M&A: The Year in Review and a Look Ahead; Recent Noteworthy Valuation & Accounting Trends Alan D. MacEwan, Partner, Verrill Dana, LLP W.S. (Sandy) Miller, Jr., Partner, Tax Services, CF, Accountants and Consultants Jeffrey S. Phillips, Managing Director, Stout Risius Ross Justin A. Wolfort, Director, Western Reserve Partners
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M&A: The Year in Review and a Look Ahead; Recent ... · Feb 05, 2013 Dell Inc. Michael Dell and Silver Lake Partners $20.5 $22.4 5.0x Feb 05, 2013 Virgin Media, Inc. Liberty Global
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M&A: The Year in Review and a Look Ahead; Recent Noteworthy Valuation & Accounting Trends
Recap of 2012 – Market Recoveries: They Don’t Make Them Like They Used To
3
U.S. Middle Market M&A Activity
Great Expectations
Deal activity was strong in 2012, particularly in Q4, but overall fell short of expectations
M&A volume as a percent of total U.S. market cap in 2012 was almost 30% below the historical average
A Tale of Two Markets
A closer examination reveals a bifurcation of the “haves” and “have-nots” (companies with healthy margins and strong growth stories versus those with weaker performance or less sophisticated technology)
Middle market LBO targets with above average financial performance accounted for 64% of middle market LBO activity in 2012, compared to only 42% in 20091
M&A: The Year in Review and a Look Ahead
1 GF Data, February 2013
M&A Volume as a % of Market Cap
5%
0%
2%
4%
6%
8%
10%
12%
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
U.S. Announced M&A as a % of Market Cap U.S. Average
Source: Dealogic
1995 - 2012 Average: 6.7%
6,203
7,030
7,766 8,428 8,527
6,986
5,639 6,299 6,546
6,208
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Number of Transactions Deal Value
Source: Thomson Financial
(# of transactions) ($ in billions)
CLEVELAND ● COLUMBUS ● DALLAS
Recap of 2012 – Fiscal Cliff Effect: Pennywise and Pound Foolish?
While Q4 ‘12 deal volumes went up significantly, buyers took advantage of sellers’ tax-driven motivations and drove valuation levels lower
Tax-motivated sellers were met by a buyer universe with lower valuation and faster deal cycles in 2012
M&A: The Year in Review and a Look Ahead
2012 Middle Market Private Equity M&A Volume by Quarter
52
3730
89
0
20
40
60
80
100
Q1'12 Q2'12 Q3'12 Q4'12
* Middle Market = transaction enterprise value between $10 and $250 millionSource: GF Data
6.2x 6.1x
6.9x
5.9x
3.0x
4.0x
5.0x
6.0x
7.0x
Q1'12 Q2'12 Q3'12 Q4'12
* Middle Market = transaction enterprise value between $10 and $250millionSource: GF Data
CLEVELAND ● COLUMBUS ● DALLAS
Recap of 2012 – Valuation Trends: Synergy and Size Still Matter!
5
Middle Market Private Equity EBITDA Multiples
Strategic valuation premiums lessened as corporations pulled back and private equity firms continued to aggressively deploy their long-committed capital on quality businesses
However, a longer-term perspective and synergy creation allow strategic buyers to afford premium valuations
M&A: The Year in Review and a Look Ahead
Middle Market EBITDA Multiples
5.5x
6.1x
6.8x
7.5x
4.0x
4.5x
5.0x
5.5x
6.0x
6.5x
7.0x
7.5x
8.0x
2007 2008 2009 2010 2011 2012
$10 - $25 million $25 - $50 million $50 - $100 million $100 - $250 million
Source: GF Data *Middle Market = transaction enterprise value between $10 and $250 million
(EV / EBITDA)
8.7x 8.3x
6.8x
8.2x 8.4x 7.9x
6.0x 6.0x 6.0x 5.9x 6.1x 6.2x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
10.0x
2007 2008 2009 2010 2011 2012
Strategic Financial
Source: Capital IQ / GF Data * Middle Market = transaction enterprise value between $10 and $250 million
(EV / EBITDA)
CLEVELAND ● COLUMBUS ● DALLAS
Recap of 2012 – Cross-Border Activity
6
U.S. Acquisitions Abroad
Cross-border M&A activity continued to cool in 2012 as the global financial crisis kept buyers at bay
U.S. companies continue to focus on building domestic capacity versus offshore investing
The compressing exchange rate of the U.S. dollar to key international currencies has cut into the “value” proposition of U.S. targets
Still mired in the Eurozone crisis and sovereign debt issues, coveted European assets present a value opportunity for healthy foreign acquirors
M&A: The Year in Review and a Look Ahead
Foreign Acquisitions in the U.S.
1,893
1,680 1,538 1,501 1,501 1,454
$0
$100
$200
$300
$400
$500
0
400
800
1,200
1,600
2,000
2007 2008 2009 2010 2011 2012
Number of Transactions Deal Value
Source: Thomson Financial
(# of transactions) ($ in billions)
2,362
1,999
1,440
1,809 1,8771,744
$0
$100
$200
$300
$400
$500
0
500
1,000
1,500
2,000
2,500
2007 2008 2009 2010 2011 2012
Number of Transactions Deal Value
Source: Thomson Financial
(# of transactions) ($ in billions)
CLEVELAND ● COLUMBUS ● DALLAS
Recap of 2012 – Private Equity Sectors in Favor: Who’s Hot and Who’s Not
7
Business Products & Services continues to garner substantial attention, with investors appreciating scalable and capital-light nature of these businesses in the face of macroeconomic uncertainty
□ Business Process Outsourcing
□ Staffing / PEOs
□ Facility Services
M&A: The Year in Review and a Look Ahead
Consumer Products & Services has seen a shift from consumer staples to discretionary focused sub-sectors
□ Specialty Retail
□ Consumer Discretionary
□ Specialty Food (Organic, Gourmet, Ethnic)
Information Technology has seen recent investment growth as businesses continue to realize the savings associated with outsourcing information technology and other electronic services
□ SAAS
□ Systems Automation
Financial Sponsor Activity (Percent of Deal Count)
Healthcare investment has remained relatively stable amid uncertainty regarding the Affordable Healthcare Act
□ Pharmaceuticals
□ Healthcare Software
3% 2% 3% 2% 2%
4% 4% 5% 4% 4%
6% 6%6%
6% 5%
8%7%
6% 7% 7%
13%
11%11% 12% 12%
17%21% 19% 18%
16%
17% 17% 16% 18%20%
31% 33% 33% 33% 34%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2008 2009 2010 2011 2012
Information Technology Consumer Products & Services
Healthcare Business Products & Services
Industrial Energy
Financial Services Materials & Resources
Source: Pitchbook
CLEVELAND ● COLUMBUS ● DALLAS
Outlook for 2013 – Confidence Will Be Key Component
8
Q1 ’13 is experiencing a “hangover effect” from the “go-go” market of Q4 ‘12
M&A volume and public equity market performance are correlated
□ Continued improving sentiment supports an outlook for increased deal activity
□ Consumer confidence increased substantially in 2012, but still remains well below the pre-recession peak
The stage is set for a strong M&A year in 2013; however, anxiety surrounding the sequester and debt ceiling looms on the horizon
M&A: The Year in Review and a Look Ahead
M&A Volume and Consumer Confidence M&A Volume and S&P 500
0
25
50
75
100
125
150
$0
$100
$200
$300
$400
$500
$600
Q2
'95
Q1
'96
Q4
'96
Q3
'97
Q2
'98
Q1
'99
Q4
'99
Q3
'00
Q2
'01
Q1
'02
Q4
'02
Q3
'03
Q2
'04
Q1
'05
Q4
'05
Q3
'06
Q2
'07
Q1
'08
Q4
'08
Q3
'09
Q2
'10
Q1
'11
Q4
'11
Q3
'12
Deal Volume Consumer ConfidenceSource: Dealogic
(Consumer Confidence)($ in billions)
0
200
400
600
800
1,000
1,200
1,400
1,600
$0
$100
$200
$300
$400
$500
$600
Q2
'95
Q1
'96
Q4
'96
Q3
'97
Q2
'98
Q1
'99
Q4
'99
Q3
'00
Q2
'01
Q1
'02
Q4
'02
Q3
'03
Q2
'04
Q1
'05
Q4
'05
Q3
'06
Q2
'07
Q1
'08
Q4
'08
Q3
'09
Q2
'10
Q1
'11
Q4
'11
Q3
'12
Deal Volume S&P 500 IndexSource: Dealogic
($ in billions) (S&P 500 Index)
CLEVELAND ● COLUMBUS ● DALLAS
Outlook for 2013 – The Return of the Mega Deal?
9
Market capitalizations have recovered from their lows in early 2009 to levels comparable with 2005 and 2006, providing a valuable acquisition currency and boosting CEO confidence levels
The “Wait-and-See” mentality that stemmed from the presidential election and fear of the fiscal cliff is over, and clarity surrounding the Euro crisis has increased
Buoyed by strong balance sheets and an appetite for growth, large strategic buyers have re-entered the market and are looking to put capital to work
Private equity mega funds have reemerged; fundraising efforts produced 32 $1B+ funds in 2012, compared to less than 20 in 2010
With the housing crisis in the rearview mirror, banks are looking to “turn the spigot back on” for high quality corporate loans with historically low interest rates
M&A: The Year in Review and a Look Ahead
Mega Deals Announced in 2013 Year to Date
($ in bi l l ions)
Date
Announced Target Acquiror Deal Value
Enterprise
Value EV/EBITDA
Feb 05, 2013 Dell Inc. Michael Dell and Silver Lake Partners $20.5 $22.4 5.0x
Feb 05, 2013 Virgin Media, Inc. Liberty Global $13.2 $23.8 9.3x
Feb 12, 2013 NBCUniversal Media (49% equity stake) Comcast $16.7 $40.1 9.2x
Feb 14, 2013 H. J. Heinz Company Berkshire Hathaway and 3G Capital Management $23.4 $27.5 13.6x
Feb 14, 2013 US Airways Group AMR Corp (American Airlines) $10.6 - -
Feb 20, 2013 OfficeMax Office Depot $1.2 $1.7 8.7x
CLEVELAND ● COLUMBUS ● DALLAS
Outlook for 2013 – What’s Motivating Buyers?
10
Despite recent increased earnings following recession-era cost cutting measures, companies have been increasingly challenged to grow revenue organically given the limits of a slowly improving economy
Acquisitions have been tapped to accelerate market share expansion and improve distribution efficiencies
S&P 500 cash balances have reached a ten-year high at over $2.0 trillion, while near zero interest rates and higher dividend taxation provide incentive for corporate reinvestment
Low leverage and wide availability of capital from financial sponsors and commercial lenders are conducive to increased M&A activity
M&A: The Year in Review and a Look Ahead
S&P 500 Cash Balances Uninvested PE Capital
$989 $999
$1,497 $1,601
$1,703
$2,060
7%
10%
13% 12% 13%14%
0%
5%
10%
15%
20%
25%
$0
$500
$1,000
$1,500
$2,000
$2,500
2007 2008 2009 2010 2011 2012
Cash on Hand Cash as % of Enterprise Value
Source: Capital IQ
($ in billions )
$428
$501$481
$433
$373$348
$0
$100
$200
$300
$400
$500
$600
2007 2008 2009 2010 2011 2012
Source: Pitchbook
($ in billions)
CLEVELAND ● COLUMBUS ● DALLAS
Outlook for 2013 – Strengthening Lending Environment
11
Middle Market Debt / EBITDA Multiples
Lenders remain hungry to put money to work, and competition can be fierce for high quality credits
Overall debt multiples (senior and sub) have held steady above 3.0x EBITDA in the middle market
A premium of nearly 1.0x EBITDA for deal values above $100 million has emerged
Despite more favorable lending conditions, middle market loan volume was down significantly below 2011 levels
A significant maturity wall in 2013 exists which, if coupled with an uptick in M&A activity, could support an increase in loan volume
M&A: The Year in Review and a Look Ahead
$9.5
$26.9
$35.4 $36.4
$31.8
$9.2
$5.4
$11.5$14.3
$9.9
$0
$5
$10
$15
$20
$25
$30
$35
$40
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: S&P
($ in billions)
* Middle Market = issuers with EBITDA of ≤ $50 million
Secondary Buyout Initial Public Offering ("IPO") Corporate Acquisition
Source: Pitchbook
(# companies exited)
4,703
5,342 5,637
6,020 6,344 6,538
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2007 2008 2009 2010 2011 2012*
Source: Pitchbook
(# companies held)
*through 11/30/12
CLEVELAND ● COLUMBUS ● DALLAS
M&A: The Year in Review and a Look Ahead
13
Motivations and Factors
Confidence will continue to guide the level of M&A activity
Strategic buyers will acquire growth in the absence of organic opportunities
Large deals could cause industry participants to reevaluate growth strategies and spur additional M&A activity
Banks continue an aggressive push for strong credit opportunities
Financial sponsors will continue to eagerly pursue exit strategies for well-aged portfolio investments
Acquirors continue to compete for “trophy” properties and take advantage of improving financing markets
Transactional Characteristics
Scarcity value of well performing companies will perpetuate a market of “haves” and “have-nots”
Technology, healthcare, business services and consumer discretionary sectors will continue to garner attention over that of their commodity-based peers
Cross-border M&A activity will remain at relatively low levels in light of abundance of domestic acquisition and investment opportunities