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Bryant Park Capital, Inc B RYANT P ARK C APITAL MMiiddddllee MMaarrkkeett UUppddaattee 3 RD Q UARTER 2010 ECONOMIC OUTLOOK: U.S. GDP EXPANDED FOR THE FOURTH CONSECUTIVE QUARTER – BUT ECONOMISTS ARE FIXATED ON THE SLOW RATE OF GDP GROWTH ......... 1 MERGERS & ACQUISITIONS: THE PACE OF ECONOMIC RECOVERY TO DRIVE SECOND HALF M&A ACTIVITY .......................................................................................... 3 PRIVATE EQUITY: PRIVATE EQUITY FIRMS IN A HURRY TO DEPLOY REMAINING CAPITAL COMMITMENTS ................................................................................... 4 DEBT CAPITAL: DEBT MARKETS FALL IN THE SECOND QUARTER ................................... 7 FEATURED ARTICLE: CURRENT TRENDS IN REVERSE MERGERS ............................................. 9 BY SCOTT M. MILLER, FELDMAN LLP, NEW YORK, NEW YORK BRYANT PARK CAPITAL, INC. (“BPC”) is an investment bank providing mergers and acquisitions and corporate finance advisory services to its clients. Our principal relationships exist with companies having revenues between $25 and $500 million. BPC professionals have a unique combination of experience, including experience in bulge-bracket investment banking, as principal investors, prior owners and operators of businesses. BPC excels in providing M&A advisory and capital raising services for complex deal structures. For more information on Bryant Park Capital, please visit www.bryantparkcapital.com. 489 Fifth Avenue, 27th Floor • New York, NY 10017 • 212-798-8200 435 Devon Park Drive, Suite 700 • Wayne, PA 19087 • 484-586-8200 BRYANT PARK C APITAL, INC. is wholly owned subsidiary of BPC Group LLC Member FINRA/SIPC MIDDLE MARKET UPDATE 3RD QUARTER 2010 ECONOMIC OUTLOOK: U.S. GDP EXPANDED FOR THE FOURTH CONSECUTIVE QUARTER – BUT ECONOMISTS ARE FIXATED ON THE SLOW RATE OF GDP GROWTH During the second quarter, the U.S. Gross Domestic Product (GDP) grew at an annual rate of 2.4%, marking the fourth consecutive quarter of U.S. GDP expansion. However, the growth rate was below the 2.6% forecasted, and economists are concerned about the sluggish pace of growth compared to the first quarter of 2010, when the GDP grew by 3.7%. The slowdown in the GDP growth rate is raising fears about the economic recovery and is sparking thoughts of a double-dip recession. The biggest drivers of second quarter GDP growth included growth in business investment, residential investment, government spending, and exports, which were partially offset by an increase in imports and a deceleration of private inventory investment. During the second FIGURE 1: REAL GDP GROWTH SINCE 2003 quarter of 2010, consumer spending, 7.0% 5.6% * which accounts for 6.0% 70% of U.S. GDP and is 5.0% 3.6% 3.7%* generally the leading 4.0% 3.1% 2.7% 3.0% 2.5% 2.2%* 2.4% * indicator of economic 2.1% 2.0% recovery, increased at 0.4% 1.0% a modest rate of 1.6%, 0.0% as compared to a 1.9% -1.0% -0.7% * increase in the first -2.0% quarter. Household Percent Change Percent -3.0% - 2.4% spending, which has -4.0% potential to accelerate -5.0% the economic revival, -6.0% has been hampered by -7.0% -6.4% * (i) the poor job market 2003 2004 2005 2006 2007 2008 Q1 Q2 Q3 Q4 2009 Q1 Q2 2009 2009 2009 2009 2010 2010 – the unemployment rate as of June 30th * Annualized was 9.5% and (ii) poor Source: Bureau of Economic Analysis consumer sentiment – according to a recent Bloomberg National Poll, more than seven out of ten Americans believe the U.S. economy is still mired in a recession. A positive feature of the second quarter’s GDP growth was a big rise in business investment. Overall, businesses increased spending at an annual rate of 17%, significantly above the 7.8% uptick reported in the first quarter. Furthermore, spending on equipment and software grew at an annual rate of 21.9%, the fastest pace in 12 years. Businesses seem to be investing more in fixed assets rather than in human capital, contributing to the high unemployment and poor consumer spending figures. Other than business investments, bright spots in the second quarter GDP report included residential investment and government spending. During the quarter, residential investment, buoyed by federal tax credits climbed 28% and government spending rose by 9.2%. With regards to trading activity, exports grew at an annual rate of 10.3%, but the gain in exports was more than offset by an increase in imports, which grew by 28.8%. The overall net trade activity subtracted 2.8% from the second quarter GDP growth rate. Private businesses increased inventories by $75.7 billion in the second quarter, following an increase of $44.1 billion in the first quarter and a decrease of $36.7 billion in the fourth quarter. The second Copyright 2010 Bryant Park Capital, Inc. 1 MIDDLE MARKET UPDATE 3RD QUARTER 2010 quarter increase represented an addition of 1.05% to the second quarter change in real GDP, a decrease compared to the 2.64% added during the first quarter of 2009. The decelerating investment in inventories demonstrates the pressure businesses are suffering from subdued consumer demand. According to the U.S. Bureau of Labor Statistics, the national unemployment rate as of June 2010 declined to 9.5% from the 9.7% reported in May 2010. As of June 2010, there were 14.6 million persons unemployed. Economists took the improved unemployment statistics with a grain of salt, as it was largely due to 652,000 individuals leaving the workforce. An encouraging aspect of the unemployment figures is hiring in the private sector. The private sector added 83,000 jobs for the month and so far this year private-sector employment is up by 593,000, reflecting modest increases in several industries. However, the outlook for the employment picture remains difficult, as the lower second quarter 2010 GDP growth figures make it unlikely that employers will increase hiring activity. As a result, analysts fear that the unemployment rate could return to double digits by the end of the year. The broader gauge of employment – the underemployment rate – as of June 2010 fell slightly to 16.5%. This figure includes discouraged workers who have resorted to part-time employment due to economic conditions. During the second quarter of 2010, as the previous tax credit deadline of June 30th approached, housing activity slowed. According to the National Association of Realtors, in June 2010, sales of existing homes fell 5.1% to a seasonally adjusted annual rate of 5.37 million units, while sales of new homes – at an annualized rate of only 311,000 units – managed an anemic increase of 3.7% over the corresponding May figures. These statistics clearly indicate that, even as mortgage rates have declined to their lowest levels in over 50 years, a lack of jobs and income is forcing more and more Americans to shy away from home ownership. Another obvious concern for the housing markets is the high rate of foreclosures, which according to RealtyTrac jumped 38% in the second quarter from the year earlier quarter. According to a report from Thomson Reuters, out of the 336 companies in the S&P 500 that have reported second quarter earnings, 75% topped, 10% came in line with, and 15% fell below analyst estimates. Among financial services companies, a common theme formed when the major banks – Bank of America, Citigroup, J.P. Morgan, Morgan Stanley, and Wells Fargo – reported higher than expected earnings. The improvement in the earnings numbers was driven largely by a decrease in loan loss provisions, as banks began to see an improvement in credit quality and a decline in the percentage of delinquencies. Goldman Sachs was an outlier, as it reported earnings below estimates, due to a large decline in trading revenues along with a $550 million settlement with the SEC. Concern over the U.S. economy and the European debt crisis resulted in the worst quarter for the stock markets since late 2008. The Dow Jones and S&P 500 experienced double digit losses of 10% and 12%, respectively. However, in July, the stock markets regained some of their losses. Crude oil followed the trend of stock markets, with prices falling from a high of $87 per barrel recorded in April 2010 to $76 per barrel at the end of the quarter. The Energy Information Administration estimates that oil prices will average $79 per barrel during the second half of the year. In its most recent meeting on June 22nd and 23rd, the Federal Reserve indicated its intentions to keep the fed funds rate at its current level for an extended period of time. Subsequently, the Fed provided one of the grimmest outlooks for the economic recovery since December 2008, noting that financial conditions (reflecting developments abroad) have become less supportive of economic growth. OUTLOOK FOR 2010 According to the second quarter 2010 CEO Economic Outlook survey published by the Business Roundtable, America’s top CEOs anticipate an improvement in sales and employment in the next six months, although they expect capital spending to remain flat as compared to the Copyright 2010 Bryant Park Capital, Inc. 2 MIDDLE MARKET UPDATE 3RD QUARTER 2010 previous quarter. On overall economic growth, member CEOs estimate that real GDP will grow by 2.7%. The Business Roundtable CEO Economic Outlook Survey Index rose to 94.6 in the second quarter of 2010, an increase of 6.4% from the previous quarter’s level of 88.9. Index readings of 50 or higher are consistent with economic expansion. FIGURE 1a: CEO ECONOMIC OUTLOOK INDEX 110 104.4 101.7 101.4 102.2 100 94.3 98.6 94.6 96.5 98.9 94.3 90 84.9 88.9 88.2 82.4 79.5 80 79.5 78.8 81.9 81.9 77.4 71.5 70 74.5 60 50 Index Index 44.9 40 30 18.5 20 16.5 10 0 -5.0 -10 Source: Business Roundtable MERGERS & ACQUISITIONS: THE PACE OF ECONOMIC RECOVERY TO DRIVE SECOND HALF M&A ACTIVITY According to Thomson FIGURE 2: U.S.
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