20 100
$0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD YTD Q3 Q3 Amount Raised Number of Issues 2006 2007 Source: Portfolio Management Data LLC
Initial Public Offering (IPO) Despite a third quarter slowdown in the IPO market, issuances over the first three Activity quarters of the year outpaced those of the comparable period in 2006. In fact, the IPO market experienced its best year in terms of deal volume and dollars raised since 2000, according to MarketWatch. The amount of money raised through IPOs in New York is set to pass London for the first time since 2004, a positive sign for U.S. exchanges, which have been hurt in recent years by onerous regulatory requirements. Through the first nine months, there have been 136 IPOs completed, raising nearly $40 billion versus 110 IPOs for $25 billion completed over the same time period in 2006 (see Exhibit 12). The 2006 IPO market saw a slow third quarter but an explosion in the fourth, which carried over into 2007. With the current bearish market conditions, it may be tough for 2007 to finish as vigorously as 2006. Rising gas prices, falling housing prices and low consumer confidence are all weighing on investors. That said, corporate profits are at record highs, IPO backlog remains high across all industries and stock-investing hedge funds are making a strong comeback. The volatile stock market has not seemed to frighten companies, as only 9% of all IPOs filed were withdrawn, according to MarketWatch. Large IPOs such as Visa Inc. and KKR & Co. still loom in the pipeline as well. The first half of 2008 is likely to see a steady increase in IPOs as the backlog is reduced and capital is put to work.
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December 2007
Exhibit 12
HISTORICAL IPO ANALYSIS ($ in Billions)
$80 600
$70 500
$60
400 $50
$40 300
$30 200
$20
100 $10
$0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD YTD Q3 Q3 Total Amount Raised Number of IPO's 2006 2007 Source: Securities Data Corporation, Dealogic and Piper Jaffray
In the aggregate, IPOs have returned nearly 14% for the first three quarters of 2007, driven by strong performances in the clean technology, consumer and transportation sectors. Total IPO returns doubled the 2006 number of 7% due to the relatively strong performance of all the industry sectors. Consumer and technology, two of the strongest sectors in 2006, have lagged their prior performances. Surprisingly, this has also been the case with the energy sector despite record oil prices.
Exhibit 13
IPO ANALYSIS BY SECTOR — YTD Q3 2007 ($ in Millions)
Number of YTD Q3 2007 IPOs Amount Offered Performance Clean Technology 10 $2,921 58.7% Consumer 4 $1,173 36.3% Transportation 4 $603 21.1% Technology 46 $10,660 19.5% Industrial Growth 6 $2,849 10.4% Health Care 29 $3,259 6.7% Energy 8 $1,786 5.2% Other 6 $2,726 -1.3% Financial 23 $13,572 -5.2% Total 136 $39,549 13.9%
Source: Securities Data Corporation, Dealogic and Piper Jaffray
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 21 December 2007
Market indices hit record highs for the first half of the year and IPOs were plentiful. The credit crunch brought the markets down at the beginning of the third quarter, and while they have rebounded somewhat, the indices have not come close to their first half levels. As a result, IPOs slowed in the third quarter; yet as previously noted, few companies withdrew after filing. Companies took advantage of the strong market in the first half of the year (especially the second quarter), but the number of IPOs dropped 54% in the third quarter versus the second quarter.
In our Middle Market M&A Outlook 2007, we mentioned an emerging trend in the IPO market of small domestic firms avoiding the U.S. markets and costly Sarbanes- Oxley regulations and instead filing on the London Stock Exchange’s Alternative Investment Market (AIM). The AIM targets early-stage companies looking for a cheaper means to raise funds than a U.S. IPO. In 2006, more than 20 U.S. companies went public on the AIM, and another nine in the first nine months of 2007. This trend is still not affecting the U.S. IPO market significantly because the majority of these companies would be considered too small for a U.S. listing, but it could potentially affect the U.S. markets if the AIM continues to snag companies that might have eventually gone public in the U.S.
Exhibit 14
SPONSOR-BACKED IPO ANALYSIS ($ in Billions) $50 500
$45 450
$40 400
$35 350
$30 300
$25 250
$20 200
$15 150
$10 100
$5 50
$0 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD YTD Q3 2006 Q3 2007 Total Capital Raised Number of IPOs Source: Capital IQ
With the M&A market remaining the preferred exit for private equity firms (especially those in the middle market) looking to realize returns from their investments, the sponsor-backed IPO market suffered a huge decline, with only 49 announced sponsor-backer IPOs through the first three quarters of 2007, compared with 81 in the comparable period of 2006. This represents a decline of almost 40%. While the market has remained receptive to sponsor-backed offerings, the onerous regulatory requirements and red-hot nature of the M&A market have made a public offering far less attractive for many companies, especially smaller firms. The average amount raised has also gone down, falling 16% to $165 million. This is still above the
22 ⏐ PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008
December 2007
2005 average, which suggests that these IPOs remain largely dominated by big companies. It is also important to note that private sales remain the most efficient alternative for most companies, and the recent downturn in the market may discourage companies from taking the IPO route. Though these factors may detract from sponsor-backed IPO activity, some relief may be garnered by the cooling deal flow and lower multiples in the M&A market. These conflicting forces will need to be closely monitored in 2008 to see where the balance is struck.
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 23 December 2007
SECTION III: PRIVATE EQUITY/LEVERAGED BUYOUTS
Introduction The private equity community continued to drive growth in the broader M&A market in 2007. Year-to-date LBO volume has already outpaced 2006 annual totals, yielding yet another record high. Once again, large take-private transactions fueled the growth, as TXU Corp., First Data Corp. and Alltel dominated headlines in the first half of the year. However, the second half of the year brought about a swift change in market conditions, as the once-hot financing market suddenly cooled. LBO volume dipped in the third quarter from the record $152 billion second quarter, and indications are for further easing in the fourth quarter.
All signs point to a slowdown in deal volume in 2008. Financing terms are less favorable and warning signs litter the broader economic landscape, creating fears of a recession. Of all the negative indicators threatening 2008, perhaps the most daunting to the LBO market is housing. The fallout from the subprime mortgage market has had ripple effects throughout the lending community, making LBOs more difficult. Should borrowers continue to default on their mortgages, banks will be forced to further pull in the reins, making LBOs of “B” properties difficult. “A” properties and most middle market deals, which are largely insulated from the broader debt capital markets, however, will continue to be financed.
In general, it is important to keep some perspective during the latest highly publicized “catastrophe” to hit the market. The $152 billion in LBOs in the second quarter was greater than the 2000, 2001, 2002 and 2003 annual totals…combined. Quite frankly, given the frenzied market of 2007, LBO volume had no where to go but down. Barring a broad-based recession, it is unlikely we will see the collapse of the market that some fear.
24 ⏐ PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008
December 2007
LBO Volume Exhibit 15
LBO VOLUME ($ in Billions) $450 $405 $400
$350
$300
$250 $233
$200
$150 $130
$100 $94 $57 $53 $47 $50 $33 $41 $20 $22
$0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 LTM Q3 2007 Total Common/Preferred Equity Funded Bank Debt Other (High Yield, Mezzanine, etc.) Source: Portfolio Management Data LLC
The favorable market conditions of 2006 spilled over into the first half of 2007, yielding another record year for LBO transactions. LBO volume over the first nine months of 2007 has already outpaced the 2006 full year total, driven once again by large, take-private transactions. Over the last 18 months, nine of the ten largest buyouts in history were either announced or completed. Highly liquid financing markets, large pools of uninvested private capital and stringent regulatory requirements combined to create a perfect environment for a public to private switch.
Exhibit 16
TOP DOMESTIC PRIVATE EQUITY DEALS BY SIZE ($ in Billions)
Date Announced Company Name Transaction Value 2/25/2007 TXU Corp. $32.1 10/24/1988 RJR Nabisco $30.6 10/2/2006 Harrah’s Entertainment, Inc. $27.9 7/3/2007 Clear Channel Communications, Inc. $27.5 4/2/2007 First Data Corp. $25.7 4/16/2007 SLM Corporation $25.5 5/20/2007 Alltel Corp. $25.1 11/19/2006 Equity Office Properties Trust $25.0 5/29/2006 Kinder Morgan, Inc. $21.6 7/24/2006 Hospital Corporation of America $20.8
Source: Securities Data Corporation and Capital IQ
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 25 December 2007
While it was these large transactions that led LBO volume to record heights, rumors of difficulty in financing a mega-deal were an early signal of its downfall. In July, one leg of the favorable market conditions critical to LBO success weakened. Rumors began swirling that KKR was having difficulty selling debt to finance its purchase of First Data Corp. Standard & Poors then announced that it might lower ratings on $12 billion of subprime debt and cut ratings on some top-rated mortgage bonds a little over a week later. As it stands today, the aftershocks of the credit crisis have already cost the CEOs of Merrill Lynch and Citigroup their jobs and resulted in tens of billions of dollars in write-downs, with more on the horizon.
Nevertheless, to paraphrase Mark Twain, reports of the death of the LBO have been greatly exaggerated. Third quarter LBO volume totaled more than $67 billion, greater than all of 2003 combined and hardly representative of a dried up market. Clearly, third quarter volume would not have been viewed in such a draconian manner had it not followed the $152 billion second quarter, which exceeded every annual total in history prior to 2006. Rather, what has happened can be more accurately labeled a market correction. Financing terms in early 2007 approached irrational levels, and the pull back in the second half of the year merely corrected a market trend. LBO volume in 2008 will be down from 2007, yet not to the levels seen earlier in the decade. We expect that deals for “A” properties will still get done, albeit at more reasonable financing levels, and overall volume may approximate 2005 levels.
Portfolio Company Hold Exhibit 17 Periods AVERAGE NUMBER OF YEARS BETWEEN ORIGINAL LBO AND DIVIDEND
4.5 4.1 4.0
3.5 3.3
3.0
2.5 2.1 2.0 2.1 2.0
1.5
1.0
0.5
0.0 2003 2004 2005 2006 YTD Q3 2007
Source: Standard & Poors LCD Report
26 ⏐ PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008
December 2007
Another key factor driving LBO volume was the reduced hold period between the original LBO and the first dividend to shareholders. Since 2003, this level has dropped from just over four years to just over two years. Throughout 2006 and the first half of 2007, private equity firms have taken advantage of the generally strong economic conditions and competitive, highly liquid financing markets to recognize returns earlier than historical averages. In many instances, sponsors were selling strong companies, with planned growth initiatives that had yet to be implemented. However, faced with valuation levels as they were, the impetus to sell was too strong. Shortened holding periods and strong realized returns are enabling firms to raise larger funds ahead of historical fundraising cycles. While the data in Exhibit 17 is somewhat clouded due to dividend recapitalizations, it nonetheless speaks to the broader market trend of shortened hold periods.
Exhibit 18
REMAINING PEG-OWNED COMPANIES VS. YEAR PURCHASED
1,200 1120
1,000 971
800 730
618 600
400 348
207 226 200 171 178 173
0 1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD Q3 2007
Source: Capital IQ and Piper Jaffray
Exhibit 18 indicates the number of companies acquired each year that are still held in the financial sponsors’ portfolio. The increasing number of companies held in private equity portfolios is a reflection of the growing size and breadth of the private equity community. The combination of increased private equity activity and shortened hold periods yields the steep increase in 2006 and through the third quarter of 2007. Given that the market has cooled, we expect hold periods to increase and begin to approach historical norms. As such, the record amount of companies bought by private equity firms in 2006 and 2007 may not come to market for some time, as sponsors no longer face red hot market conditions enticing them to divest.
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 27 December 2007
Private Equity Fundraising Exhibit 19
PRIVATE EQUITY FUNDRAISING ($ in billions)
$250
216
$200 198 183
$150
$100
63 55 $50 42 35 37 24 17
$0 1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD Q3 2007
Source: Portfolio Management Data LLC
Despite the second half downturn, private equity fundraising continued on its record pace in 2007, as year-to-date 2007 figures have already surpassed the lofty standards set in 2005 and 2006. In fact, over the past 11 quarters, $597 billion in private equity capital has been raised. To offer some perspective, in the 11 years prior to 2005 only $349 billion was raised.
Once again, mega-funds are lead contributors to the record growth, with roughly 60% of year-to-date 2007 totals coming from funds with target levels of $3 billion and above. Furthermore, unlike other areas of the economy that cooled in the second half of the year, money continued to flow into private equity. Fundraising held steady throughout 2007, generating totals of $68 billion, $74 billion and $74 billion in the first, second and third quarters, respectively. The continued strength of private equity, particularly in the face of a downturn in the credit markets, demonstrates the perceived attractiveness of this investment vehicle.
28 ⏐ PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008
December 2007
Exhibit 20
TOP PRIVATE EQUITY FUNDS BY SIZE ($ in Billions)
Fund Size Vintage Status Blackstone V * $21.7 2005 Closed Carlyle V * $17.0 2007 Fundraising KKR 2006 * $16.1 2007 Fundraising APAX VII * $15.6 2007 Closed TPG V * $14.3 2006 Closed Permira IV * $14.1 2006 Closed Providence VI * $12.1 2006 Closed Apollo VI $10.1 2005 Closed Bain IX ** $10.0 2006 Closed Carlyle IV *** $10.0 2005 Closed
* Estimated fund size ** Includes co-investment fund *** Includes $2 billion European fund Source: Thomson Financial and Capital IQ
Despite signs that mega-deals may cool off, mega-funds appear to be here to stay. From a purely logistical standpoint, it is much easier for a limited partner to allocate $250 million to a large fund, than to give $25 million to 10 middle market funds. Given recent successful fundraising efforts from Blackstone Group, The Carlyle Group and KKR, it appears that while large funds may have to work a little harder, capital is still readily available.
This presents an interesting dichotomy for the LBO market. Capital continues to flow into large funds, yet due to pull backs in the debt markets, large deals are struggling to find financing. As a result, we believe larger funds will begin to move down market and participate in deals that formerly fell below their radar.
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 29 December 2007
Uninvested Equity Capital Exhibit 21
UNINVESTED PRIVATE EQUITY CAPITAL ($ in Billions)
$200
$180 $176 $160 $160 $152
$140
$123 $120 $120 $118 $115 $110 $101 $100 $100
$80 $64 $60
$40
$20
$0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Q3 2007
Source: Thomson Research
In a positive sign for future fundraising, the amount of uninvested private equity capital was lower at the end of the third quarter than 2006 year end totals. This shows the record amount of capital raised over the first three quarters has already been put to use. Nevertheless, at $160 billion there is still a sufficient amount of “dry powder” left in the market to fund upcoming deals. Typically, the equity portion of an LBO approximates between 25% and 33% of the total deal size. Using third quarter figures, this implies approximately $480 billion to $640 billion of private equity purchasing power currently available in the market.
Since 2000, year-end totals for uninvested private equity capital have averaged approximately $134 billion. While these levels have trended upward over the past three years, it in no way approaches the explosive increases in private equity fundraising during the same period. Essentially, all funds raised were being put to use. Historically, the private equity market has been fairly efficient and has avoided periods of surplus capital. As third quarter numbers trend down from 2006 year-end totals, we expect a similar trend to occur in 2007, as fundraising will slow and uninvested capital will level off.
Competitive Environment There are two major factors present today that could have a profound effect on the private equity community. In February of 2007, Fortress Investment Group became a publicly traded company, followed shortly thereafter by Blackstone Group and by news that KKR had filed a shelf registration for a proposed IPO. Many skeptics have questioned the move, citing the costs of increased public disclosures and heightened regulatory scrutiny as likely outweighing the benefits of enhanced liquidity. After all, as we pointed out earlier, private equity fundraising has apparently never been easier. Nevertheless, KKR has offered no signs that it intends to change its plans, despite the downturn in the private equity market.
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December 2007
The public filing option is essentially only viable for mega-funds. Middle market funds will largely be unaffected by this trend, aside from the potential residual effects of public filings on the market as a whole. Blackstone Group’s public filing brought broad-based attention to the private equity community and amplified scrutiny of the tax treatment of carried interest. Currently, carried interest is taxed at the capital gains rate of 15%, yet certain members of Congress are pushing for legislation to change that to ordinary tax rates. With Democratic front-runners, Hillary Clinton, Barack Obama and John Edwards all in favor of the change and similar changes in the UK taking effect in 2008, a tax amendment may not be far off.
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 31 December 2007
SECTION IV: STRATEGIC BUYERS
Introduction Strategic buyers were the predominant drivers of deal volume and a significant contributor to overall deal value in the M&A market once again in 2007. Following a cool down from 2001 through 2003, strategic buyers re-entered the M&A market during 2004 and have remained very active since, with industry consolidation emerging as a prevalent theme over this period. Strategic acquirors played an integral role in 2007 activity as they aggressively favored expansion through external growth strategies in their market sectors due to improved operational performance and aggressive Wall Street growth expectations that could not be achieved internally. Strong financial performance and significant levels of cash, combined with potentially lower target valuations and lower leverage multiples for private equity buyers, should enable strategic buyers to remain acquisitive in 2008. The ability to finance deals internally, coupled with the debt market turmoil of recent months, may signal a shift that will allow strategic buyers to regain their advantage over the LBO firms that have grabbed headlines of late.
Exhibit 22
STRATEGIC M&A ACTIVITY ($ in Billions) $1,800 20,000
$1,600 18,000
16,000 $1,400
14,000 $1,200 12,000 $1,000 10,000 $800 8,000 $600 6,000
$400 4,000
$200 2,000
$0 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD YTD Q3 2006 Q3 2007 Total Reported Deal Values Number of Deals Source: Securities Data Corporation
While the total number of deals done by strategic buyers remained fairly consistent from 2001 to 2005, it increased significantly in 2006. Likewise, the average deal size increased rather consistently from 2002 to 2005 before leveling off in 2006. This has continued to be the case over the first nine months of 2007, with average deal sizes approximately the same as in the prior year, but the total number of deals increasing year-over-year. Total strategic deal value (where strategic acquirors purchased U.S.-based companies) increased approximately 5.5% for the first three quarters of 2007 versus the same period last year, in-line with strategic deal volume which increased by 6.5%. Strategic M&A deal value growth lagged that of the overall market, but deal volume growth kept pace.
32 ⏐ PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008
December 2007
Total value of the strategic M&A market has been less dependent on game- changing deals, though a number of large transactions were consummated in 2007. This view is substantiated by the fact that even though strategic buyers were responsible for 82% of deal volume, only 53% of deal value was attributed to them through the third quarter of 2007, down from 68% through the same period in 2006. This is demonstrative of the disproportionately large percentage of mega- deals consummated globally by financial buyers, who were responsible for nine of the 15 largest announced bids this year (or nine of the top 13, excluding multiple bids for ABN AMRO and Alcan Inc. from competing strategic buyers).
Of note in Exhibit 23 is the influx of foreign investment in domestic companies, with five of the ten largest domestic acquisitions going to foreign buyers. As a whole, foreign acquisition as a percentage of all strategic transactions increased 240 bps to 17.8% year-over-year in the third quarter of 2007. This has likely been fueled by a desire to expand into new geographies and weakness of the dollar relative to foreign currencies.
Exhibit 23
LARGEST DOMESTIC STRATEGIC TRANSACTIONS BY VALUE THROUGH Q3 2007 ($ in Billions)
Date Transaction Announced Target Acquiror Value 4/23/2007 ABN AMRO North America Bank of America Corp. $21.0 7/23/2007 GlobalSanteFe Corp. Transocean Inc. $17.3 4/23/2007 MedImmune Inc. AstraZeneca PLC $14.6 7/17/2007 Lyondell Chemical Co. Basell $12.4 5/21/2007 GE Plastics SABIC $11.6 2/16/2007 Compass Bancshares Inc. BBVA Group $9.9 4/17/2007 Extended Stay America Inc. The Lightstone Group $8.0 5/3/2007 IPSCO Inc. SSAB $7.6 7/25/2007 Dade Behring Holdings Inc. Siemens Medical Solutions $7.1 5/31/2007 A.G. Edwards Inc. Wachovia Corp. $6.9
Source: Securities Data Corporation and Company Press Releases
Capital Structure Because of the strong operational and financial results of the strategic buyer universe and the U.S. economy in general over the past few years, U.S. companies have been able to de-lever their balance sheets, while at the same time build considerable cash reserves. Following the challenging business environment that grew out of the technology bubble at the turn of the century, many companies significantly reduced the debt on their balance sheets and took on a more conservative capital structure to insulate themselves from market disruptions. A strategic bonus of this safety net is that it makes these companies much more flexible and better prepared to participate in potential M&A opportunities as they arise. The median cash balance for the S&P 500 as of the third quarter 2007, was $742 million, an increase of 6% versus the September 30, 2006, figure of $700 million, but more than twice the average level from the previous decade of $368 million (see Exhibit 24). The median net debt to market capitalization ratio has also fallen dramatically over the past five years, from a peak of over 22% in 2002 to 11% at the end of 2005, rising to just below 15% on September 30, 2007.
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 33 December 2007
Exhibit 24
MEDIAN CASH OF THE S&P 500 VS. CAPITALIZATION ($ in Millions) $1,000 30%
$900 25% $800
$700 20% $600
$500 15%
$400 10% $300
$200 5% $100
$0 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Q3 2006Q3 2007 Median Cash Balance Net Debt to Market Cap Source: Capital IQ
Cash Levels To further substantiate this point, we looked across three indices (the S&P 500, the NASDAQ 100 and the Russell 2000) to verify that cash balances were not simply growing as the economy expanded. Exhibit 25 depicts the median cash balances as a percentage of revenue for the stated indices and shows a very clear trend of companies carrying significantly larger cash balances given their size. This trend has strengthened the capital structure of the indices considerably. In recent years, much of this excess cash has been returned to shareholders through dividends and large share repurchases, but given the recent credit crunch and its effect on valuations, an increased portion of these funds will likely be funneled into relatively more affordable M&A opportunities. Concurrently, the ability to make acquisitions with cash on hand rather than relatively less accessible debt will likely appeal to sellers, especially when combined with other advantages such as shorter due diligence periods and reduced tax complexity. We believe this is a structural shift that will drive strategic buyers to continue to be active acquirors in 2008 and beyond.
34 ⏐ PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008
December 2007
Exhibit 25
MEDIAN CASH AS A PERCENTAGE OF REVENUE
60%
50%
40%
30%
20%
10%
0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Q3 2007 S&P 500 Nasdaq 100 Russell 2000
Source: Capital IQ
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 35 December 2007
SECTION V: CONCLUSION
Last year, we wrote that we believed that the frantic pace of M&A activity was going to continue well into 2007, but a day of reckoning caused by credit tightening over concerns about macroeconomic conditions was coming. True to form, in the first half of 2007 the M&A market continued along like a runaway train with record levels of M&A activity as both the number of deals and overall volume increased significantly. Mega-LBO transactions seemed to be announced every week with larger and larger take-privates dominating the news headlines and fueling rising stock prices. Then, over the summer, the credit crunch appeared to slam on the emergency brake as financing markets dried up because of the deterioration of subprime mortgages and a correction of aggressive lending terms. Despite all of this, the middle market has remained active as total deal volume is only off 4% through the first nine months of 2007, when compared to the same period in 2006. Conversely, large cap buyouts have become rare with only 48 buyouts of $1 billion or more announced since September 1st, compared to 202 earlier in the year.
As we look to 2008, we think the key word will be “volatility.” The hangover from the credit markets will continue to weigh on the U.S. M&A market through at least the first half of 2008, especially with regard to large buyouts. M&A activity will likely decline but remain well above the recessionary levels that we saw in 2002 on the strength of the global economy. We believe that the growth in the M&A market over the past three years has been built on stronger fundamentals than in past periods so this slowdown should be much more muted than those experienced over the past decade. These fundamentals include enormous capital pools providing increased liquidity, increasingly diversified markets, health of strategic acquirors and the private equity buy/sell cycle. Foreign buyers will play an increasing role as both sovereign funds and large foreign companies seek to take advantage of the cheap dollar to expand their global capabilities. Given these strong fundamentals and increasing foreign buyer interest, we expect middle market M&A activity to remain steady in 2008, but dependent on the continued strength of the U.S. economy.
We believe that 2008 will be somewhat of a correction from the extraordinary M&A levels we have seen over the last couple years. Large deal activity will be hit hardest largely due to financing conditions through the first half of the year. We expect middle market M&A activity to slow down slightly through the early part of the year as many companies and private equity firms have adopted a wait-and-see approach due to the volatility in the market. As the market becomes more comfortable with the current economic environment and the credit issues, we expect a slight rebound in middle market M&A activity through the second half of 2008 as private equity firms need to put large pools of uninvested capital to work.
As always, we will take stock of our predictions and changes in the M&A market again a year from now, but we continue to welcome your thoughts and comments in the interim.
36 ⏐ PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008
December 2007
APPENDIX BUSINESS SERVICES: ENVIRONMENTAL SERVICES
2007 Review PIPER JAFFRAY TEAM CONTACTS The environmental services industry experienced significant transaction volume in 2007 as industry participants looked to divest non-core assets Matthew Stern John Lonnquist and expand into key markets and services to drive growth. The 612 303-0130 612 303-6308 anticipated benefits of consolidation led to strong multiples, with a [email protected] [email protected] median of 8.7x EBITDA. Transactions were spread across all size ranges and industry subsectors. LTM M&A TRANSACTION MEDIAN MULTIPLES
Market Overview 18x 17.2x The environmental services industry includes several subsectors, including solid waste, hazardous waste, specialty waste, remediation, 15x and engineering and consulting. These sectors are differentiated enough to have their own market leaders, but major players include Waste 12x Management, Allied Waste Industries, Stericycle, Covanta Energy and EnergySolutions. The leading players in the space are active acquirors, 8.7x 9x looking for complementary businesses that add geographic reach, increase market density and/or broaden their service offering. Strategic 6x acquisitions in recent years have tended to be smaller “tuck-ins.”
3x 2.1x Industry Attributes & Dynamics • Environmental services businesses are generally stable, slow-growth 0x with little exposure to the broader macro environment. Net Sales EBITDA EBIT • After a wave of consolidation in the 1990s (including numerous troubled roll-ups), strategic acquirors have become much more disciplined in their acquisition strategies, focusing on complementary Source: Press Releases, Regulatory Filings and Capital IQ businesses that bring real value and identified synergies. 2007 SELECT EMPLOYER SERVICES TRANSACTIONS • Companies are benefiting from more stringent regulations and a ($ in millions) greater consumer and government focus on environmental issues. Announced Transaction Date Target Acquiror Value 2008 Outlook 10/22/07 Waste Industries USA Inc Goldman Sachs / Macquarie $269 08/31/07 Winters Bros. Waste Systems BFI Canada 263 Environmental services firms generally performed well in 2007, despite 05/02/07 Accutest Laboratories Bolder Capital 110 the slowing economy and rising fuel costs. Our Environmental Services 04/27/07 SULO Gruppe Veolia Environment SA 1,973 Index has increased 9.2% since January 1, and trades around an average 03/13/07 Cory Environmental Ltd ABN AMRO Global Infrastructure 1,136 01/28/07 Synagro Technologies The Carlyle Group 739 of 20.4x forward 2008 earnings. We expect that the sector will continue to perform well, as the pricing environment remains favorable and Source: Securities Data Corporation, Capital IQ and Press Releases equity investors are likely to see large portions of the sector as “defensive,” which should increase interest if the economy slows INDEXED STOCK PERFORMANCE significantly. 115.0 For business owners looking for partial or full liquidity in 2008, we would expect both the M&A and equity markets to be receptive to 110.0 companies with strong business models and excellent free cash flow 105.0 profiles. As the recent announcements of the take-private of Waste Industries USA and the successful initial public offering of 100.0 EnergySolutions show, there is considerable public and private interest in the space. 95.0
Consequently, we expect the M&A market to remain strong in 2008, as 90.0 both strategic and financial acquirors remain active. In particular, the 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007 interest on the part of infrastructure-focused private equity funds has PJC Environmental Services S&P 500 significantly increased competition for deals, driving valuations higher. We expect this trend to continue, which should result in continued Source: Capital IQ strong M&A activity. The only major catalyst that could lead to a significant change in the pricing environment is a substantial deterioration of the debt markets. Given the recession-resistant nature of environmental services businesses and their generally strong cash flows, we do not believe this is likely.
In addition, assuming the equity markets remain at or near their current levels, environmental services companies that possess significant size and scale, along with strong financial performance and expected future growth, should be attractive equity market candidates. Most companies in this space will be able to tell the story of the favorable supply/demand dynamics in the sector along with increasing regulations, which will resonate with most public investors. Source: Securities Data Corporation, Capital IQ, FactSet and Piper Jaffray PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 37
December 2007
APPENDIX BUSINESS SERVICES: FACILITIES SERVICES
2007 Review PIPER JAFFRAY TEAM CONTACTS The facilities services sector saw substantial consolidation activity in 2007. In particular, foreign acquirors (notably The United Group and John Lonnquist Matthew Stern ISS) made significant platform acquisitions in the U.S., with the 612 303-6308 612 303-0130 expectation that they will continue to expand their presence in North [email protected] [email protected] America via acquisitions. This activity, combined with additional acquisitions by Transfield Services and ABM Industries, has led to the LTM M&A TRANSACTION MEDIAN MULTIPLES emergence of several major players in this still fragmented market.
Market Overview 16x 14.6x The facilities services industry is composed of janitorial, landscaping, 14x 12.1x maintenance, security, parking and other miscellaneous outsourced 12x services. The global market totals more than $200 billion in annual 10x revenue, and there is substantial opportunity for greater penetration as 8x customers continue to outsource these non-core functions. The market is 6x highly fragmented, with the top ten players accounting for less than 25% 4x of the market and more than 30,000 smaller independent firms making 2x 1.2x up the remainder. 0x
Net Sales EBITDA EBIT Industry Attributes & Dynamics
• Facilities services companies generally provide required services on a Source: Securities Data Corporation, Analyst Reports and Piper Jaffray recurring basis, making them very stable, recession-resistant business models. 2007 SELECT FACILITIES SERVICES TRANSACTIONS • Because of the on-site services provided, there is no risk of offshore ($ in millions)
outsourcing; however, it also means that these businesses do not Announced Enterprise generate as much operating leverage. Date Target Acquiror Value 10/07/07 OneSource Services ABM Industries $345 • Companies continue to benefit from customers’ continued 09/17/07 VMS Inc Transfield Industry 30 outsourcing of more high-value facilities services and their emphasis 08/20/07 EMCOR Group Ohmstede 455 on cost controls. 07/30/07 Presto-X-Company Rentokil Initial plc 45 07/11/07 UNICCO United Group Limited 410 05/23/07 Sanitors Inc ISS A/S NA 05/01/07 Paramount Building Solutions LaSalle Capital / Marquette Capital NA 2008 Outlook 03/30/07 Initial Electronic Security Systems United Technologies Corp 1,168 Facilities services firms have generally performed well in 2007, despite 03/18/07 Servicemaster Clayton, Dubilier & Rice 5,191 02/25/07 ATI Systems International Garda World Security 341 the slowing economy. Our Facilities Services Index has increased 8.9% 02/21/07 Kellermeyer Building Services Key Principal Partners NA since January 1, and trades around an average of 17.0x forward 2008 02/20/07 Central Parking Corporation Investor Group 871 earnings. Although growth may slow if the economy softens Source: Regulatory Filings, Capital IQ and Press Releases significantly, many investors will like the recurring nature of this business, which should support valuations into 2008. INDEXED STOCK PERFORMANCE For business owners looking for partial or full liquidity in 2008, we would expect the M&A market to be receptive to companies with strong 125.0 business models, organic growth, healthy margins and positive free cash 120.0 flow. As the OneSource Services and UNICCO Service Company acquisitions demonstrate, there is substantial domestic and foreign 115.0 strategic interest in the space, and also financial sponsors have been active. 110.0 105.0 We believe that facilities services firms with significant size and scope could access the public equity markets, as the recent consolidation has 100.0 validated the investment thesis of these firms. Given the strong multiples 95.0 paid by corporate buyers, however, we believe that M&A will most likely be the best way for existing shareholders to maximize value in 90.0 2008. 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007
PJC Facilities Services S&P 500 Source: Capital IQ
Source: Datamonitor 38 ⏐PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 December 2007
APPENDIX CLEAN TECHNOLOGY: BIOFUELS
2007 Review PIPER JAFFRAY TEAM CONTACTS In contrast to 2006, public equity financing came to a near standstill as no major public offerings were reported in 2007. This was mainly attributable Tom Halverson Hema Gunasekaran to a steep decline in valuation, stemming from significant production 612 303-6371 612 303-1830 capacity that was brought on line relative to the U.S. blending capacity and [email protected] [email protected] escalating grain prices. This dynamic has led to a drop in the biofuels composite index of over 50% in 2007. Despite lower operating margins, companies have been reluctant to slow production due to project funding 2007 SELECT BIOFUELS TRANSACTIONS already in place and the pending increase in the government mandate. ($ in millions) Announced Transaction Date Target Acquiror Value On the M&A front, 2007 saw the biggest deal to date in the ethanol space, 11/29/07 U.S. BioEnergy VeraSun Energy $1,039 when VeraSun Energy acquired US BioEnergy for about $1.2 billion in 07/22/07 ASAlliances Biofuels VeraSun Energy 839 07/17/07 Delta-T Bateman Litwin 120 stock. This transaction is sure to be a harbinger for future industry 05/31/07 Millennium Ethanol U.S. BioEnergy 186 consolidation. 04/24/07 Iroquois Bio Energy Babcock & Brown NA 03/01/07 Ace Ethanol ALL Fuels & Energy 103 02/11/07 Celunol Diversa 155 Industry Attributes & Dynamics • Highly fragmented industry with 37% of plants still farmer owned Source: Capital IQ and Securities Data Corporation • Growth in the industry propelled by the Renewable Fuels Standard INDEXED STOCK PERFORMANCE which recently increased its initiative to 15 billion gallons of ethanol by 110.0 2015 and 36 billion gallons by 2022 • The government granted billions of dollars in subsidies, and the sector 100.0 continues to receive broad support from both sides of the aisle • Price and volatility of petroleum reached record highs in 2007, resulting 90.0 in record high renewable energy investments • As new blending capacity comes online in 2008–2009, the supply 80.0 demand fundamentals should rebalance, and we expect the differential 70.0 to gasoline to trend back to historic levels • Construction for the industry is backlogged well into 2008, forcing 60.0
industry participants to “buy” rather than “build” new capacity 50.0
40.0 Consolidation/Active Buyers 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007 The industry is fragmented and has begun to see consolidation as margin Biofuels S&P 500 compression and higher cost of capital have become significant market drivers. From a strategic buyer standpoint, large industry players have Source: FactSet and Capital IQ begun seeking smaller players with valuable stand alone assets as potential targets. Key attributes of these targets will include superior production technology, plant level scale, geographic diversity and sound risk management. Transaction currency for these players likely will be stock- based as valuation gaps on a cash basis likely will be too large to drive consolidation. Financial buyers have also become involved in the sector. Investors have demanded environmentally conscious investments, and private money has been looking for the “next big thing.” Notable financial sponsors entering the space include Babcock & Brown and Macquarie Group. These buyers may be coveted acquirors for players looking to exit the space via a cash tender offer.
2008 Outlook M&A activity is likely to be robust in 2008. The recent US BioEnergy and VeraSun Energy merger highlighted that there are significant synergies to be realized through industry consolidation, including (i) grain origination, (ii) logistics infrastructure, (iii) plant management expertise, (iv) feedstock and process optimization R&D, (v) finished product marketing and (vi) risk management. Moreover, with construction costs approaching $2.10/gallon, capacity expansion via acquisition is a viable economic alternative. Finally, despite recent M&A activity, the industry remains extremely fragmented, providing a platform for further consolidation.
Source: Capital IQ, FactSet, Piper Jaffray and Securities Data Corporation PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 39
December 2007
APPENDIX CLEAN TECHNOLOGY: SOLAR
2007 Review PIPER JAFFRAY TEAM CONTACTS A substantial amount of capital is flowing into the solar sector to build new capacity, particularly in China. Attention from the media, political Cheryl Perino Colin McKay network and the financial markets all contributed to the amount of 415 984-5187 415 984-5183 activity in the sector. The trend of clean technology investing continued at [email protected] [email protected] its torrid pace, unmatched since the internet boom of the 1990s. Boosted by a worldwide political focus and the corresponding legislation, the rapid growth witnessed in 2006 continued through 2007. Overall, the energy 2007 SELECT SOLAR TRANSACTIONS sector has done well on high prices in oil, natural gas and coal. Given the ($ in millions) lofty energy prices, in addition to looming regulatory controls, interest in Announced Enterprise Date Target Acquiror Value renewable energy overall continues to increase. Solar continues to drive 11/18/07 Baccini Applied Materials Inc $329 down the cost curve toward grid parity with capacity expansions in raw 06/25/07 HCT Shaping Systems SA Applied Materials Inc 474 polysilicon, new balance of system equipment and advances in thin film Source: Capital IQ and Securities Data Corporation technologies. Overall, the sector saw a high level of capital raising activity to fund growth in infrastructure and manufacturing as most of these INDEXED STOCK PERFORMANCE businesses tend to be capital intensive.
Industry Attributes & Dynamics 200.0 • Highly fragmented industry with majority of manufacturing moving
into China 180.0 • Polysilicon shortage continues, which most likely will continue for the
foreseeable future 160.0 • Globally governments have granted billions of dollars in subsidies and the sector receives broad political support 140.0 • As the capacity expansion continues along the value chain, particularly in silicon, advanced solar products will gradually decline 120.0 • Thin film technology will continue to dominate the utility market with the lowest installed cost per watt 100.0 • The integrator market will be the next bottleneck beyond silicon, and players will need scale to compete 80.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007
Solar S&P 500 Consolidation/Active Buyers No specific consolidation activity has started yet, but the industry has the Source: FactSet and Capital IQ hallmarks of fragmentation that will see consolidation as valuations rationalize. Larger industry players will start to look for smaller players, and conglomerates that have been watching and waiting will strategically enter the market.
Financial buyers and smart money also have become very involved in the sector. In addition to investors demanding environmentally conscious investments, private money views the clean technology space as the next rapid growth market. Notable private equity groups entering the field include Kleiner Perkins Caufield & Byers, Khosla Ventures, DFJ Element Ventures and Vantage Point.
2008 Outlook M&A activity should increase in 2008. Germany, Spain, Italy, Greece and Korea will fuel near term solar demand, with the U.S. and China following shortly thereafter. Solar will be an increasingly favorable alternative to conventional generation as subsidies drive economics and technology improves. With little technology differentiation in the China solar industry, consolidation around industry leaders with strong supply chains should begin. The U.S. integrator market is highly fragmented and will need to consolidate, especially as utility and commercial installation increases (especially if the Investment Tax Credit is extended) and solar projects are aggregated, similar to the wind industry in 2006 and 2007. Finally, several conglomerates will begin to invest in new technologies like thin film, such as GE Energy’s investment in PrimeStar Solar this year.
Source: Capital IQ, FactSet, Piper Jaffray and Securities Data Corporation 40 ⏐PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 December 2007
APPENDIX CONSUMER: CONSUMER PRODUCTS
2007 Review PIPER JAFFRAY TEAM CONTACTS The volatility in the capital markets led to a modest slowdown in consumer products M&A activity in 2007, when compared to Michael Dillahunt Shaun Westfall 2006. Market turbulence aside, there were a number of high 612 303-6337 415 277-1501 profile strategic deals and several successful financial sponsor-led [email protected] [email protected] middle market buyouts of private companies. Unlike many other sectors, consumer products companies were absent from any LTM M&A TRANSACTION MEDIAN MULTIPLES large scale take-private deals.
On the strategic side, the acquisition of the natural personal care 18x company, Burt’s Bees, by The Clorox Company was one of the 15.1x most notable transactions of the year. Through this acquisition, 16x The Clorox Company became the latest of several large 14x 12x 11.5x consumer products firms seeking to capture the growth and 10x changing consumer preferences toward natural household and personal care products. Consumer products consolidator, Jarden 8x Corporation was also very active in 2007 with the acquisitions of 6x 4x K2 Inc. and Pure Fishing. 2x 1.1x
0x Private equity firms continued to play a meaningful role in the sector. Notable deals include GTCR’s consolidation of the Net Sales EBITDA EBIT crafting and décor sector with the acquisitions of Wilton Industries and Dimensions Holdings. Bain Capital Partners’ Source: Capital IQ and Securities Data Corporation buyout of American Standard Companies’ residential bathroom fixtures business is likely the start of private equity firms seeking 2007 SELECT CONSUMER PRODUCTS TRANSACTIONS value plays in the consumer durables related segment. ($ in millions) Announced Transaction Date Target Acquiror Value Industry Attributes & Dynamics 12/06/07 Del Laboratories Coty Inc NA Positives: 12/01/07 Vivendi Games Activision 8,121 • Increased spending from emerging markets consumers 10/30/07 Cleveland Golf SRI Sports 133 10/30/07 Burt's Bees Clorox 1,041 • A significant portion of the U.S. consumer spending is 10/09/07 Gilchrist & Soames Swander Pace Capital NA unaffected by higher energy and food costs 07/28/07 Everlast Worldwide Sports Direct International 165 07/12/07 Playtex Products Energizer Holdings 1,881 • Federal Reserve Board appears focused on taking necessary 07/11/07 Wilton Industries Inc Wilton Products Inc NA steps to avoid a recession 07/11/07 Dimensions Wilton Products Inc NA 05/02/07 MITY Enterprises Sorenson Capital / Peterson Partners 79 04/24/07 K2 Inc Jarden Corporation 1,182 Negatives: 04/06/07 Pure Fishing Jarden Corporation 450 04/02/07 KCP Income Fund Caxton-Iseman Capital 688 • Housing market unlikely to turn in the next 12 months 03/14/07 Hunter Fan MidOcean Partners NA • An economic slowdown with continued rising prices 03/05/07 Topps Company Madison Dearborn Partners 385 • Geopolitical concerns impacting consumer confidence and 01/31/07 Philosophy Inc The Carlyle Group NA spending Source: Capital IQ, Press Releases, Public Filings and Securities Data Corporation
2008 Outlook The weak U.S. dollar combined with the strong balance sheets of INDEXED STOCK PERFORMANCE the major consumer products companies will continue to drive 115.0 substantial large scale consolidation in the sector. Financial buyers possess large pools of capital and will continue to seek 110.0 consumer products companies with stable cash flows. In addition, strategic and financial buyers will look to identify 105.0
consumer durables and housing-related companies where the 100.0 short term slowdown has created potential value based buying opportunities. Lastly, the evolving distribution model for beauty 95.0
and personal care products will generate promising high growth 90.0 companies that will become solid acquisition candidates. 85.0
80.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007 Consumer Staples Consumer Durables S&P 500 Source: FactSet and Capital IQ
Source: Capital IQ, FactSet, Piper Jaffray and Securities Data Corporation
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 41
December 2007
APPENDIX CONSUMER: FOOD PROCESSING & DISTRIBUTION
2007 Review PIPER JAFFRAY TEAM CONTACTS
The M&A environment in the food processing and distribution sectors Scott LaRue Matt Roghair remained strong with 188 reported transactions over the past 12 months, as 650-383-1407 415 277-1502 reduced private equity activity was offset by significant strategic buyer activity. [email protected] [email protected] While strategic buyers continue to pursue tactical acquisitions to enhance their product portfolios, 2007 was marked by large transformative transactions in several categories. The changing landscape of the food retailing environment drove significant activity while the divestiture of non-core businesses by major LTM M&A TRANSACTION MEDIAN MULTIPLES food companies continued to drive additional strategic activity. Financial buyer interest remained strong but was concentrated in the food retailing and distribution categories as high quality packaged food assets were primarily 14x acquired by strategic buyers during 2007, particularly after the tightening of the 12x credit markets. 9.6x 10x The median multiple paid for transactions involving food companies LTM 2007 was approximately 9.6x trailing 12 months EBITDA driven by high multiples 8x for large transactions. Valuation ranges for the majority of middle market 6x private transactions decreased modestly and generally fell within a range of 7– 9x EBITDA. 4x Industry Attributes & Dynamics 2x 1.0x Positives: 0x • Healthy living driving significant product and packaging innovations Net Sales EBITDA • Emergence of “bridge brands” that offer both natural/organic attributes yet
appeal to mainstream taste profiles • Natural and functional foods having a significant impact on mature Source: Capital IQ and Securities Data Corporation categories 2007 SELECT FOOD PROCESSING & DISTRIBUTION • Food retailers are building sustainable differentiation from mass and club TRANSACTIONS retailers by offering premium and unique offerings ($ in millions)
Announced Enterprise Negatives: Date Target Acquiror Value • Continued energy, transportation and commodity cost inflation 11/15/07 Post Cereals (Kraft) Ralcorp Holdings Inc. $2,600 11/14/07 Lawry's McCormick & Co. 605 • Continued concerns over food-borne illnesses 11/06/07 Bear Naked Inc. / Wholesome & Hearty Foods Co. Kellogg Co. NA 11/05/07 Sadler's Bar-B-Que Sales Ltd. Brazos Private Equity Partners NA • Consolidation across the food chain continues to favor scale 08/23/07 Burke Corp. Hormel Foods 110 08/06/07 Icicle Seafoods Inc. Fox Paine 208 07/23/07 Alexia Foods Inc. ConAgra Foods NA 07/20/07 The Harris Soup Company Basic American NA Consolidation/Active Buyers 07/18/07 Fleischmann's Vinegar Co. American Capital Strategies NA 07/11/07 Hickory Farms Sun Capital Partners NA M&A activity was marked by several large transactions that will have a 05/29/07 Swift & Co. J&F Participacoes SA 1,400 05/25/07 Glaceau (Vitamin Water) The Coca-Cola Company 4,100 significant impact on their respective categories. In addition, strategic activity 05/07/07 Van Houtte Inc. LittleJohn & Co. 544 continued to be driven by major food companies seeking to bolster core brands 05/07/07 Associated Grocer United Western Grocer NA 05/02/07 U.S. Foodservice KKR & Roberts / Clayton Dublier & Rice 7,100 and capabilities. Coca-Cola’s acquisition of Glaceau, Whole Foods Market’s 04/20/07 San Antonio Farms TreeHouse Foods 89 04/10/07 Ready Pac Produce Bayside Capital NA acquisition of Wild Oats Markets, and Ralcorp Holdings’ acquisition of the 04/02/07 Eagle Family Foods Holdings, Inc. J.M. Smucker 323 Post Cereal brands from Kraft Foods were major transactions during 2007 that 03/06/07 Bloomfield Baker Ralcorp Holdings Inc. 140 02/21/07 Wild Oats Markets Whole Foods Market Inc. 752 promise to shake up their categories. Premium brands with a healthy angle 02/12/07 Pinnacle Foods Group Inc. Blackstone Group 2,154 continued to attract interest from strategic buyers such as Kellogg (Bear 02/01/07 FUZE Beverage LLC The Coca-Cola Company NA 01/24/07 Cream of Wheat B&G Foods 200 Naked), Basic American Foods (The Harris Soup Company), PepsiCo (Naked Juice) and ConAgra Foods (Alexia Foods). Financial buyer activity was strong Source: Public Filings, Securities Data Corporation and press releases during the first half of the year with several large transactions in the foodservice distribution category; KKR and Clayton, Dubilier & Rice (U.S. Foodservice), INDEXED STOCK PERFORMANCE Blackstone Group (Pinnacle Foods Group) and Littlejohn & Co. (Van Houtte). The second half of the year saw more selected acquisitions of smaller brands by 115.0 financial buyers including American Capital Strategies (Fleischmann’s Vinegar Company), GESD Capital Partners (Milton’s Fine Foods) and Brazos Private 110.0 Equity (Sadler’s Bar-B-Que Sales). 105.0
2008 Outlook 100.0 The S&P Food Products Index performed in line with the S&P 500 Index with an approximate gain of 4.5% over the last 12 months. The outlook for the food 95.0 processing and distribution industry is mixed in 2008, due to concerns over the 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007 broader economic environment and increasing commodity costs being offset by Food Products S&P 500 the continued strength of premium and healthy living brands. The M&A environment remains positive as strategic buyers are expected to continue to Source: FactSet and Capital IQ aggressively pursue tactical acquisitions, as well as divest non-core assets.
Source: Capital IQ, FactSet, Piper Jaffray and Securities Data Corporation
42 ⏐PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 December 2007
APPENDIX CONSUMER: HARDLINES & SPECIALTY RETAIL
2007 Review PIPER JAFFRAY TEAM CONTACTS M&A activity in the hardlines and specialty retail sector was fairly stagnant as compared to last year, with 12 deals disclosed, accounting for Doug Whitaker Jon Kreidler $17.0 billion in transaction value compared with 14 deals disclosed, 612 303-6316 612 303-6328 accounting for $17.9 billion in transaction value at this time in 2006. [email protected] [email protected] Overall macroeconomic activity has created increased uncertainty throughout the market and more specifically within the hardlines and specialty retail space. LTM M&A TRANSACTION MEDIAN MULTIPLES
2007 started off strongly, led by heavy private equity involvement, but the 17.0x credit market turmoil in the summer of 2007 caused a significant reversal 18x of trends and a noticeable slow-down. Record oil prices, continued 16x troubles in the housing market and depressed consumer confidence also 14x 12.4x aided in slowing down overall deal activity. 12x 10x Although the near-term outlook has slowed, long-term optimism remains. 8x Broader interest focused on the hardlines and specialty retail space persists 6x within the private equity community. Strategic buyers also continue to 4x stay active. The trend of increasing deal size in the industry also has 2x 0.9x continued to build in 2007. 0x Net Sales EBITDA EBIT The median multiple paid for hardlines and specialty retail companies in 2007 was approximately 12.4x LTM EBITDA, up from approximately Source: Capital IQ and Securities Data Corporation 9.8x last year. Valuations are attractive for sellers for three primary reasons: (i) financial performance of companies continues to improve, (ii) 2007 SELECT HARDLINES & SPECIALTY RETAIL increased interest from the financial community, and (iii) continued TRANSACTIONS consolidation and diversification throughout the strategic universe. ($ in millions) Announced Enterprise Industry Attributes & Dynamics Date Target Acquiror Value • Appropriate inventory levels and generally favorable consumer 12/06/07 Overton's Gander Mountain $70 spending, providing strong margins 11/28/07 Levitz Furniture Hilco Merchant Resources 58 • Mass merchants continue to be a factor 11/26/07 Chick's Sporting Goods Dick's Sporting Goods 76 • Short-term uncertainty combined with long-term optimism 08/27/07 Cost-U-Less Inc. North West Co. Fund 56 08/17/07 Stride Rite Collective Brands 872
06/28/07 Everlast Worldwide Sports Direct International 165 Consolidation/Active Buyers 06/27/07 Guitar Center, Inc. Bain Capital Partners 2,093 Strategic acquirors continue to take advantage of the difficult 06/20/07 Oakley Inc. Luxottica Group SpA 2,309 environment facing buyout shops. Interest from the private equity 03/20/07 Claire's Stores Apollo Management 3,091 community has become broader, although not necessarily more intense. It 03/11/07 Dollar General Kohlberg Kravis Roberts 7,224 is important to note that there have been several acquisitions this year by Source: Capital IQ and Securities Data Corporation private equity firms that are not included in our data set because the requisite information was not available. We believe that the hardlines and INDEXED STOCK PERFORMANCE specialty retail sector will continue to produce significant opportunities 115.0 over the coming year for acquirors who are in tune with the markets.
110.0 2008 Outlook Expectations are low across the industry, as substantial roadblocks 105.0
remain—high oil prices, depressed housing market, uncertain credit 100.0 market and falling consumer confidence among others. Long-term optimism persists, but if the credit markets don’t improve and buyout 95.0 shops don’t become more aggressive, hardlines and specialty retail could 90.0 be in for another trying year.
85.0
80.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007
Hardlines & Specialty Retail S&P 500 Source: FactSet and Capital IQ
Source: Capital IQ, FactSet, Piper Jaffray and Securities Data Corporation
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 43
December 2007
APPENDIX CONSUMER: RESTAURANTS
2007 Review PIPER JAFFRAY TEAM CONTACTS
Both M&A deal volume and transaction value in 2007 substantially exceeded 2006 levels , marking 2007 as the most active year for Murray Huneke John Twichell restaurant M&A in a decade. Year-to-date, there have been 28 650 838-1388 650 838-1375 transactions completed, totaling $9.6 billion in transaction value. This [email protected] [email protected]
compares to 26 completed deals totaling $6.1 billion in 2006. Three Damon Chandik restaurant transactions with disclosed deal values have been announced 650 838-1340 in 2007 and are expected to close by the end of the year for an additional [email protected] $0.3 billion in transaction value. Of the 28 completed transactions in 2007, private equity firms were the YTD 2007 M&A TRANSACTION MEDIAN EBITDA MULTIPLES buyer on 20 deals, or 71% of the transactions versus 77% in 2006. Strategic acquirors have stepped up the pace in the restaurant M&A market in 2007, with notable deals including the IHOP acquisition of 12x 9.6x Applebee’s, the Darden Restaurant acquisition of RARE Hospitality 10x 8.1x International and the Ruth’s Chris Steak House acquisition of Mitchell’s 7.0x 7.1x Fish Market (announced). 8x 6.3x The median multiple paid for restaurant companies in 2007 YTD was 6x approximately 9.6x trailing 12-month EBITDA. This compares to an 4x average multiple of 8.1x EBITDA in 2006, demonstrating the strong M&A market in 2007 for high-quality restaurant companies. The range 2x for restaurant M&A multiples continues to be wide with some 0x undisclosed multiples in the 6.0x range up to the low teens for some transactions. 2003 2004 2005 2006 YTD 2007
Piper Jaffray executed six restaurant M&A deals YTD in 2007, leading the market in number of M&A transactions for the restaurant sector. Source: Piper Jaffray, including multiples for undisclosed transactions 2007 SELECT RESTAURANT TRANSACTIONS Current Market Conditions ($ in millions) Restaurant M&A market conditions have cooled since mid 2007, with Announced Transaction (i) fewer transactions in the marketplace, (ii) lower levels of debt Date Target Acquiror Value financing available, and (iii) operational headwinds for most restaurant 12/04/07 Smokey Bones Sun Capital Partners $80 companies. Financial buyers are active and strategic buyers continue to 11/06/07 Mitchell's Fish Market Ruth's Chris Steak House 94 08/22/07 Yardhouse TSG Consumer Partners NA look for additional growth vehicles or synergy plays. 08/16/07 RARE Hospitality International Inc. Darden Restaurants Inc. 1,376 08/06/07 Boston Market Sun Capital Partners NA 2008 Outlook 08/01/07 Beef O' Brady's Levine Leichtman Capital Partners Inc. NA 07/15/07 Applebee's IHOP 2,063 Restaurant industry participants are facing headwinds as they prepare 06/21/07 CiCi Enterprises OnCap 250 to enter 2008. Commodity prices and wages have increased throughout 06/19/07 Pacific Coast Restaurants Inc. Restaurants Unlimited Inc. NA 2007 and restaurant companies have had mixed success passing costs 06/18/07 Johnny Rocket Red Zone Capital Partners NA along to the consumer. 06/17/07 Friendly Ice Cream Corp. Sun Capital Partners 333 05/31/07 Champps Entertainment Inc. Fox & Hound Restaurant Group 75 Despite the challenging operating environment, restaurants continue to 05/27/07 Restaurants Unlimited Inc. Sun Capital Partners NA be an attractive area for private equity investment and strategic 05/02/07 KarpReilly Z' Tejas NA 03/05/07 BR Guest Starwood Capital Group 150 acquirors continue to be active. We expect 2008 to be an active year, but 02/26/07 Smith & Wollensky Bunker Hill Capital 95 with fewer transactions than 2007. 01/08/07 Peter Piper ACON Investments NA 01/04/07 95 Chili's Restaurants Olympus Partners 155
*Excludes deals under $25 million Source: Piper Jaffray and Press Releases INDEXED STOCK PERFORMANCE
120.0
115.0
110.0 105.0 100.0 95.0 90.0 85.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007
Limited Service Restaurants Full Service Restaurants S&P 500
Source: FactSet and Capital IQ
Source: Securities Data Corporation, FactSet and Piper Jaffray & Co.
44 ⏐PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 December 2007
APPENDIX CONSUMER: SOFTLINES RETAIL, FOOTWEAR & APPAREL
2007 Review PIPER JAFFRAY TEAM CONTACTS M&A deal flow in softlines retail, footwear and apparel remained active in 2007. In the last 12 months there were 30 deals disclosed, accounting for over Michael Hoffman Tim Carlson $12.7 billion in transaction value. Strategic buyers are driving much of the 612 303-6386 415 277-1519 activity, a similar trend to last year. This activity compares to 28 deals [email protected] [email protected] disclosed, accounting for over $8.1 billion in transaction value at this time last year. Average deal sized increased to $469 million for the LTM period from LTM M&A TRANSACTION MEDIAN MULTIPLES $290 million last year, despite only two deals greater than $1.0 billion in transaction value. 14 x 13 .2 x Valuations continued to increase in 2007 with the median EBITDA multiple 12 x increasing to 9.3x LTM EBITDA. Importantly, international buyers were active 9.3x and paid premium multiples for strong U.S. brands (Oakley, Everlast, Cutter & 10 x Buck, Barneys). Attractive valuations have persisted for sellers for three primary 8x reasons: (i) scarcity value of strong U.S. brands with compelling market positions and growth prospects, (ii) strategic acquirors continued to focus on 6x M&A as an avenue for growth in a mature domestic industry, and (iii) financial buyers continued utilization of large pools of equity capital to bid aggressively 4x on attractive consumer stories where they have a strategic angle. 2x 1.3 x Industry Attributes & Dynamics 0x Branded Apparel & Footwear Net Sales EBITDA EBIT • Overall industry growing mid-single digits with pockets of stronger growth in specific categories Source: Capital IQ and Securities Data Corporation • Retail consolidation continues to impact vendors (private label, exclusivities, 2007 SELECT SOFTLINES RETAIL, FOOTWEAR & APPAREL rationalization of brands, margins) • Larger businesses continue to seek alternative avenues of growth (new TRANSACTIONS ($ in millions) product categories, international, direct retail, M&A) Announced Enterprise • Uncertainty related to the consumer clouding growth prospects for 2008 Date Target Acquiror Value Softlines Retail 11/15/07 Exeter Brands (Starter) Iconix $60 11/05/07 American Marketing Enterprises Li & Fung 128 • Considerable uncertainty around consumer, particularly in discretionary 09/11/07 United Retail Group Redcats USA 198 categories such as apparel, is impacting comparable store sales entering 09/06/07 Official Pillowtex Iconix 246 07/27/07 Deb Shops Inc. Lee Equity Partners 277 important holiday season/early 2008 07/26/07 Lucy Activewear VF Corp. 110 • Continued growth in jobs and wages key to mitigating negative impact of 07/26/07 Seven For All Mankind VF Corp. 775 higher oil prices and softness in housing/credit concerns 07/26/07 Faconnable M1 Group 210 06/22/07 Barneys New York Istithmar 942 • Generally tighter inventory controls and better planning/allocation tools will 06/20/07 Oakley Luxottica Group 2,309 help support margins in softer spending environment 06/13/07 Hanna Andersson Kellwood 175 05/31/07 Everlast Worldwide Sports Direct International 191 05/22/07 Stride Rite Collective Brands 892 Consolidation/Active Buyers 05/15/07 Express Golden Gate Capital 803 M&A activity in the softlines retail, footwear and apparel sector has gradually 04/12/07 Cutter & Buck New Wave 133 increased since 2001. Prospects remain good for continued activity in the sector, 04/10/07 Wear Me Apparel Allied Capital 137 03/20/07 Claire's Stores Apollo Management 3,091 despite headline dislocation in the capital markets, as strategic buyers continue 03/05/07 ROC Apparel Iconix 239 to focus on accelerating top- and bottom-line growth through M&A. 02/28/07 Majestic Athletic VF Corp. NA 02/23/07 Rocket Dog Brands Golden Gate Capital NA Specifically, strategic buyers including industry consolidators, such as VF 02/22/07 Danskin Iconix 85 Corporation, Li & Fung Group and Iconix have capitalized on several M&A 02/10/07 Tommy Hilfiger- Global Sourcing Li & Fung 247 strategies to achieve growth including: (i) adding new brands to portfolio, (ii) 02/04/07 Jimmy Choo TowerBrook Capital 364 01/22/07 Vanity Fair Brands Fruit of the Loom 350 leveraging current infrastructure with addition of new product lines/platforms to portfolio, and (iii) acquiring lifestyle brands in growth sectors. Source: Capital IQ, Company Filings and FactSet Private equity firms continue to have selective interest in the softlines retail, INDEXED STOCK PERFORMANCE footwear and apparel sector, being drawn by strong brands, compelling cash flows, multiple opportunities for continued growth and attractive exit 115.0 alternatives. Private equity interest likely will be tempered by dislocations in the credit markets and concentrated on businesses where they have a strategic 110.0 angle. 105.0 2008 Outlook The Softlines Retail Index largely tracked the S&P 500 through the first five 100.0 months of the year, but has since under-performed beginning in the summer/back-to-school selling season. As a discretionary purchase, the softlines 95.0 universe has not been immune to the uncertainty related to consumers weighed 90.0 down by higher oil prices, deteriorating housing market conditions and 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007 increasing credit concerns. Job growth and wages have been stable, mitigating a Softlines S&P 500 portion of the impact, and will be an important factor moving into 2008. Despite choppiness in the capital markets, however, we continue to expect source: FactSet and Capital IQ strong M&A activity in 2008 driven by companies looking to execute on their longer-term strategic plans. Source: Capital IQ, FactSet, Piper Jaffray and Securities Data Corporation PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 45
December 2007
APPENDIX FINANCIAL INSTITUTIONS: ASSET MANAGEMENT
2007 Review PIPER JAFFRAY TEAM CONTACTS Year-to-date, U.S. M&A activity in the asset management sector has declined over the past two years while mega-transactions have re- Thomas Chen Val Schnell emerged. 25 deals have been announced with a total of $11.5 billion in 212 284-9585 212 284-9444 aggregate transaction value in 2007. By comparison, 31 deals were [email protected] [email protected] announced with a total deal value of $10.7 billion in 2006.
Year-to-date, the most notable transaction is the LBO of Nuveen ASSET MANAGEMENT M&A TRANSACTIONS Investments announced in June 2007. Excluding this transaction, the ($ in billions) aggregate transaction value in the asset management sector in 2007 would have been $5.7 billion. EBITDA multiples have also risen to the $12 80 14-15x range from the low double-digit multiples seen from 2005 to 2006. $9 60
Industry Attributes and Dynamics The U.S. asset management industry encompasses a broad range of $6 40 entities, including separate account managers, mutual funds and alternative asset managers, such as hedge funds. The overall U.S. industry, estimated at more than $10 trillion in assets under management $3 20 (“AUM”), is growing rapidly at an annualized rate of approximately 10.2%. $0 0
The asset management sector is a highly competitive space and has 2003 2004 2005 2006 YTD increasingly become a global industry. Product diversity, broad Q3 2007 distribution capabilities and a global presence are all becoming Transaction Value increasingly critical competitive advantages. One notable trend is that Number of Transactions alternative investment managers are accessing the public markets, although the response has largely been tepid. Source: SNL Financial LC
Consolidation/Active Buyers 2007 SELECT ASSET MANAGEMENT TRANSACTIONS Strategic players, including broker/dealers, will continue to play a large ($ in millions) role in the asset management sector as the industry continues to be Announced Enterprise characterized by an abundance of smaller, independent franchises. Date Target Acquiror Value 6/19/2007 Nuveen Investments Madison Dearborn Partners $5,770 Financial sponsors, armed with record amounts of uninvested capital, 5/11/2007 Daehan Investment UBS AG 195 have become increasingly attracted to the asset management sector and 6/26/2007 Oppenheim Pramerica Sal. Oppenheim Jr 121 its robust EBITDA margins. Another trend worth noting is the increased 4/12/2007 Fiduciary Asset Management Piper Jaffray 66 frequency of cross-border M&A—24% of the buyers of U.S.-based asset managers in 2007 were foreign-based companies compared to 19% in Source: SNL Financial LC, Capital IQ 2006. INDEXED STOCK PERFORMANCE 2008 Outlook Since economies-of-scale are critical to investment managers who 120.0 generate fees based on aggregate AUM, asset management firms will likely continue to aggressively seek acquisitions to increase AUM, 115.0 expand customer and geographical scope and add complementary assets. 110.0 In addition, cross-border deal activity should remain strong as asset managers look to globalize and diversify their client bases. 105.0
* Includes data for U.S. targets only 100.0
95.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007
Asset Management S&P 500
Source: SNL Financial LC and Capital IQ
Source: Capital IQ, FactSet, Piper Jaffray and Securities Data Corporation
46 ⏐PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 December 2007
APPENDIX FINANCIAL INSTITUTIONS: BROKER/DEALER
2007 Review PIPER JAFFRAY TEAM CONTACTS Year-to-date, 61 deals with $13.3 billion in aggregate transaction value have been announced in the U.S. broker/dealer sector. M&A activity in Thomas Chen Nick Golding 2007 has been robust compared to 2006 (38 announced deals and $2.2 212 284-9585 212 284-9584 billion in transaction value). [email protected] [email protected]
Industry Attributes and Dynamics The broker/dealer sector encompasses a broad range of companies BROKER/DEALER M&A TRANSACTIONS ($ in billions) including investment banking firms, securities exchanges and trading services firms. Certain subsectors within the broker/dealer sector remain largely fragmented and are likely to experience continued consolidation as $30 100 players seek increased scale. In particular, securities exchanges have been $25 consolidating at a rapid pace. The performance of global securities markets 75 and a relatively strong M&A environment continues to drive industry $20 fundamentals. $15 50
Although large transactions like the acquisition of A.G. Edwards by $10 Wachovia capture the headlines, the vast majority of broker/dealer 25 transactions are quite small. Of the 61 deals announced in 2007, only eight $5 had deal sizes greater than $100 million. $0 0
2004 2005 2006 YTD Consolidation/Active Buyers Investment banking firms have been active players within the broker/dealer Q3 2007 sector. Bear Stearns, Stifel Financial, Lazard, Jefferies, and Friedman, Transaction Value Billings, Ramsey all made strategic acquisitions in 2007. Transaction Volume
2008 Outlook Source: SNL Financial LC Over the past few years, a number of middle market investment banks 2007 SELECT BROKER/DEALER TRANSACTIONS have completed initial public offerings. While this trend has continued in ($ in millions) 2007, recent turmoil in the equity markets and the paucity of suitable candidates point to a diminution in broker/dealer IPOs. Some of these Announced Enterprise firms may be the subject of takeovers as banks and others look to expand Date Target Acquiror Value their capabilities, continuing a recent trend in the market and the operating 11/6/2007 Philadelphia Stock Exchange Nasdaq Stock Market $652 environment becomes more challenging (i.e., Stifel Financial/Ryan Beck, 5/30/2007 A.G. Edwards Wachovia 6,936 Lazard/Goldsmith Agio Helms and Jefferies/Putnam Lovell). 5/29/2007 Cantor Fitzgerald LP eSpeed, Inc. 1,305 4/30/2007 Int. Securities Exch. Eurex Deutschland 2,777 * Includes data for U.S. targets only Source: SNL Financial LC and Capital IQ INDEXED STOCK PERFORMANCE
115.0
105.0
95.0
85.0
75.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007
Broker/Dealer S&P 500
Source: SNL Financial LC and Capital IQ
Source: Capital IQ, FactSet, Piper Jaffray and Securities Data Corporation PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 47
December 2007
APPENDIX FINANCIAL INSTITUTIONS: DEPOSITORY INSTITUTIONS
2007 Review PIPER JAFFRAY TEAM CONTACTS Year-to-date, U.S. M&A activity in the bank and thrift sector has declined compared to 2006. 250 deals have been announced with $72.0 billion in Robert Rinek aggregate transaction value in 2007. By comparison, 2006 was a robust year 612 303-6306 with 325 announced deals with a total of $111.0 billion in deal value. The [email protected] three largest U.S. transactions in 2007 were Bank of America/LaSalle Bank ($21.0 billion), BBVA S.A./Compass Bancshares ($10.2 billion) and TD Bank YTD Q3 2007 M&A TRANSACTION MEDIAN MULTIPLES Financial Group/Commerce Bancorp ($9.2 billion).
2007 multiples of 23.7x net income and 2.5x tangible book value (“TBV”) were generally on par with the prior three years. The median U.S. M&A 30x multiples for depository institution transactions were 23.6x net income and 23.7x 2.6x TBV in 2006. 20x Industry Attributes and Dynamics The U.S. depository institutions sector continues to be characterized by an abundance of smaller independent franchises and acquisitive larger regional 10x and national banks. This dynamic drives consolidation as skilled buyers add new branches efficiently via acquisition. 2.5x 0x Consolidation has been a consistent theme over the past two decades. The decline in the number of depositories has been somewhat offset by new Tangible Book Value Net Income charter additions. The number of U.S. depositories (approximately 8,700) still remains large and fragmented compared to foreign markets. Source: SNL Financial LC
Consolidation/Active Buyers DEPOSITORY INSTITUTIONS M&A TRANSACTIONS ($ in billions) The valuation disconnect between the larger acquirors and traditional community bank targets has somewhat muted the ability and desire of the large buyers to pay the necessary acquisition premiums. As a result, $140 350 consolidation activity was driven by local and small regional acquirors. In $120 300 fact, 61.7% of bank and thrift acquirors were institutions with under $2 $100 250 billion of total assets in 2007. $80 200 2008 Outlook $60 150 Although 2007 M&A activity has been torrid, the recent change in industry $40 100 conditions is likely to slow the pace of consolidation for the near term. $20 50 Credit problems, financing challenges and depressed currencies will sideline many otherwise acquisitive franchises. Longer term, we anticipate a return $0 0 to the consolidation pace of the last two years, as smaller players continue to 2004 2005 2006 YTD 2007 feel pressure from the current rate environment, competitive loan, deposit pricing and regulatory expenses. Transaction Value Transaction Volume
* Includes data for U.S. targets only Source: SNL Financial LC
INDEXED STOCK PERFORMANCE
115.0 110.0 105.0 100.0 95.0 90.0 85.0 80.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007
Depository Institutions S&P 500
Source: SNL Financial LC and Capital IQ
Source: Capital IQ, FactSet, Piper Jaffray and Securities Data Corporation
48 ⏐PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 December 2007
APPENDIX FINANCIAL INSTITUTIONS: INSURANCE
2007 Review PIPER JAFFRAY TEAM CONTACT Year-to-date, there have been 38 announced deals with a total transaction value of $12.5 billion in the U.S. property and casualty (“P&C”) insurance sector. 2007 Michael Gebo John Butler transaction values increased significantly compared with 2006 due to three large 212 284-9581 212 284-9580 transactions. Median M&A valuation multiples for P&C insurance companies [email protected] [email protected] stood at 1.9x book value and 15.4x net income in 2007 compared to 1.5x book value and 9.7x net income for the same period in 2006. YTD 2007 M&A TRANSACTION MEDIAN MULTIPLES In the U.S. insurance brokerage sector, 2007 figures stood at 190 announced deals 15.4x worth $5.7 billion in transaction value compared with 230 announced deals and 16x $3.2 billion in 2006. Notable transactions announced in the insurance brokerage sector in 2007 include Apax Partners and Morgan Stanley Principal 12x Investments/Hub International ($1.8 billion), The Blackstone Group/Alliant Insurance Services ($1.1 billion) and GS Capital Partners/USI Holdings 8x Corporation ($1.0 billion).
4x Year-to-date, there were 38 announced deals worth $12.5 billion in transaction 1.9x value in the U.S. P&C insurance sector compared with 48 announced deals worth $4.4 billion in 2006. Notable transactions announced in the P&C 0x insurance sector in 2007 include Liberty Mutual Group/Ohio Casualty Book Value Net Income Corporation ($2.7 billion), MAPFRE/The Commerce Group ($2.3 billion) and Source: SNL Financial LC (P&C Insurers only) Munich Re/The Midland Company ($1.3 billion). INSURANCE M&A TRANSACTIONS Industry Attributes and Dynamics ($ in billions) The insurance brokerage sector remains highly fragmented. There are now six publicly traded insurance brokers, a second tier of regional P&C brokers (several $14 60 of which are now sponsor-backed), dozens of bank-owned brokers and $12 50 thousands of small owner-operator agents and brokers. The majority of $10 transactions done in this sector tend to be the larger and mid-sized firms buying 40 $8 out the smaller owner-operators. 30 $6 In contrast, insurance underwriters tend to be much larger entities than their $4 20 broker counterparts. Although they only comprised 18.4% of total M&A deal 10 activity in 2007, P&C insurance underwriter transactions comprised 78.6% of $2 transaction value. $0 0 2004 2005 2006 YTD Consolidation/Active Buyers Q3 2007 Within the insurance brokerage sector, the publicly traded consolidators have P&C Ins. Deal Value Ins. Brok. Deal Value been as active as ever in 2007. Year-to-date, Brown & Brown made 19 P&C Ins. Deal Volume Ins. Brok. Deal Volume (10x) acquisitions followed by Arthur J. Gallagher with 15 acquisitions. Notably, after a long period of dormancy, large P&C insurance brokerage deals returned to Source: SNL Financial LC favor as financial sponsors took advantage of a (temporarily) highly favorable credit market. INDEXED STOCK PERFORMANCE
Among P&C insurance underwriters, foreign acquirors were active in the U.S. 115.0 led by QBE Insurance Group and Zurich Insurance Services. Sellers included non-standard auto underwriters, specialty underwriters and regional players 110.0 such as The Ohio Casualty Insurance Company and The Midland Company. 105.0
2008 Outlook 100.0 Thanks to another benign storm season, P&C premium rates are declining across 95.0 virtually all lines of businesses and top-line growth has slowed dramatically. As a result, M&A activity should continue to trend upward as cash-rich underwriters 90.0 seek to deploy capital expeditiously and multiples are likely to creep higher. 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007 Property & Casual Insurance Insurance Brokerage S&P 500 Insurance brokerage M&A volume should also continue to trend upward in 2008 as declining premium rates pressure brokerage commissions. Other trends that Source: SNL Financial LC and Capital IQ point to robust consolidation activity in 2008 are (i) the looming increase in capital gains tax rates, (ii) the momentum behind bank divestitures of brokerage units, (iii) sponsors seeking exits from growth-challenged mid-sized brokers, and (iv) the well-funded, larger sponsor-backed brokerages who are focused on growth via M&A. LBO activity, however, will likely cease in 2008 given the troubled credit markets.
*Includes data for U.S. and Bermudan targets only Source: Capital IQ, FactSet, Piper Jaffray and Securities Data Corporation PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 49
December 2007
APPENDIX FINANCIAL INSTITUTIONS: SPECIALTY FINANCE
2007 Review PIPER JAFFRAY TEAM CONTACTS Year-to-date, there have been 101 announced specialty finance M&A transactions accounting for $34.8 billion in transaction value in the U.S. Robert Rinek Thomas Chen Year-to-date, 2007 transaction value is already double 2006 transaction 612 303-6306 212 284-9585 value. The bulk of this value stems from the J.C. Flowers/SLM Corp. [email protected] [email protected] transaction ($25.6 billion) announced in April 2007. The deal is currently the subject of litigation as the investor group spearheaded by J.C. Flowers Val Schnell seeks to walk away or re-price the deal based on the change in market 212 284-9444 conditions post-announcement. Excluding this deal, 2007 transaction value [email protected] is roughly equal to 2006 total transaction value. YTD 2007 M&A TRANSACTION MEDIAN MULTIPLES Year-to-date 2007 median valuation multiples for U.S. M&A transactions stand at 1.2x book value and 17.1x net income. M&A multiples in 2007 are consistent with 2006 multiples but are notably lower than multiples in 2004 17.1x and 2005. Valuations have declined as a result of the subprime mortgage 15x market turmoil. 12x Most of the notable deals announced occurred in the first half of 2007 due to challenging credit market conditions in the second half of the year. Some 9x of these transactions include GE Capital Solutions/PHH Corporation ($1.8 billion), Cerberus Capital Management/Option One Mortgage ($1.3 6x billion), Fortress Investment Group/Interpool Inc. ($807 million) and Lone 3x Star Funds/Accredited Home Lenders ($295 million). 1.2x
0x Industry Attributes and Dynamics The U.S. specialty finance sector is characterized by many smaller players. Book Value Net Income Year-to-date, only 21% of transactions had a deal size greater than $25 million. The specialty finance sector has also experienced attractive growth Source: SNL Financial LC in many areas, including consumer finance, mezzanine lending and commercial finance. Many of the larger competitors are divisions or SPECIALTY FINANCE M&A TRANSACTIONS captive operations within large institutions and many new specialty finance ($ in billions) platforms have started up in recent years. $60 200 Consolidation/Active Buyers Private equity has been active in the specialty finance sector as low 150 $40 barriers-to-entry, industry fragmentation and the potential for high returns have attracted a wide range of investors. Newly capitalized start-ups— 100 taking many forms including finance companies, business development $20 companies/regulated investment companies, collateralized debt obligations, 50 etc.—continue to re-populate certain subsectors such as commercial finance. $0 0 2004 2005 2006 YTD 2008 Outlook Q3 2007 M&A deal activity in the specialty finance sector has declined lately Transaction Value (approximately 101 deals in 2007 and 117 deals in 2006 compared with an Transaction Volume average of about 170 deals annually in previous years), and recent deals have generally been smaller and often portfolio-oriented. M&A activity Source: SNL Financial LC will likely decline in 2008 given market conditions. INDEXED STOCK PERFORMANCE * Includes data for U.S. targets only
115.0 110.0
105.0
100.0 95.0
90.0
85.0 80.0
1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007
Specialty Finance S&P 500
Source: SNL Financial LC and Capital IQ
Source: Capital IQ, FactSet, Piper Jaffray and Securities Data Corporation
50 ⏐PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 December 2007
APPENDIX FINANCIAL INSTITUTIONS: TECHNOLOGY & SERVICES
2007 Review PIPER JAFFRAY TEAM CONTACTS Year-to-date, there were 154 announced deals representing $53.6 billion in aggregate transaction value. The previous year included 229 deals Nick Golding with $20.7 billion in transaction value. Excluding the KKR/First Data 212 284-9584 Corp. ($26.3 billion) transaction, however, 2007 transaction value is [email protected] $27.3 billion, which is more comparable to 2005 and 2006 figures.
Valuations continued to be robust in 2007, with multiples generally LTM M&A TRANSACTION MEDIAN MULTIPLES higher than those observed in 2006. The median LTM M&A multiples for financial technology and services (“FTS”) transactions were 3.2x revenue, 14.6x EBITDA and 33.9x net income. 33.9x 30x Notable U.S. transactions announced in 2007 included KKR/First Data Corp. ($25.7 billion), The Blackstone Group/Alliance Data Systems ($6.8 20x billion), Fiserv/CheckFree Corp. ($4.3 billion) and Fidelity National 14.6x Information Services/eFunds Corp. ($1.8 billion).
Industry Attributes and Dynamics 10x U.S. M&A activity within the FTS sector continues to be driven by 3.2x strategic acquirors who have strong acquisition currencies, availability of funds and a desire to broaden their customer reach and service 0x offerings. Global consolidation of the exchange subsector continued as Revenue EBITDA Net Income companies sought increased scale and breadth of activities. The industry continues to enjoy favorable long-term macro growth trends and Source: SNL Financial LC attractive business models, which continue to drive robust valuations throughout the sector. FINANCIAL TECHNOLOGY & SERVICES M&A TRANSACTIONS ($ in billions) Consolidation/Active Buyers $60 300 Certain strategic buyers were particularly active such as First Data Corp., which bought five companies; Fidelity National Information $50 225 Services, which acquired five as well and Fiserv, which purchased three $40 companies. FTS companies tend to enjoy high margins and recurring revenue models that can typically support significant leverage. As a $30 150 result, financial sponsors’ interest in the sector also continues to be high. $20 75 Notable financial sponsor deals in 2007 included KKR’s acquisition of $10 First Data Corp. ($25.7 billion) and The Blackstone Group’s acquisition $0 0 of Alliance Data Systems ($6.8 billion). 2004 2005 2006 YTD 2007 Banks continued to be active acquirors in 2007, with JPMorgan acquiring FisaCure, Integrated Investment Services and Xign Transaction Value Corporation and Citigroup acquiring Ecount and Bisys Group. Number of Transactions Source: SNL Financial LC 2008 Outlook We expect a continued high level of M&A activity in the FTS sector in INDEXED STOCK PERFORMANCE 2008. Financial sponsors will continue to be active as significant amounts of uninvested funds remain outstanding and attractive industry 115.0 growth fundamentals persist. Strategic buyers will continue to have a 110.0 strong appetite for acquisitions. The M&A market will remain a seller’s market, with a scarcity of sizeable, quality companies available to be 105.0 acquired. 100.0 *Includes data for U.S. targets only 95.0
90.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007
Financial Technology & Services S&P 500
Source: SNL Financial LC and Capital IQ
Source: Capital IQ, FactSet, Piper Jaffray and Securities Data Corporation PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 51
December 2007
APPENDIX HEALTH CARE: BIOPHARMACEUTICALS
2007 Review PIPER JAFFRAY TEAM CONTACT Through December 2007, M&A activity in the biopharmaceutical sector is trending above 2006 levels in terms of total transaction value, Brett Skolnik but has not exceeded 2006 in number of deals. Year-to-date, there have 212 284-9328 been 43 deals announced accounting for $50.3 billion in aggregate [email protected] transaction value. This activity compares to 52 announced deals and $37.1 billion in aggregate transaction value for 2006. BIOPHARAMEUTICALS M&A TRANSACTIONS
($ in millions) Industry Attributes & Dynamics M&A activity was strong in 2007 with large-cap pharmaceutical $60,000 60 companies seeking to expand their pipeline in front of patent expirations and expected generic competition. Uncertain capital $50,000 50 markets, particularly in the second half of the year, also resulted in $40,000 40 private companies turning to M&A rather than the traditional IPO
route: $30,000 30 • Merck & Co. announced its acquisition of NovaCardia in July for Number of of Transactions Number $20,000 20
$350 million in ($ Value million) Transaction • Genzyme Corporation announced its acquisition of Bioenvision in May for $308 million $10,000 10 • AstraZeneca announced its acquisition of Arrow Therapeutics in $0 0 February for $150 million 2001 2002** 2003 2004 2005 2006 2007YTD
Transaction Value Number of Transactions The middle market underwent significant consolidation in 2007 with * Excludes $76 billion merger of Glaxo Wellcome and SmithKline Beecham ** Excludes $60 billion merger of Pfizer and Pharmacia several players abandoning the go-alone model: • Eisai announced its acquisition of MGI Pharma in December for Source: Capital IQ and Securities Data Corporation $3.9 billion • GlaxoSmithKline announced its acquisition of Reliant 2007 SELECT BIOPHARMACEUTICALS TRANSACTIONS Pharmaceuticals in November for $1.7 billion ($ in millions) • Celgene Corporation announced its acquisition of Pharmion Announced Transaction Date Target Acquiror Value Corporation in November for $2.9 billion 12/10/07 MGI Pharma Eisai $3,900 11/27/07 Agensys Astellas 537 11/21/07 Reliant Pharmaceuticals GlaxoSmithKline 1,650 Shareholder activism also played an increasing role in 2007, with 11/19/07 Pharmion Celgene Corp. 2,900 shareholders calling for action from companies including Genzyme 11/16/07 Coley Pharmaceuticals Pfizer 164 10/29/07 Bradley Pharmaceuticals Inc. Nycomed 346 Corporation, Biogen Idec and PDL BioPharma and contributing to 10/18/07 Aspreva Pharmaceuticals Galenica Group 915 several transactions: 10/12/07 Viacell PerkinElmer (Victor Acquisition Corp.) 310 09/24/07 Adnexus Therapeutics Bristol-Myers Squibb Co. 430 • Sale of MedImmune to AstraZeneca in April for $15.2 billion 09/19/07 Esprit Pharma Inc. Allergan Inc. 370 • Sale of Nabi Biopharmaceuticals Biologics business unit to Biotest 09/19/07 Renovis Evotec AG 152 09/11/07 Nabi Biologics (Nabi Biopharmaceuticals) Biotest AG 185 Pharmaceuticals Corporation in November for $185 million 07/25/07 NovaCardia Merck & Co. 350 07/10/07 JDS Pharmaceuticals Noven Pharmaceuticals 125 06/06/07 Ilypsa Amgen 420 2008 Outlook 05/29/07 Bioenvision Genzyme 308 05/14/07 Merck- Generics Business Mylan Laboratories Inc. 6,700 The Nasdaq Biotechnology Index is up 7.5% YTD. The NASDAQ has 04/23/07 MedImmune AstraZeneca 15,200 outperformed the broader market and is up 11.5% YTD—the S&P 500 02/20/07 New River Pharmaceuticals Shire Pharmaceuticals 2,371 02/02/07 Arrow Therapeutics AstraZeneca 150 is up 7.8% YTD. Source: Capital IQ and Securities Data Corporation The outlook for M&A activity in the sector looks strong for 2008 as we expect large-cap pharmaceutical companies to experience continued INDEXED STOCK PERFORMANCE pressure to acquire pipeline and products. In addition, the challenging market for IPO candidates will continue to force private companies to 115.0 look to M&A as a potential exit strategy. Continuing weakness in the
U.S. dollar will also contribute to increased activity from ex-U.S. 110.0 companies.
105.0
100.0
95.0
90.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007
Nasdaq Biotechnology NASDAQ S&P 500
Source: Capital IQ
Source: Capital IQ, Piper Jaffray and Securities Data Corporation
52 ⏐PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 December 2007
APPENDIX HEALTH CARE: HEALTH CARE SERVICES
2007 Review PIPER JAFFRAY TEAM CONTACTS M&A activity in the health care services (“HCS”) sector was very robust through the first half of 2007. M&A activity in the second half of 2007 Rod O’Neill Ross DeDeyn lagged as the debt markets began to experience turmoil in August. The 212 284-9396 212 284-9413 median multiples paid for health care services companies during 2007 were [email protected] [email protected] approximately 11.5x LTM EBITDA and 1.5x LTM revenues, which represented a modest increase from 2006 median multiples. Overall, both LTM M&A TRANSACTION MEDIAN MULTIPLES strategic buyers and financial sponsor buyers were actively acquisitive in 2007. 14x Industry Attributes and Dynamics 11.5x • Health care represents 15% of gross domestic product 12x • Cost focus away from acute care setting driving alternate site growth 10x • Pharmaceuticals outsourcing sector driven by robust drug pipelines • High government regulation 8x – reimbursement rates are subject to change 6x – Health Insurance Portability and Accountability Act • High barriers to entry 4x 1.5x • Characteristics driving demand 2x – aging population – increasing utilization of services 0x • Health care automation and outsourcing to reduce costs and improve efficiency Sales EBITDA
Consolidation/Active Buyers Source: Piper Jaffray and Company Data M&A activity was strong across all subsectors of health care services in 2007 SELECT HEALTH CARE SERVICES TRANSACTIONS 2007. Focus areas have been health care IT, home health care, managed ($ in millions) care and alternate site providers. Furthermore, consolidators in various Announced Enterprise subsectors have had strong levels of cash and their shares, which are used Date Target Acquiror Value as acquisition currency, have performed well allowing them to be 10/15/07 Coram, Inc Apria Healthcare $350 aggressive bidders for synergistic assets. 09/01/07 Radiation Therapy Services Vestar Captial Partners 1,100 07/24/07 PRA International Genstar Capital 754 07/02/07 Option Care Inc Walgreen Company 779 07/02/07 Manor Care Inc Carlyle Group 5,986 2008 Outlook 05/13/07 Viasys Healthcare Inc Cardinal Health 1,530 The Health Care Large-Cap Index outperformed while the Mid-Cap Index 04/19/07 National Veterinary Associates Summit Partners 128 03/19/07 Triad Hospitals Community Health Systems 7,074 underperformed the S&P 500 Index through September 30, 2007. While we 01/25/07 Cardinal Health- PTS Division Blackstone Group 3,300 do not expect that small- and mid-cap stocks will perform on par with the 01/08/07 United Surgical Partners International Welsh Carson Anderson & Stowe 1,800 major indices indefinitely, it is our opinion that growth companies that Source: Piper Jaffray and Securities Data Corporation continue to grow revenues and demonstrate operating leverage and accelerating earnings growth will be rewarded in the public markets. In INDEXED STOCK PERFORMANCE particular, those companies have positioned themselves to take advantage 120.0 of demographic trends and technological change within the health care services industry. 115.0 We would expect the trend of strategic acquirors “buying vs. building” to continue throughout 2008. In addition, we expect financial buyers to 110.0 actively pursue platform acquisitions. We believe that the current, less- than-favorable debt market environment will constrain financial buyers, 105.0 and we see this having a more meaningful negative impact on very large transactions rather than on middle market transactions. Also, research 100.0 suggests there will be an increase in liquidity events for existing sponsor portfolio companies over the next 12-24 months, resulting in an enhanced 95.0 potential pipeline of M&A activity. Overall, the market drivers affecting 90.0 the health care services industry are non-cyclical in nature and bode well 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007 for continued growth. HCS Large-Cap HCS Mid-Cap S&P 500
Source: FactSet and Capital IQ
Source: FactSet, Piper Jaffray and Wall Street Research PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 53
December 2007
APPENDIX HEALTH CARE: INFO-DRIVEN HEALTH CARE
2007 Review PIPER JAFFRAY TEAM CONTACTS M&A activity in the health care IT (“HCIT”) sector has been strong through 2007 with the total transaction value year-to-date exceeding the same period in Dan Gulbrandson Adam Gunther 2006. Deals with an aggregate value of $7.5 billion have been announced to 612 303-5652 612 303-1240 date this year, including Onex Corporation’s $2.6 billion announced purchase [email protected] [email protected] of Eastman Kodak Company’s health care division, the largest deal announced in this space since McKesson Corporation purchased Per-Se Technologies for LTM M&A TRANSACTION MEDIAN MULTIPLES $1.7 billion in 2006. The 2007 aggregate transaction value supersedes the total value of $5.2 billion for the same period in 2006. Also, the mean reported deal value year-to-date of $198 million represents a significant increase over the 14.0x 12.9x $145 million that was announced during the same period in 2006. 12.0x
The median multiples paid for HCIT companies to date in 2007 are 10.0x approximately 12.9x LTM EBITDA and 2.0x LTM revenue. Strategic 8.0x consolidation has allowed HCIT companies to trade at higher valuations than companies in other health care service segments. 6.0x
4.0x Valuations remain highly dependent on revenue growth, margin expansion, 2.0x technology, quality of service and profitability. 2.0x
0.0x Industry Attributes and Dynamics Revenue EBITDA • Highly fragmented
• Drive to improve productivity through automation Source: Company Data and Piper Jaffray • Continued margin pressure faced by providers and payors • Increasing demand for improved patient safety 2007 SELECT HCIT M&A TRANSACTIONS • Limited and stressed resources of providers ($ in millions) • Government technology investment initiatives driving adoption Announced Transaction • Shifting reimbursement (P4P) Date Target Acquiror Value • Consolidators looking for growth engines 10/31/07 First Consulting Group Computer Sciences Corp. $275 09/28/07 Commissure Nuance Communications 40 • Complexity of claims chain 08/13/07 JJWild Perot Systems Corp. 89 • Integration of independent and ambulatory environments 07/30/07 Hyland Software Thoma Cressey Bravo 457 07/29/07 MedAssist Firstsource 330 • Increasing cross border activity 07/24/07 LYNX Medical Systems Picis 130 07/19/07 iSOFT Group CompuGroup Holding AG 448 07/11/07 Sunquest Information Systems Vista Equity Partners 382 Consolidation/Active Buyers 06/26/07 Innovative Health Strategies inVentiv Health 75 M&A activity in the HCIT industry has ramped up considerably in 2007 as 06/20/07 Smart Document Solutions Companion Technologies Corp. 185 04/19/07 Springfield Service Corp. SPI Technologies 44 macro dynamics continue to drive activity and investor interest. Focus areas have 04/17/07 XactiMed MedAssets 65 been ambulatory and clinical IT, which have all benefited from recent legislation 03/01/07 Dendrite International Cegedim SA 658 and a focus on medical error reduction, as well as productivity gains. Also, the 02/07/07 Keane Caritor 901 general trend of procedures moving into outpatient settings has provided a 01/10/07 Eastman Kodak Onex Corp. 2,550 significant boost to IT spending. Source: Piper Jaffray and Irving Levin Associates INDEXED STOCK PERFORMANCE 2008 Outlook 115.0 HCIT spending is expected to grow at a CAGR of 7.7% over the next five years. This growth will be driven by high growth in software sales, increasing hospital IT budgets and an increase in alternate-site spending. Hospitals are expected to 110.0 dramatically increase the use of new technologies, forcing a corresponding jump in adoption rates. Recent advances on the part of the federal government to 105.0 increase overall HCIT adoption and the desire of customers to fully incorporate HCIT into the healthcare process are forcing providers to become increasingly 100.0 aware of HCIT benefits. These trends will entice buyers to continue to pay for
accelerated top line growth and to support industry fundamentals. In addition, 95.0 large consolidators will remain active in the space due to their vast balance sheets
and an ability to effectively incorporate HCIT systems into other medical 90.0 technology divisions. This activity will propagate the high value of HCIT 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007
vendors. Health Care IT NASDAQ S&P 500
Source: Capital IQ
Source: FactSet, Piper Jaffray and Securities Data Corporation
54 ⏐PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 December 2007
APPENDIX HEALTH CARE: LIFE SCIENCES TOOLS & DIAGNOSTICS
2007 Review PIPER JAFFRAY TEAM CONTACT Year-to-date, 22 M&A deals have been announced, an increase from 15 deals for the same period in 2006. Deals with an aggregate transaction value of $24.4 Vitali Trotsko billion have been announced to date this year, up from $22.1 billion for the same 212 284-9445 period in 2006. Year-to-date, the mean reported deal value of $1.2 billion for [email protected] announced deals represents a decrease from the mean deal size of $1.6 billion announced during the same period in 2006. LTM M&A TRANSACTION MEDIAN MULTIPLES Year-to-date, the median LTM transaction multiples for life sciences tools and diagnostics companies were approximately 18.2x EBITDA and 4.2x revenues. This represents an increase from the median LTM EBITDA and revenue 20x 18.2x transaction multiples during the same period in 2006 of 14.8x and 3.3x, respectively. 16x
Industry Attributes & Dynamics 12x • Health care cost pressures promote increased use of diagnostics for early 8x detection 4.2x • New technologies allow caregivers to diagnose conditions and treat patients 4x more efficiently, reducing overall costs • Molecular diagnostics bridges traditional diagnostics and life sciences tools 0x markets and represents an attractive growth opportunity Revenue EBITDA • Consolidators looking to expand menu of tests and applications • Characteristics driving demand for new technologies Source: FactSet, Piper Jaffray and Securities Data Corporation – aging population – increasing test volume 2007 SELECT M&A TRANSACTIONS – significant health care expenditures ($ in millions)
– decentralizing lab testing Announced Transaction – trend towards personalized medicine Date Target Acquiror Value 12/02/07 Bruker Biospin Bruker Biosciences $914 • Challenging 510k approval/regulatory environment 11/07/07 Velocity11 Agilent Technologies NA 10/24/07 Alere Medical Inverness Medical 302 09/05/07 Cozart PLC Concateno PLC 130 08/31/07 Berkeley HeartLab Celera 195 Consolidation/Active Buyers 08/06/07 HemoSense Inc. Inverness Medical 160 The life sciences tools and diagnostic space is starting to look more like the 07/25/07 Dade Behring Siemens 7,120 06/25/07 Ventana Medical Systems Roche Holding AG 2,778 medical technology space in which large consolidators with substantial sales and 06/19/07 NimbleGen Systems Inc. Roche Holding AG 273 06/04/07 Cholestech Inverness Medical 291 distribution capabilities look to acquire smaller companies with novel, 06/03/07 Digene Qiagen 1,323 innovative product offerings, while expanding the menu of tests offered; 05/20/07 Cytyc Hologic 5,634 05/02/07 VWR International Madison Dearborn 3,172 meanwhile, smaller companies look to gain critical mass. We feel that valuation 04/05/07 Stratagene Agilent Technologies 236 04/04/07 Biosite Inverness Medical 1,467 levels in the sector remain attractive on a historical and relative basis, and we 04/04/07 BioVeris Corp. Roche Holding AG 576 expect consolidation to continue, as large conglomerates with health care 03/28/07 454 Life Sciences Corp. Roche Holding AG 140 02/28/07 Dako A/S EQT Partners 1,310 subsidiaries have expressed interest in the space. In addition, companies with 02/26/07 Adiana Cytyc 215 02/11/07 Adeza Biomedical Cytyc 351 cutting edge technologies in high-growth segments, such as molecular 02/01/07 HemoCue Quest Diagnostics 420 diagnostics, represent prime acquisition targets. 01/28/07 Molecular Devices Corp. MDS Inc. 572
2008 Outlook
The Diagnostics and Life Sciences Research/Tools Indices have outperformed Source: Capital IQ and Securities Data Corporation the S&P 500 Index by approximately 27% and 18%, respectively. We expect positive sector growth in 2008 based on technological advancements, strong INDEXED STOCK PERFORMANCE
R&D spending and an attractive molecular diagnostics market. In addition, we 140.0 expect M&A activity to continue to be strong in the space as it remains
attractive for both strategic and financial players. 130.0
120.0
110.0
100.0
90.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007 Diagnostics Life Sciences Research/Tools S&P 500
Source: Capital IQ
Source: FactSet, Piper Jaffray and Securities Data Corporation PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 55
December 2007
APPENDIX HEALTH CARE: MEDICAL TECHNOLOGY
2007 Review PIPER JAFFRAY TEAM CONTACT M&A activity in the medical technology sector has been strong through the third quarter of 2007, with aggregate transaction value totaling Bob DeSutter nearly $50 billion. There were 77 announced transactions, including 50 612 303-6392 greater than $20 million. This activity compares to 74 announced [email protected] transactions totaling $31.4 billion for all of 2006.
The median multiple paid for medical technology companies in 2007 was LTM M&A TRANSACTION MEDIAN MULTIPLES approximately 15.6x LTM EBITDA which is in line with the 2006 median of 16.6x. This remains the result of (i) the continued strong performance of high growth targets, (ii) acquirors making platform bets, (iii) acquirors 30x paying for organic growth and (iv) low interest rates in the first half of the 20.8x year. 25x
20x 15 . 6 x Valuations remain highly dependent on revenue growth, proprietary intellectual property, addressable end markets and profitability. 15x
Industry Attributes and Dynamics 10 x • High barriers to entry 3.2x • Regulatory approvals 5x • Insurance reimbursement • Proprietary IP essential to long-term success 0x • Relatively few major consolidators Net Sales EBITDA EBIT
Consolidation/Active Buyers Source: Securities Data Corporation M&A activity in the medical technology industry has been building over MEDICAL TECHNOLOGY M&A TRANSACTIONS the past several years. As in past years, strategic buyers largely dominate ($ in billions) the medical technology M&A market. Consolidators continue to focus on highly strategic, high-growth product tuck-ins or stand-alone $60 90 platforms. 80 $50 Major medical technology consolidators include Abbott Laboratories, 70 Alcon, Allergan, Boston Scientific Corporation, General Electric $40 60 Company, Johnson & Johnson, Medtronic, Philips Medical Systems, 50 Siemens Corporation, Smith & Nephew, St. Jude Medical, Stryker $30 Corporation, Covidien and Zimmer. 40 $20 30 Conventional leverage buyout activity continued 2007 evidenced by The 20 Blackstone Group buying DJ Orthopedics on the heels of the closing of $10 the Biomet transaction by the consortium of Goldman Sachs Asset 10 Management, KKR, The Blackstone Group and Texas Pacific Group. $0 0 The credit markets, however, deteriorated in the latter part of 2007 2002 2003 2004 2005 2006 YTD 2007 which makes the potential for LBOs somewhat limited in the near term. Transaction Value Transaction Volume
2008 Outlook Source: Securities Data Corporation We expect M&A activity to remain steady for 2008. Organic revenue growth remains a top concern to the market and valuations are largely INDEXED STOCK PERFORMANCE hinged on this metric. Strategic acquirors are expected to have an edge due to the turmoil in the credit markets. For the same reason, stock deals may gain at the expense of cash transactions. 140.0 130.0 Technology sectors to monitor in 2008 include obesity, diabetes, dental, neurology, orthopedics, urology/women’s health and cardio. 120.0
110.0
100.0
90.0 1/3/2007 2/16/2007 4/3/2007 5/17/2007 7/2/2007 8/15/2007 9/28/2007
Large Cap Medical Technology Small Cap Medical Technology NASDAQ
Source: FactSet and Capital IQ
Source: FactSet, Piper Jaffray and Securities Data Corporation
56 ⏐PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 December 2007
APPENDIX INDUSTRIAL GROWTH: BUILDING PRODUCTS
2007 Review PIPER JAFFRAY TEAM CONTACT The building products sector M&A activity has significantly declined in 2007. Year-to-date, there were 165 deals accounting for over $13.8 billion in Michael Dillahunt Garry Vaynberg aggregate transaction value. This activity compares with $36.1 billion and 235 612 303-6337 612 303-6348 transactions completed for the comparable period in 2006. The drop-off would [email protected] [email protected] have been more severe if not for several large divestitures of the residential building products companies and the strong M&A activity on the non- residential side. LTM M&A MEDIAN MULTIPLES
The overall building products sector has been affected by the significant 12.0x
downturn in the housing market. Dramatic deceleration in homebuilding and 10.2x declines in property values, among other factors, have contributed to extremely 10.0x weak conditions in the sector. As a result, companies across the entire supply chain have been, and will continue to be, adversely impacted. On the other end 8.0x 7.3x of the spectrum, non-residential construction has remained very strong. Year-
to-date through August 2007, value of private non-residential construction put 6.0x in place is 17% higher than the same period in 2006.
4.0x As a result of the factors listed above, the M&A market generally is much more seller friendly to commercial building products companies. Several commercial building products transactions have occurred in recent months, 2.0x with both strategic companies and private equity firms being active. On the 0.7x strategic side, one of the more notable transactions was the acquisition of a 0.0x privately owned storefront window manufacturer, EFCO by the residential Sales EBITDA EBIT window manufacturer, Pella Company. International companies are also Source: Capital IQ and Securities Data Corporation starting to show interest in U.S. acquisitions. Royal Philips Electronics is acquiring The Genlyte Group, a manufacturer of lighting fixtures and related BUILDING PRODUCTS M&A TRANSACTIONS products. On the financial side, Genstar Capital acquired International ($ in billions) Aluminum Corporation, an aluminum building products manufacturer, in a going-private transaction. $40 250
200 Private equity firms, which over recent years have made significant bets in the $30 housing cycle, have mostly sat on the sidelines. One of a few exceptions is Hellman & Friedman’s pending acquisition of Goodman Global, which was 150 $20 taken public less than two years ago by Apollo Management. 100
$10 While private equity owners continued to try and ride out the residential 50 building products cycle, corporate divestitures of residential building products divisions have continued. Some of the more notable transactions include the $0 0 sale of American Standard Company’s kitchen and bath business to Bain 2002 2003 2004 2005 2006 YTD 2007 Capital Partners and the sale of The Home Depot’s wholesale distribution Deal Volume # of Deals business to Bain Capital Partners, The Carlyle Group and Clayton, Dubilier & Rice. Source: Securities Data Corporation 2008 Outlook INDEXED STOCK PERFORMANCE We remain extremely optimistic about the macroeconomic fundamentals and the M&A activity in the building products space. In the long-term, we expect 110.0 the long-standing consolidation theme to remain intact. Big box retailers and large cap homebuilders will continue to gain market share. As a result, vendors 105.0 will seek manufacturing and distribution scale, and broad product portfolios, 100.0 to effectively serve their customers. Growth through acquisition is a key tool to achieve those attributes. 95.0
2008 will be a challenging year for most companies in the building products 90.0 space. Despite the government actively trying to stabilize the residential credit 85.0 market, there are several strong headwinds, which are likely to make 2008 another very difficult year. In addition, there are signs that non-residential 80.0 construction growth may be moderating. Therefore, we believe that most 1/3/07 3/11/07 5/17/07 7/23/07 9/28/07 companies and private equity firms will focus on riding out the current cycle. Building Products S&P 500 On the M&A front, particularly for residential building product companies, demand will likely outstrip supply as most company boards and private equity Source: Capital IQ owners will focus on riding out the cycle, rather than selling into the current market. Conversely, numerous strategic and financial buyers (including hedge funds) are looking to opportunistically seek targets in weak or distressed situations. Source: SDC, Capital IQ, U.S. Census and Piper Jaffray PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 57
December 2007
APPENDIX INDUSTRIAL GROWTH: JANITORIAL AND SANITATION SUPPLY
2007 Review PIPER JAFFRAY TEAM CONTACT The janitorial and sanitation supply (“Jan/San”) sector showed robust M&A activity in 2007. Compared to the first three quarters of 2006, Robert Frost Blake Cunneen Jan/San M&A volume in 2007 increased by 18%, while the broader 612-303-8248 312-920-3273 market rose by 3.5%. During 2007, the Jan/San industry saw three [email protected] [email protected] transactions reaching the $1+ billion mark—Clayton, Dubilier & Rice’s acquisition of Servicemaster Co. for $5.4 billion, Eurazeo’s acquisition of Elis SA for $3.2 billion and Bain’s acquisition of American Standard’s LTM M&A TRANSACTION MEDIAN MULTIPLES bath and kitchen unit for $1.8 billion. 20x 17.5x The median multiple paid for Jan/San companies during the first three quarters of 2007 was approximately 9.6x trailing twelve month EBITDA. 16x This compares favorably with a median EBITDA multiple of 9.2x in fiscal 2006. The strong valuations in the janitorial and sanitation sector 12x 9.6x are representative of trends within the broader M&A marketplace and 8x reflect the attractive industry dynamics. 4x 1.2x Industry Attributes & Dynamics • Highly fragmented with recent consolidation 0x • Naturally recession-resistant Net Sales EBITDA EBIT • Increasing public awareness of hygiene will drive growth • Consolidating supply base is forcing distributors to expand Source: Capital IQ capabilities JAN/SAN M&A TRANSACTIONS Consolidation/Active Buyers ($ in billions) Strategic acquisition activity within the Jan/San space has grown in 2007 $10 150 as buyers, both distributors and manufacturers, have sopped up companies to supplement moderate organic growth. Jan/San companies $8 120 typically grow around the rate of GDP, so strategic acquisitions can be a $6 90 strong way to boost top line growth. Given that Jan/San companies have performed well in the first three quarters of 2007 (the Janitorial & $4 60 Sanitation Supply Index has risen 15% compared to 8% for the S&P), $2 30 acquisitions will likely remain a viable growth option. $0 0 Financial buyers are also eager to invest in the Jan/San space, predominately to capitalize on this industry’s steady cash flows. The 2002 2003 2004 2005 2006 YTDQ3 YTDQ3 reliability of cash flow allows for increased leveragability, reducing the 2006 2007 credit spreads on high-yield debt and diminishing the risks assumed in highly-levered transactions. Transaction Value Transaction Volume
Source: Capital IQ 2008 Outlook The Janitorial & Sanitation Supply index has outperformed the S&P INDEXED STOCK PERFORMANCE index YTD 2007 by approximately 7.2%, and the impressive performance of companies in this sector will help maintain that trend. 120.0 Although there is some concern regarding possible economic slowdown 115.0 in 2008, the Jan/San space is expected to largely avoid negative impacts of such a trend. 110.0 105.0 Given the tightening of the credit markets, financial buyers will likely remain active in the Jan/San space, as lenders will be attracted to the 100.0 industry’s steady, recession-resistant cash flows. 95.0
90.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007 Janitorial & Sanitation Supply S&P 500
Source: Capital IQ
Source: Capital IQ and Piper Jaffray
58 ⏐PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 December 2007
APPENDIX INDUSTRIAL GROWTH: PACKAGING
2007 Review PIPER JAFFRAY TEAM CONTACT M&A activity in the packaging space was very strong throughout much of 2007 before quieting down in the second half of the year. Despite the Shane McDaniel Jason Roudabush relatively slow third quarter, deal value and volume both showed 312 920-3271 312 920-3293 considerable increases over the first three quarters of 2006, in part due to [email protected] [email protected] a number of sizeable, high-profile deals.
The packaging subsectors varied greatly with the rigid packaging and YTD M&A TRANSACTION MEDIAN MULTIPLES label sectors outperforming the S&P through the first three quarters and the flexible packaging and paper sectors lagging in terms of equally 15.5x weighted stock performance. The Flexible Packaging and Paper and 16x Board Indices trailed S&P returns by approximately 18% and 10%, respectively. The Rigid and Label Indices, however, outperformed the 12x S&P by 7% and 10%, respectively. 8.2x 8x The consolidation in the packaging sector of 2006 continued into 2007. 4x Growth through acquisition has been a key strategy for many packagers 1.0x to scale up in an effort to combat rising input prices while refocusing on 0x core operations. These trends were exemplified by the strategic acquisition of Owens-Illinois’ plastics packaging business by Rexam for Net Sales EBITDA EBIT $1.8 billion in June. This transaction immediately transformed Rexam into a major player in the rigid plastic packaging space, complementing Source: Securities Data Corporation its market leadership as the largest beverage can producer in the world. The divestiture of this business will undoubtedly allow Owens-Illinois to PACKAGING M&A TRANSACTIONS focus more exclusively on its glass container business. This was just one ($ in billions) of a number of large game-changing deals that contributed to the increase in packaging transaction value in 2007. $30 400 $25 350 Private equity firms remained active in this space as well, not to be 300 $20 outdone by strategic acquirors. In September, for example, Aldabra 2 250 Acquisition Corp. announced its $1.6 billion dollar acquisition of the $15 200 paper and packaging assets of Boise Cascade. Later that month, private $10 150 equity firm, Cerberus Capital Management announced the acquisition of 100 $5 the North American operations of Stora Enso, intending to merge its 50 operations with those of portfolio company, NewPage Holding $0 0 Corporation to form the largest manufacturer of coated paper products in 2002 2003 2004 2005 2006 YTD Q3 YTD Q3 the United States. '06 '07
Transaction Value Number of Deals 2008 Outlook Continued M&A activity in the packaging space will likely reflect the same trends as the broader M&A market, assuming that company Source: Press Releases and Securities Data Corporation financials remain strong and the astonishing increases in energy costs seen in 2007 are reeled in during 2008. The late summer and early fall deals INDEXED STOCK PERFORMANCE previously mentioned are evidence that some large mergers and 120.0 acquisitions will persist despite the recent turmoil in debt markets. One
deal to watch for in 2008 is the sale of Alcan’s packaging assets, which 115.0 was announced as part of the Alcan acquisition by Rio Tinto earlier in
2007. Essel Propack, Sealed Air Corporation and Bemis Company have 110.0 drawn media attention as interested buyers.
105.0 Given the bifurcation of the packaging market, with most firms competing on either a high-volume, low-cost strategy or catering instead 100.0 to a low-volume niche market, it would seem reasonable that most packaging deal flow in 2008 will fall in the mid-market space occupied by 95.0 the latter group. As noted above, however, a select number of high- quality large deals are certainly still in play. 90.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007 PJC Packaging S&P 500 Source: Capital IQ
Source: Capital IQ and Piper Jaffray PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 59
December 2007
APPENDIX INDUSTRIAL GROWTH: SPECIALTY & INDUSTRIAL DISTRIBUTION
2007 Review PIPER JAFFRAY TEAM CONTACT Merger and acquisition activity in the specialty and industrial distribution sector continued to be healthy in 2007. Year-to-date through November, the leading Matthew Sznewajs companies across the sector completed 74 deals accounting for $11.1 billion in 612 303-2030 aggregate reported transaction value in 2007. This activity compares to $9.0 [email protected] billion and 99 transactions completed for the same period in 2006. The transaction value in 2007 included the $8.5 billion acquisition of HD Supply by a consortium of private equity firms. SPECIALTY AND INDUSTRIAL DISTRIBUTION M&A ($ in millions) Industry Attributes & Dynamics $12,000 120 • Product breadth versus specialization • Supply chain and inventory management 100 • Economies of scale in purchasing $9,000 • Broader geographic coverage 80 • Larger SKU offerings $6,000 60 Consolidation/Active Buyers 40 Prospects remain positive for continued M&A activity in the near term. Strategic $3,000 buyers continue to participate in the market for a number of reasons. There is a 20 clear search for scale by the major players and the general theme in the industry is that the big will continue to get bigger. Powerful customers in their respective $0 0 end markets have systematically consolidated their vendors. As a result, 2001 2002 2003 2004 2005 2006 YTD YTD suppliers of specialty and industrial distribution products continue to search for 2006 2007 the scale and efficiencies to expand their share of the market. Growth through Transaction Value Transaction Volume acquisition is a key tool in achieving those attributes.
Source: Capital IQ This consolidation push and resulting increase in M&A activity has driven up multiples as well in recent years. That being said, there appears to be a clear INDEXED STOCK PERFORMANCE bifurcation in multiples paid based on transaction size and end market served. Transactions north of $300 million tend to command significant premiums from 125.0 the market. In addition, companies with end market exposure to construction, particularly residential construction, have experienced falling multiples based on 120.0 the relatively negative near-term outlook for this end market. 115.0 Private equity firms continue to demonstrate strong interest in the fragmented 110.0 specialty and industrial distribution market. Private equity groups understand 105.0 the consolidation trend that is taking place in the industry. Accordingly, quality specialty and industrial distribution companies provide a means to achieve long- 100.0 term organic and acquisition-related earnings growth in a portfolio company 95.0 and the consolidating landscape provides numerous exit alternatives. 90.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007
2008 Outlook Industrial Distribution S&P 500 The Piper Jaffray Specialty and Industrial Distribution Index outperformed the Source: Capital IQ broader S&P 500 index by over 400 basis points through September 2007. In addition, as a result of the channel trends discussed above, we believe that 2008 will be another strong year for M&A activity in this industry. Private equity firms, particularly in the middle market, are likely to remain active in the sector, taking advantage of the relatively high levels of free cash flow generated by companies and the available leverage in the marketplace.
Source: Securities Data Corporation , Capital IQ and Piper Jaffray
60 ⏐PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 December 2007
APPENDIX INDUSTRIAL GROWTH: SPECIALTY CHEMICALS
2007 Review PIPER JAFFRAY TEAM CONTACT M&A activity in the specialty chemicals industry was stronger in the first three quarters of 2007 than during the same period last year, both in terms of Robert Frost transaction volume and transaction value. In the first three quarters of the year, 612 303-8248 140 deals were announced, accounting for more than $33 billion in aggregate [email protected] transaction value. This compares to 124 transactions and $10 billion in aggregate value for specialty chemical deals completed during the same period of 2006. LTM M&A TRANSACTION MEDIAN MULTIPLES
Year-to-date, the median multiple paid for specialty chemical companies is 12x 11.6x approximately 9.9x trailing 12 months EBITDA, matching the EBITDA multiple for the LTM period. This compares with a median EBITDA multiple of 9.7x over the preceding three years. The strong valuations in the specialty chemical 10x sector are consistent with trends in the broader M&A marketplace and reflect 8x favorable industry attributes and dynamics. 7.3x
Industry Attributes and Dynamics 6x • Fragmented sectors
• End market driven 4x • High barriers to entry
• R&D investment critical 2x 1.5x • Increasing environmental requirements
0x Consolidation/Active Buyers Sales EBITDA EBIT Consolidation among major players hit an all-time high in 2007. The acquisitions of ICI by Akzo Nobel (expected to close in January of 2008), Source: Capital IQ National Starch and Chemical Company by Henkel KGaA (contingent on Akzo SPECIALTY CHEMICALS M&A TRANSACTIONS Nobel’s successful close of ICI) and Sigmakalon Group by PPG Industries, ($ in billions) account for nearly $27 billion in combined transaction value. Acquisition activity among smaller players has also been high, with strong petroleum prices $40 200 driving revenue growth, and niche strategies defending margins. Overall, 180 $35 production of specialty chemicals is expected to rise 5.2% in 2007. 160 $30 140 Year-to-date 2007, private equity has maintained its high status in the industry, $25 120 accounting for roughly 15.0% of total transactions in the industry, compared with 14.0% of transactions in 2006. Financial sponsors are attracted to the niche $20 100 80 business models of many specialty chemical firms, models that require strict $15 protection of profit margins and strong, stable cash flows. Since 2002, the 60 $10 industry has grown at an annual rate of 4.5%, with little year-over-year 40 $5 variance. These industry characteristics, along with the general trend toward 20
consolidation and a willingness to divest, keep sponsors active and interested. $0 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD Q3 YTD Q3 2006 2007 2008 Outlook Value of Transactions No. of Transactions Despite pressure on credit markets in the latter part of 2007, transaction activity Source: Capital IQ in the specialty chemical industry maintained its momentum. The volume of Note: Transaction count reflects deals announced announced deals increased from 33 in the first quarter of the year to 56 in the third quarter, and we expect the industry to continue to consolidate, fueled by strong revenues, balance sheets and market valuations. INDEXED STOCK PERFORMANCE
125.0
The S&P Chemical Sub-index performed better than the S&P Specialty Chemical Sub-index in the first three quarters of 2007 by 9.6%, and both indices 120.0
exceeded the growth of the broader market, represented by the S&P 500 115.0 Industrials Index. 110.0
105.0
100.0 95.0
90.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007 Specialty Chemicals Chemicals Industrials S&P 500
Source: Datamonitor and Capital IQ
Source: Securities Data Corporation, Capital IQ and Piper Jaffray PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 61
December 2007
APPENDIX INDUSTRIAL GROWTH: SPECIALTY VEHICLES
2007 Review PIPER JAFFRAY TEAM CONTACT M&A activity in the specialty vehicle sector hit a tough road in 2007, after three robust years of activity from 2004 to 2006. Both strategic and financial Robert Frost Neil Weinstein acquirors continue to show interest in this sector, but the M&A market has 612 303-8248 612 303-6493 been hindered by a weakening housing market, significantly lower freight [email protected] [email protected] activity, overhang from last year’s pre-buy in advance of changing emissions regulations and an overall slowing economy. LTM M&A TRANSACTION MEDIAN MULTIPLES The median multiple paid for specialty vehicle companies in 2007 has been approximately 7.3x LTM EBITDA. 14.0x
The specialty vehicle sector is heavily influenced by broad macroeconomic 12.0x 11.6x trends such as housing and commercial construction activity, as well as the service economy. Although there has been a downturn in the market, there 10.0x still are positive macroeconomic and industry specific trends that will 8.0x continue to drive specialty vehicle M&A activity: (i) significant market 7.3x fragmentation, (ii) increasing average age and miles driven per vehicle, (iii) geographic reach and access to niche markets, (iv) potential raw material 6.0x (particularly steel) synergies, (v) benefits from scaleable operations, (vi) increasing need for global sourcing capabilities, (vii) ability of new 4.0x machinery, materials or processes to create barriers to entry and (vii) product
manufacturers looking to control their distribution (and vice versa). 2.0x 1.5x
Industry Attributes and Dynamics 0.0x Sales EBITDA EBIT • Highly fragmented industry with specialized niche markets • Customer and supplier consolidation • Potential for significant raw material synergies Source: Capital IQ and Securities Data Corporation • Changing environmental requirements 2007 SELECT SPECIALTY VEHICLES TRANSACTIONS • Macroeconomic driven ($ in millions)
Announced Enterprise Consolidation/Active Buyers Date Target Acquiror Value The specialty vehicle industry is exemplified by thousands of companies 12/04/07 Lund International Linsalata / Resilience Capital Partners NA 11/22/07 Dynojet Research American Capital Strategies 118 ranging in both size and product offering from specialty niche players to 11/05/07 Blount- Forestry Division Caterpillar Forest Products 77 global companies. Some of the largest strategic transactions of 2007 included 07/29/07 Ingersoll-Rand Co.-Bobcat Equipment Doosan Infracore 4,900 06/28/07 Snorkel International Tanfield Group 126 Volvo’s acquisition of Ingersoll-Rand’s road construction equipment division 06/11/07 Peterson Pacific Corp. Astec Industries 31 in April, BAE Systems’ purchase of Armor Holdings in July and Doosan 06/11/07 Ricon Corporation Westinghouse Air Brake 74 05/07/07 Armor Holdings BAE Systems 4,183 Infracore’s acquisition of Ingersoll-Rand’s bobcat utility equipment division 03/13/07 Gamber Johnson Leggett & Platt NA in November. Consolidators in the specialty vehicle space continue to include 02/27/07 Ingersoll-Rand Co. - Road Development Volvo 1,303 Oshkosh Truck Corporation, Thor Industries and VT Systems. 02/16/07 Country Coach Riley Investment $52 Source: Capital IQ and Securities Data Corporation Private equity firms continue to demonstrate interest in specialty vehicle transactions, due in part to: (i) attractive long-term growth characteristics, INDEXED STOCK PERFORMANCE (ii) highly fragmented nature of the industry, (iii) amount of funds seeking investment, (vi) niche markets with defensible barriers to entry and (vii) 125.0 willingness of orphan public companies to go private. As before, private 120.0 equity firms are capitalizing on the fragmented nature of the industry by 115.0 seeking to identify and invest in platform companies. 110.0
There are financial sponsors across a broad range of fund sizes and portfolio 105.0 interests seeking companies in the specialty vehicle space. On the smaller end, 100.0 this includes Gridiron Capital, LLR Partners, Kirtland Capital Partners and 95.0 Linsalata Capital Partners, while Cerberus Capital Management and The 90.0 Carlyle Group are representative of much larger sponsors with an appetite for 1/3/2007 2/16/2007 4/3/2007 5/17/2007 7/2/2007 8/15/2007 9/28/2007 this sector. Specialty Vehicles S&P 500 2008 Outlook The Piper Jaffray Specialty Vehicle Index outperformed the S&P 500 Index Source: Capital IQ by almost 9 percent through the first nine months of 2007, led by strong gains from Spartan Motors and Astec Industries, offset by declines at Miller Industries and Wabash National Corporation. We believe strategic and financial acquirors will continue to selectively pursue targets in the specialty vehicle industry in 2008. Expect opportunistic acquisitions from private equity firms and strategic players of varying sizes seeking to drive growth, augment product lines and diversify end market exposure.
Source: Securities Data Corporation, Capital IQ and Piper Jaffray
62 ⏐PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 December 2007
APPENDIX TECHNOLOGY: COMMUNICATIONS EQUIPMENT
2007 Review PIPER JAFFRAY TEAM CONTACTS In 2007, $45 billion of communications equipment M&A volume was announced, representing a 19% increase over 2006 and a 59% increase over David Parker Dave Castagna 2005. Excluding the impact of the 2006 merger of Alcatel and Lucent 415 277-1597 415 984-5101 Technologies, the 2007 year-over-year increase would have been 85%. The [email protected] [email protected] median transaction size in 2007 was almost 2x the level seen in 2006 and 2005, and there were more billion dollar transactions announced in 2007 (11) Scott Weinstein Geoff Tobin than in 2006 and 2005 combined. 415 984-5186 415 277-1541 [email protected] [email protected] During the year, several well-known companies agreed to be taken private by investor groups, including Avaya ($8.1 billion), 3Com Corporation ($2.2 SUMMARY OF COMM EQUIPMENT M&A ACTIVITY billion), ECI Telecom ($1.2 billion) and Inter-Tel ($717 million). These four ($ in billions) transactions alone accounted for 27% of the total deal value in 2007. $50 70 2007 also witnessed continued consolidation of small- and mid-cap players, 60 including C-COR, Terayon Communication Systems, Andrew Corporation, $40 Komag and Optical Communication Products. It comes as no surprise that 50 these classic consolidation-driven transactions occurred in sectors with $30 40 challenging industry fundamentals, including optical components, cable $20 30 equipment, RF subsystems and storage subsystems. 20 $10 The more offensive-oriented transactions announced in 2007, and those with 10 the highest valuation multiples, occurred in several subsectors with attractive $0 0 growth characteristics, including: 2003 2004 2005 2006 YTD 2007 • GPS/Navigation—NAVTEQ, Tele Atlas, NovAtel • Security—IronPort Systems, Vontu, SurfControl Deal Volume # of Deals • Virtualization—EqualLogic, Acopia Networks, XenSource, Neoware Note: Year-to-date as of 12/5/07. Data excludes deals under $50 mm. • Video/Web Collaboration—WebEx, Codian, TandbergTelevision Source: Securities Data Corporation
The year also saw a healthy number of liquidity events for venture-backed 2007 SELECT COMM EQUIPMENT M&A TRANSACTIONS companies. Most notable was Dell’s agreement to acquire storage vendor ($ in millions) EqualLogic out of IPO registration for $1.4 billion in cash, which represents Announced Transaction the largest venture-backed acquisition in recent memory. Other high-profile Date Target Acquiror Value 11/05/07 EqualLogic Dell $1,400 VC-backed companies acquired in 2007 include: Acopia Networks, Atrica, 10/23/07 Navini Networks Cisco Systems 330 Entrisphere, IPWireless, IronPort Systems, LGC Wireless, Picolight, Vontu 10/01/07 NAVTEQ Nokia 7,954 and XenSource. 09/28/07 3Com Investor Group 2,162 09/06/07 Codian Tandberg 270 08/06/07 Acopia Networks F5 Networks 210 2008 Outlook 07/23/07 Tele Atlas TomTom 3,965 We would expect to see 50–60 transactions announced again in 2008, 06/27/07 Andrew CommScope 2,612 06/18/07 ECI Telecom Investor Group 1,193 although the aggregate transaction value and median deal size will likely fall 06/04/07 Avaya Investor Group 8,064 from the high water marks set in 2007. Key factors contributing to this view 04/26/07 Inter-Tel Investor Group 717 04/23/07 Terayon Motorola 142 include: (i) a tighter credit market which should reduce buy-out activity, (ii) a 03/15/07 WebEx Communications Cisco Systems 3,091 receptive IPO market for private companies and (iii) a belief that we are now 02/26/07 Tandberg Television Ericsson 1,223 in the latter stages of a multi-year industry consolidation wave, with a 02/07/07 SpectraLink Polycom 232 shrinking pool of eligible acquirors and targets. However, M&A will 01/04/07 Ironport Systems Cisco Systems 830 undoubtedly remain a critical element of the communications equipment Source: Securities Data Corporation industry. The large, serial acquirors will continue their buying activities, marginalized small- and mid-cap vendors will continue to look for INDEXED STOCK PERFORMANCE consolidation opportunities and many private companies and investors will 135.0 view M&A as a quicker, lower-risk alternative to the IPO market. 130.0
125.0
120.0
115.0
110.0
105.0
100.0
95.0
90.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007
Communications Equipment NASDAQ Source: FactSet and Capital IQ
Source: FactSet, Capital IQ, Piper Jaffray and Securities Data Corporation PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 63
December 2007
APPENDIX TECHNOLOGY: HARDWARE & SEMICONDUCTORS
2007 Review PIPER JAFFRAY TEAM CONTACTS 2007 has seen a modest increase in the volume of hardware and semiconductors transactions versus a year ago with 110 transactions David Parker Chris McCabe (with values greater than $50 million) as compared to 108 transactions 415 277-1597 650 838-1323 for all of 2006; however, the aggregate transaction value for 2007 has [email protected] [email protected] declined 42% from $77 billion for all of 2006 to $44 billion year-to- date. The large decrease in transaction value can be attributed to a Scott Weinstein Blake Williams significant decline in the “mega-deals” indicative of 2006. In addition, 415 984-5186 415 277-1546 the volume of deals greater than $500 million declined over 33% versus [email protected] [email protected] 2006.
HARDWARE & SEMICONDUCTOR M&A ACTIVITY Private Equity Less Active ($ in billions) The most significant influence on the aggregate value of deals in the sector is the reduced activity of “mega-funds” targeting the technology sector. While capital was readily available in 2006 to fund large-scale $80 120 buyouts such as the $18 billion take-private of Freescale Semiconductor 100 and the $9 billion purchase Philips’ semiconductor unit, the collateral $60 80 effect of the credit crisis has reduced the availability and attractiveness of terms on debt which fueled much of this historical activity. As a result, $40 60 buyouts were concentrated in the first six months of the year with only a 40 few notable transactions, including Texas Pacific Group’s $1.8 billion $20 acquisition of United Test and Assembly Center and Aeroflex’s $1.1 20 billion acquisition by a private equity consortium. $0 0
2003 2004 2005 2006 YTD 2007 Active Strategic Buyers and Sellers In contrast to the decline in private equity-led activity, this year several Deal Volume # of Deals of the most notable transactions consisted of international and cross- boarder strategic acquisitions by companies looking to consolidate Source: Company Filings and Piper Jaffray within their industries. Most notable in this group was Singapore-based 2007 SELECT HARDWARE & SEMICONDUCTORS Flextronics’ $4.0 billion acquisition of California-based Solectron TRANSACTIONS Corporation, Singapore Technologies’ $1.2 billion acquisition of ($ in millions) Singapore-based STATS ChipPAC, Spansion’s $353 million acquisition Announced Enterprise of Israel-based Saifun Semiconductors and Fairchild Semiconductor’s Date Target Acquiror Value $197 million acquisition of Taiwan-based System General Corporation. 11/08/07 Analog Devices- Voltage ON Semiconductor $185 10/14/07 Tektronix Danaher 3,315 10/07/07 Saifun Semiconductors Spansion 353 In addition, several semiconductor companies executed strategic 09/09/07 Analog Devices- Handset MediaTek 349 08/27/07 Gateway Acer 1,012 divestitures in order to focus on their higher margin businesses. Notable 06/26/07 United Test & Assembly Investor Group 1,786 transactions included two from Analog Devices, including the sale of its 06/25/07 HCT Shaping Systems Applied Materials 474 06/21/07 Centrality Communications SiRF Technology 287 handset chipset business to MediaTek for $349 million and the sale of its 06/12/07 Global Locate Broadcom 226 voltage regulation and thermal management product line to ON 06/04/07 Solectron Flextronics 4,301 05/21/07 Aeroflex Investor Group 1,124 Semiconductor Corp. for $185 million, allowing Analog Devices to focus 05/07/07 Sipex Exar 229 on its principal high-margin analog/mixed signal product lines. In 03/01/07 STATS ChipPAC Singapore Technologies Semiconductors 1,170 addition, Silicon Laboratories sold its handset transceiver product line 02/08/07 Silicon Laboratories NXP 350 01/01/07 System General Fairchild Semiconductor 196 for $350 million to NXP Semiconductors, allowing it to focus on less- Source: Capital IQ volatile, higher-margin products.
Outside of strategic divestitures, mid-tier semiconductor companies continued consolidation within their respective industries to add scale, diversity and technology, including Exar Corporation’s $240 million INDEXED STOCK PERFORMANCE acquisition of Sipex Corporation in the analog/mixed-signal industry 120.0 and both SiRF Technology Holdings’ $287 million acquisition of Centrality Communications and Broadcom Corporation’s $226 million acquisition of Global Locate in the navigation sector. In contrast, the 115.0 semiconductor capital equipment industry saw a decrease from last year’s consolidation activity, with only two notable transactions: 110.0 Applied Materials/HCT Shaping Systems and KLA Tencor Corp./Therma-Wave. 105.0
2008 Outlook 100.0 We believe 2008 will continue to build on this year’s consolidation trend 95.0 among companies looking to add scale, diversify and build technology 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007 portfolios. In addition, we expect an increase in cross-border Semiconductors NASDAQ transactions as international consolidators use their relatively strong currency to acquire U.S.-based technology and market share. Source: FactSet and Capital IQ
Source: Securities Data Corporation, FactSet and Piper Jaffray
64 ⏐PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 December 2007
APPENDIX
TECHNOLOGY: INTERNET
2007 Review PIPER JAFFRAY TEAM CONTACTS M&A activity increased significantly from 2006 levels as Internet and traditional media companies fully realized the synergies associated with David Parker Ric Spencer their previous acquisitions and once again started looking outward for 415 277-1597 415 984-5181 additional growth opportunities. Activity in 2007 was driven in large [email protected] [email protected] part by the major Internet players looking to acquire fast growing innovators in the media, delivery and performance components of Scott Weinstein Scott Schopen online advertising, as well as financial sponsors looking to put 415 984-5186 415 984-5182 significant capital to work. [email protected] [email protected]
The dollar value of transactions in the first 11 months of 2007 equaled approximately $30 billion, a significant increase from the $10 billion INTERNET M&A TRANSACTION ACTIVITY seen in 2006. There were four transactions over $1 billion dollars and ($ in billions) an additional five transactions valued between $500 million and $1 billion dollars. This compares to three billion dollar transactions and 200 $35.0 $30.0 one in the $500 million to the $1 billion dollar range in 2006. 150 $25.0 $20.0 The large increase in aggregate deal value in 2007 was driven by large 100 Internet companies purchasing technology platforms in order to gain $15.0 additional traction in the rapidly growing online advertising space 50 $10.0
which globally is expected to reach $41 billion in 2007. Specific Number of Transactions $5.0 Aggregate Value (InBillions) transactions included Microsoft’s purchase of aQuantive for $6 billion, 0 $0.0 a move motivated by Microsoft’s desire to keep up with Google who 2004 2005 2006 YTD 2007 earlier had announced the $3 billion purchase of DoubleClick. Number of Transactions Value of Transactions Additional transactions in the online advertising sector included WPP Group’s purchase of 24/7 Real Media, AOL’s purchase of Quiqo Source: Piper Jaffray, Securities Data Corporation and Capital IQ. YTD through 11/30/07 Technologies and TACODA and Yahoo!’s acquisitions of Right Media and BlueLithium. 2007 SELECT M&A INTERNET TRANSACTIONS ($ in millions)
Announced Enterprise Another theme driving transaction value was the continued activity of Date Target Acquiror Value private equity firms targeting the Internet sector, fueled by strength in 10/25/07 Visual Sciences Omniture $387 the debt markets earlier in the year. Financial buyers continued to 10/17/07 The Generations Network Spectrum Equity Investors 300 purchase ever larger assets, including General Atlantic’s purchase of 10/01/07 Navteq Nokia 7,516 09/17/07 Zimbra Yahoo! 350 Network Solutions, the domain name registration services provider, 09/04/07 Blue Lithium Yahoo! 300 and AKQA, the independent Web design and interactive marketing 08/01/07 Club Penguin Walt Disney Company 350 07/26/07 Business.com RH Donnelley Corp. 345 agency. Additional transactions included Providence Equity Partners 07/24/07 Tacoda AOL 275 purchase of NexTag for over $1 billion, Spectrum Equity Investors 07/16/07 Mezimedia ValueClick 330 acquisition of The Generations Network and Platinum Equity’s 07/09/07 Postini Google 625 06/21/07 Fun Technologies (47%) Liberty Media 464 purchase of Covad. 06/08/07 NexTag Providence Equity Partners 1,246 05/18/07 aQuantive Microsoft 5,711 05/17/07 24/7 Real Media WPP 614 2008 Outlook 04/28/07 RightMedia Yahoo! 850 We believe 2008 will continue to build on this year’s M&A strength in 04/13/07 DoubleClick Google 3,100 the Internet industry, with companies looking to add scale, diversify 02/05/07 NetRatings (40%) The Nielsen Company 613 and build broader technology portfolios. Large-cap Internet companies Source: Piper Jaffray find themselves with increasingly large cash positions and a number have already expressed their interest in putting that capital to work. In INDEXED STOCK PERFORMANCE October, Steve Ballmer proudly announced Microsoft’s plan to acquire 125.0 about 20 companies—from $50 million to $1 billion—every year for the
next five years. 120.0
We also expect to see consolidation in the online gaming and 115.0 ecommerce sectors as their offline peers continue to mature and seek
growth opportunities. In addition, financial buyers will continue to 110.0 look for ways to put their uninvested capital to work in the middle
market space. 105.0
100.0
95.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007
Internet NASDAQ
Source: Capital IQ
Source: Securities Data Corporation, Capital IQ and Piper Jaffray PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 65
December 2007
APPENDIX TECHNOLOGY: IT SERVICES
2007 Review PIPER JAFFRAY TEAM CONTACTS Building on momentum from 2006, the IT services M&A market remained strong in 2007. Key themes for the year included continuing private equity David Parker Jerry Will buyout activity as well as the continuation of bi-directional acquisitions between 415 277-1597 612 303-6309 U.S. firms and their offshore counterparts. [email protected] [email protected]
Notable completed transactions included Caritor’s $821 million acquisition of Scott Weinstein Keane, which was backed by Citi Venture Capital International and Madison 415 984-5186 Dearborn Partners’ $6.9 billion acquisition of CDW Corporation. Notable [email protected] transactions that were announced only to be withdrawn before completion include Silver Lake Partners and ValueAct Capital Partners’ $3.0 billion purchase of Acxiom and Cerberus Capital Management’s $6.0 billion IT SERVICES M&A TRANSACTION ACTIVITY acquisition of Affiliated Computer Services. Despite volatile conditions in the ($ in billions) lending market, the steady cash flow and attractive valuation multiples associated with targets in the IT services space should continue to foster interest 80 $40.0 from private equity firms into 2008. 60 $30.0 India remained a core geography in 2007’s M&A activity. The bi-directional 40 $20.0 acquisition trend was driven by the need to provide end-to-end technology solutions with cost-effective global delivery. Wipro’s $553 million purchase of 20 $10.0
Infocrossing marked the largest overseas IT acquisition ever by an Indian Number of Transactions
company. The deal was driven by Wipro’s desire to establish a leadership 0 $0.0 Aggregate Value (In Billions) position in the high-growth global infrastructure services field while at the same 2004 2005 2006 YTD 2007 time increasing its footprint within the United States. American company Number of Transactions Value of Transactions Computer Sciences Corporation’s $1.1 billion acquisition of India’s Covansys Corporation provided it an opportunity to continue to build a robust offshore platform by doubling its presence in India, while providing a broader range of Source: Securities Data Corporation, Capital IQ. YTD through 11/31/07 capabilities from either India or through its existing business. 2007 SELECT IT SERVICES M&A TRANSACTIONS 2008 Outlook ($ in millions) IT budget growth is expected to be flat in 2008; however, offshore IT Announced Transaction Date Target Acquiror Value outsourcing spending will continue to grow at a greater rate than overall IT 11/13/07 Saber Corp. Electronic Data Systems Corp. $420 budgets. Given reduced organic growth opportunities, M&A will continue to 08/06/07 Infocrossing Wipro Technologies Ltd. 553 remain a preferred strategy among IT services companies for the near future to 08/02/07 ASAP Software Express Dell 340 07/30/07 Getronics NV Koninklijke KPN NV 1,065 increase clientele, expand into new geographies, increase product/service 07/30/07 Xansa PLC Steria SA 956 offerings and gain specialization. Domestic providers that display growth and 07/09/07 CompuCom Systems Court Square Capital Partners 628 profitability while simultaneously building a specialized capability will remain 07/02/07 Prometric ETS 435 06/25/07 Computer Task Group RCM Technologies 106 highly attractive acquisition candidates. 05/31/07 Multimax Harris Corp. 400 05/30/07 Ceridian Corp. Thomas H. Lee / Fidelity 5,033 05/29/07 CDW Corp. Madison Dearborn Partners 6,852 05/14/07 Datamonitor PLC Informa Acquisitions 928 05/02/07 ARINSO International SA Northgate Information Solutions PLC 310 04/25/07 Covansys Corp. Computer Sciences Corp. 1,114 02/06/07 Keane Caritor 821
Source: Capital IQ and Securities Data Corporation
INDEXED STOCK PERFORMANCE
115.0
110.0
105.0
100.0
95.0
90.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007
IT Services NASDAQ
Source: FactSet and Capital IQ
Source: Securities Data Corporation, FactSet and Piper Jaffray
66 ⏐PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 December 2007
APPENDIX
TECHNOLOGY: SOFTWARE
2007 Review PIPER JAFFRAY TEAM CONTACTS While the tough conditions in the credit markets slowed some sponsor activity in software in the second half of 2007, strategic M&A activity David Parker David Castagna continued to grab headlines throughout 2007, with nearly all of the 415 277-1597 415 984-5101 technology giants participating in consolidation. Add-on acquisitions and [email protected] [email protected] higher growth opportunities have continued to receive the attention of the sponsor community, although the larger, platform acquisition activity Scott Weinstein Chris Hasslinger clearly slowed in late 2007. 415 984-5186 612 303-5681 [email protected] [email protected] While the largest transactions always garner the most attention, a significant amount of liquidity continues to be created in the mid-market SOFTWARE M&A TRANSACTION ACTIVITY by private equity groups and mid-market consolidators. The uncertain ($ in billions) nature of the credit markets throughout late 2007 may have sent some
private equity players to the sidelines, but those focused on software and on higher growth companies where strong equity returns can be gained
s 150 $80.0 absent extremely high leverage levels, have continued to pursue and close meaningful transactions at attractive valuations. $60.0 100
$40.0 One of the larger stories of 2007 has been the rapid succession 50 consolidation of the three largest publicly traded business intelligence $20.0
vendors: Hyperion, Business Objects and Cognos, by Oracle, SAP and Transaction of Number IBM, respectively. The consolidation of this sector represented a 0 $0.0 Billions (In Value Aggregate meaningful portion of the multi-billion dollar deal activity of the year. 2004 2005 2006 YTD 2007 SAP’s acquisition of Business Objects was particularly interesting in light Number of Transactions Value of Transactions of the fact that large acquisitions have not historically been executed by SAP and as such, become the fodder of further commentary on the Source: Securities Data Corporation ongoing competition between Oracle and SAP. Along with the activity Note: Includes transactions with SIC code 7372. YTD through 11/30/07 driven by software giants IBM, SAP and Oracle, other technology leaders including Hewlett-Packard, Cisco and Dell were active software 2007 SELECT SOFTWARE M&A TRANSACTIONS consolidators in 2007. ($ in millions)
Announced Transaction Despite the dominance of three business intelligence deals among the large Date Target Acquiror Value 11/12/07 Cognos IBM Corp. $4,964 transactions this year, consolidation was not limited to, nor dominated by, 10/07/07 Business Objects SA Systeme Anwendungen Produkte 6,079 any one software segment. Application software consolidation tended to 09/13/07 Help/Systems Audax 850 08/15/07 XenSource Citrix Systems 500 be driven by in-market strategics and sponsors, while a meaningful 07/23/07 Opsware Hewlett-Packard Co. 1,704 portion of the infrastructure software consolidation was driven by multi- 07/09/07 Postini Google 625 06/28/07 Exstream Software American Capital Strategies 548 segment or hardware leaders. The software-as-a-service (SaaS) segment 06/19/07 Torex Retail Cerberus Capital Management 423 saw increased consolidation activity, but remained a relatively small 06/11/07 Iris Software Hellman & Friedman LLC 984 06/11/07 Telelogic AB IBM Corp. 742 portion of the overall software M&A activity. As the companies that 05/15/07 Agile Software Corp. Oracle Corp. 480 utilize this form of software delivery continue to grow and mature, we 04/05/07 webMethods Software AG 548 04/03/07 Metavante Corp. Warburg Pincus 625 expect to see additional activity in this sector. 03/22/07 Kronos Hellman & Friedman LLC 1,793 03/15/07 WebEx Communications Inc. Cisco Systems Inc. 3,091 02/28/07 Hyperian Solutions Corp. Oracle Corp. 3,292 2008 Outlook 02/12/07 Witness Systems Verint Systems 1,073 01/29/07 Altiris Symantec Corp. 1,015 We expect to see a continuation of the software M&A activity levels that 01/24/07 UGS Corp. Siemens Automation & Drives 3,500 we saw in the second half of 2007, with the potential for increased deal 01/04/07 Ironport Systems Cisco Systems Inc. 830 volume if and when credit conditions stabilize, even if such conditions do Source: Securities Data Corporation not markedly improve. Higher growth vendors with profits will continue to receive significant attention from the sponsor community as well as INDEXED STOCK PERFORMANCE
strategic suitors. Slower growth, high-margin vendors that relied on 115.0
historically high leverage levels to achieve historically high valuation
multiples face a more challenging deal environment. That said, the capital 110.0 that sponsors need to deploy remains extremely high, and they will continue to seek opportunities throughout the software industry. 105.0
Segments that we expect to remain extremely active include vertical 100.0 market applications, SME and mid-market vendors and next generation infrastructure management. As discussed above, we also anticipate 95.0 ongoing increases in deal activity in the SaaS sector. To the extent that credit conditions remain volatile, mid-market consolidators and sponsors 90.0 with existing platforms will likely represent a larger share of the buyers of software vendors in 2008. 85.0 1/3/2007 3/11/2007 5/17/2007 7/23/2007 9/28/2007 Software NASDAQ Source: Capital IQ
Source: FactSet, Piper Jaffray and Securities Data Corporation
PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008 ⏐ 67
December 2007
APPENDIX RESTRUCTURING: DISTRESSED M&A OUTLOOK
2007 Review PIPER JAFFRAY TEAM CONTACT Distressed M&A activity is typically counter-cyclical to “standard” M&A activity, and the continued strength of the M&A market has meant little Joseph Radecki opportunity for those focused on distressed companies and assets. Distressed 212 284-9588 M&A activity in 2007 continued the declining trend that started in 2003, aside [email protected] from a few well-publicized fights over auto parts manufacturers.
BANKRUPTCY M&A TRANSACTIONS Market Dynamics Many market professionals believe the distressed M&A market is about to 400 change. Significant changes in market liquidity, spreads in the credit markets, lack of credit availability and a general “wait and see” attitude about the 350 322 economy has reduced the ability of stressed credits to finance their way out of trouble. Additionally, the repricing of risk premiums associated with 300 turnaround situations is still working its way through buyer or control 250 creditor expectations, limiting distressed M&A activity. 194 200 The enactment of the Bankruptcy Reform Act in October 2005 has reduced 150 the level of protection companies have under Chapter 11 including: 122 88 100 76 • Strict rules limiting the amount of time a company has to file a reorganization plan (18 months with no extensions allowed), which will 50
place increased pressure on companies with operational, environmental and/or pension issues; 0 2003 2004 2005 2006 2007YTD • Strict maximum of 210 days to accept or reject leases without the landlord’s consent, constraining retailers in bankruptcy; Source: Thompson Financial • Changes as to how certain suppliers’ claims are defined (such as U.S. DEFAULT RATES reclamation claims and utilities) increasing the amount of administrative (Issuer Weighted) claims, which will increase the size of DIP facilities required and decrease distributions to both pre-bankruptcy senior bank lenders and bondholders; 6.0% and • Limitations on retention bonuses and payments to management, reducing 5.0% the incentive to stay through the bankruptcy process. 4.0%
In addition, companies increasingly find themselves with multi-layered capital 3.0% structures with various creditor groups that have very different agendas. Companies may find themselves facing a sale to placate creditors that can not 2.0% reach a consensual recapitalization agreement. 1.0% We believe that these changes will lead to an increased level of distressed 0.0% M&A activity as creditor constituencies choose to salvage value through a 9/1/2003 9/1/2004 9/1/2005 9/1/2006 9/1/2007 sale as opposed to a potentially difficult reorganization. Speculative Grade All
2008 Outlook Source: Moody’s Moody’s and S&P are both predicting significantly higher default ratios, roughly 3.5x-4.5x higher than current ratio, by the end of 2008. Whenever this wave of defaults arises, we believe that the next distressed market will be characterized by a sharp increase in M&A activity as opposed to reorganizations involving existing creditors. This will, in turn, provide opportunities for equity sponsors and strategic acquirors willing to invest in assets and companies in turnaround with the benefit of reduced purchase price multiples and clean balance sheets.
Source: Capital IQ, FactSet, Piper Jaffray and Securities Data Corporation
68 ⏐PIPER JAFFRAY M&A INSIGHTS MIDDLE MARKET M&A OUTLOOK 2008
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