MARKE OR E MS RL MARET DECEMBER 2013 THE M&A …...Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 18. 4. Source: Thomson Reuters Mergers & Acquisitions

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MARKET MONITOR THE MOST TRUTHFUL MARKET

THE MOST TRUTHFUL MARKETLow Growth and The Long Slog Back for M&A

By Marshall SonenshineChairman, Sonenshine Partners

Presented By

DECEMBER 2013

THE M&A ADVISORMARKET MONITOR

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Contents

Preface 1

Synopsis 2

Introduction 3

Global M&A’s Downward Curve is Slowing Reversing 10

Explaining the Long Slog 30

A Peek Into 2014 33

Conclusion 34

About the Author 35

Report Sponsor Profile 36

Publisher 37

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PrefaceIt has become apparent, in contrast to most financial markets, which respond with relative predictability to both crisis and stimulus alike, that global M&A is more closely aligned to the macroeconomic fundamentals of its’ host markets.

All financial markets are recovering. But M&A is slower simply because its future is beholden to the actual and anticipated financial performance of real tangible operating businesses, industry sectors and geographic regions.

A year ago at this time, as we and countless others were prognosticating about what lay ahead in 2013, I was concerned about what effect the M&A sluggishness may have on our industry and the economy. Yet it has become quite obvious that M&A is actually the truest indicator of the shape of business ahead. And while deals, like business fundamentals, remain in a long slow recovery mode, the market is anything but stagnant.

Turning our attention to focus less on value and volume of transactions and more on the demographics and psychographics of the deals, provides valuable insight to buyers and sellers alike. M&A opportunities today are most aptly assessed in the context of expanding economic relations between both developed and emerging countries, the fluctuations of sector popularity and the evolution of corporate strategy.

One year after his much lauded white paper on the diminished global M&A market – The Long Pause, we returned to M&A stalwart Marshall Sonenshine, Chairman and Managing Partner of New York investment bank Sonenshine Partners and Professor of Finance and Economics at Columbia University, to address the mixed signal that M&A data continues to present.

Sonenshine’s analysis of the continued decoupling of the equities and M&A markets is reported here in The M&A Advisor’s latest M&A Market Monitor, The Most Truthful Market: Low Growth and The Long Slog Back for M&A.

I invite you to read this insightful report and engage with us in this most meaningful conversation.

David Fergusson Co-CEO & President The M&A Advisor

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SynopsisWhile financial headlines worldwide remain fixated on soaring equities, sagging sovereigns and debates about bigger banks and their scale and their whales, aggregate M&A remains among the most stubbornly cautious barometers of global business today. This is as it should be in today’s low growth environment.

Most financial markets and institutions are about riding financial currents like credit expansion pre-financial crisis and cheap financial stimulus capital postcrisis. These financial currents lap against the shore and shape the contours of business beach heads. But M&A rides far larger waves still, which may differ from those closer to the shore.

Today, equities ride high in price, albeit with the help of artificially low interest rates and reduced trading volumes. Major indices including those in the US are above pre-crisis levels and grew at double digit rates this year. But M&A remains stuck at volumes 40% below pre-financial crisis levels. This year’s global M&A volume is telling us important things about sentiment concerning the slow overall pace of global recovery. At the same time, the quality of M&A also provides important signals about the outlook for recovery.

M&A is recovering, though the recovery has been cautious, and one has to assess quality, not mere quantity, of deals to discern evidence of expected recovery. In the half decade post the 2008 Financial Crisis, all markets are recovering. But M&A is a slower-to-heal patient in the recovery room precisely because it is all about the shape of the curve for real economic recovery as opposed to near term financial market momentum. Financial markets are about

funds flows – the supply and demand for specific financial products like stocks, bonds and derivatives, each relative to its alternatives. But M&A is mostly about demand for much bigger things – fundamentals, seats at industry tables, control over business enterprises.

If one evaluates the demand for these grander opportunities, one can discern some tangible, if mixed, signals pointing to recovery. The road to recovery remains a long slog. Expect global M&A data to be modestly higher for the full year 2013 versus 2012, and to grow respectably, but not dramatically, again in 2014. In the long term, M&A will return to robustness. Rumors of a snap back; however, like those of Mark Twain’s demise, remain premature, at least in the near term.

Note: This article reviews and cites data from multiple industry sources including Bloomberg, Thomson Reuters. Capital IQ and Merger Market. Note data may vary as different M&A sources assess and define closed or announced deals and periods differently.

The author expresses deep gratitude to Haldun Mutlu, Financial Analyst at Sonenshine Partners, for research and editing support.

Copyright by Marshall Sonenshine. All rights reserved.

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IntroductionWhile financial headlines worldwide remain fixated on soaring equities, sagging sovereigns and debates about bigger banks and their scale and their whales, M&A remains among the most stubbornly cautious barometer of global business today. This is as it should be in today’s low growth environment. Most financial markets and institutions are about riding financial currents like credit expansion pre financial crisis and cheap financial stimulus capital post crisis. These financial currents lap against the shore and shape the contours of business beach heads. But M&A rides far larger waves still, which may be different from those closer to the shore.

Today, equities ride high in price, albeit with the help of artificially low interest rates and reduced trading volumes. Major indices including those in the US are above pre-crisis levels and grew at double digit rates this year. But M&A remains stuck at 40% below pre financial crisis levels. The cautious volume of global M&A this year is telling us important things about sentiment concerning the slow overall pace of global recovery. At the same time, the quality of M&A also provides important signals about the outlook for recovery. These statistics are not easily interpreted and most assessments merely count deal events, when in fact M&A markets are far more nuanced than their mere numbers would alone suggest.

If financial markets ride capital currents, including the pro equity momentum created by cheap capital as the still prescribed antidote to the financial crisis, M&A markets ride a much greater wave still – macroeconomic fundamentals as expressed in staid figures like GDP growth outlooks and 5 year forecasts for real industries and businesses. Indeed, M&A is mostly about potential future growth in revenues and profits from business acquisitions and combinations. Growth remains among the toughest statistics to forecast today, whether for broad markets or individual companies, and is not a momentum play at all, but something far more doctrinal.

Usually, M&A and capital markets, particularly equity markets, are highly correlated, as bullishness (or bearishness) drives both the prices of publicly traded shares and of M&A exits for companies. In ordinary times, the correlation between equities and merger markets is driven by capital flows that reflect confidence about the future. When investors bid up share prices this normally reflects bullishness about economic growth. But we are not in ordinary times. We are in the long slow process of global economic and financial recovery from one of the most dramatic financial crises in history, an event just half a decade old. And in these odd times, the M&A market has much to tell us.

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The Great DecouplingTwo simple statistics illustrate the stubborn and anomalous cautiousness of M&A among financial markets today.1 First, while historically M&A and Equities are linked, post crisis the great decoupling of M&A and Equities continues, with M&A “stuck” at a post crisis annualized levels approaching $2.5 trillion, some 40% below pre-crisis levels. Meanwhile, the Dow Jones Industrial Average has long surpassed its pre-crisis levels and most major stock market indices in the US and Europe have again posted double digit returns. In one particularly decoupled market, long ailing Japan saw its stock market rise 35% this year, while its M&A market declined 18%.2,3 We first wrote about this decoupling last year in The Long Pause: M&A in Uncertain Times. This paper assesses these trends with another year’s data.

Second, in October 2013, Thomson Reuters reported that M&A constitutes the sole investment banking business segment whose revenues declined from 2012 levels.4 While we do not expect to see the formation of new not for profit organizations raising charitable contributions to help frustrated M&A bankers acquire new homes and cars, we do think this statistic is probative of the trend. Banking profits rose quickly post financial crisis as cheap capital from central banks made it relatively easy to make profits on a broad range of activities including not just the lending that central banks are supposed to sponsor, but capital market underwriting sales and trading, derivatives market making and all the other things that render large banks profitable.

Indeed, a further anomaly of financial life post Financial Crisis is that the banks formerly deemed too big to fail are now famously much bigger, such that calls for breaking up banks are now mainstream if still unlikely proposals. Banks are now discussed as not only too big to fail but also too big to regulate and too big to manage. But that all is about capital; it is manifestly not about the M&A business, which inside banks is mostly a benign agency business that simply has not recovered remotely to pre-crisis levels.

A further and more worrisome anomaly of life post Crisis is the continuing dependency on low interest rates and Quantitative Easing by the Fed. The extraordinary use of these monetary powers have helped the economy and increased equity values, but the inevitability of tapering (even if prematurely discussed in 2013) leaves would be acquirers of companies in a dilemma: do they price deals off equity prices today or wait to see to what extent tapering creates an opportunistic equity market correction? Macro uncertainties unsettle M&A markets, though among considerations about monetary policy, impact on M&A cannot figure very prominently at the Fed.

Of Deal Counts and Body CountsDeal counts, like body counts in a war, can be a misleading indicator of facts on the ground. If one reads the current deal data, one sees mostly M&A stagnation, with some continued deal heat flashes at the high end of the merger market. But if one interprets the data, focusing on the

1. For example, average daily volume on the NYSE has steadily declined since the financial crisis and is now less than half pre-crisis levels. 2. Source: Bloomberg. Stock market data is based off of Nikkei Index. Market data as of October 14, 2013. 3. Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 18. 4. Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 1.

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quality as well as quantity of deal activity and evaluating these in the context of broader global financial market trends, one can discern some cautious signs of recovery for M&A as for business fundamentals. The merger market, like the business fundamentals that animate it, is in only gradual recovery mode, though it is in recovery mode even if the deal count data do not make that clear. M&A is in a long slog back, and its stubborn but truth-telling characteristics indicate the shape of business ahead.

Flashes of Deal Heat but no Heat Wave YetThere have been the occasional flashes of deal heat, but so far these have been flashes, not protracted heat waves. 2013 began with a trifecta – the $28 billion purchase of Heinz, the $25 billion announced bid for Dell and the much anticipated completion of Comcast’s acquisition of NBC Universal. And third quarter data are buoyed in part by Verizon’s mammoth sized and remarkably efficiently financed $130 billion buyout of Vodafone’s stake in Verizon Wireless. Even without Verizon, Q3 is an up quarter, though one quarter does not a trend make, and Q1 and Q2 were remarkably weak.

Other flashes of deal heat punctuated the otherwise sagging merger business this year. Announced deals include Liberty’s acquisition of Virgin Media for $24 billion, the Publicis / Omnicom $20 billion merger, and biomedical bellwether Thermo Fisher’s acquiring Life Technologies for $15 billion. In addition, Mexican wireless giant American Movil had announced a $20 billion offer that remains inadequate for Dutch telecom group KPN. These deal flashes create a bountiful icing on a still downsized M&A cake; one ought not misperceive the icing as the cake. For the 9 months ended September 30, 2013, big deals (defined as above $5 billion) rose by 13%, but aggregate global M&A is up by a measly 2%.5

Beneath this delicious mega deal icing, most of M&A occurs in the huge and still soft middle market. Over 95% of merger transactions by number involve companies below $500 million.6 These deal counts remain lackluster, at around 6,000 reported deals per quarter worldwide, still way off from close to 8,000 in Q3 of 2008 when the financial crisis seized the globe.7

Aggregate nine month global deal volume is still about $1.7 trillion, roughly the same as for the comparable period last year, even with the big frothy mega deals.8 At best global mergers may hit again $2.5 trillion for the year, where it generally has hovered. The DJIA is riding high, as are the S&P500 and the NASDAQ, but M&A remains a long way from the almost $4 trillion go-go market of 2008. Indeed, when equities are propped up by cheap stimulus capital, which is hardly a proxy for fundamental bullishness, this can have the perverse effect of calming M&A animal spirits, since deals get pricey in response to high equity benchmarks. Average M&A multiples this year are a heady 12x EBITDA.9 Equities also trade at full multiples – the S&P500 currently has a P/E of 19.4x versus a Schiller 10 year average of 16.5x.

5. Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 1. 6. Source: Bloomberg Global Financial Advisory Mergers & Acquisitions Rankings Q3 2013. Page 4. 7. Source: Bloomberg Global Financial Advisory Mergers & Acquisitions Rankings Q3 2013. Page 3. 8. Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 1. 9. Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 4.

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Thus the overall trend continues that proffered last year in our paper, The Long Pause: M&A in a Time of Uncertainty – cheap money post crisis has inevitably driven up equities, causing an expensive paradigm for M&A. With the benefit of new data this year, one can refine the theory. Equity markets are a long lead indicator of financial recovery, forced to look farther ahead because the alternative remains weak fixed income returns. By contrast, M&A is a more selective (and probably more meaningful) barometer of fundamental growth outlooks, which are only cautiously improving.

It’s About Economic Growth, StupidIn the final stages of the 2013 US debt ceiling crisis, the IMF reduced its World Economic Outlook growth forecasts to 2.9% for 2013, compromised in part by the twin charades in Washington and the EU, with a similarly softened 3.9% forecast for 2014. The IMF’s reductions are essentially across the board, reducing growth outlooks for all regions.

Current year GDP growth remains weak in the US at 1.6% and negative in Europe, where even mighty Germany is expected to post an anemic 0.5% growth rate. The Latin Miracle is largely behind us, though China and Emerging Asia remain powerful if slowing engines of growth. China has notably become among the most acquisitive M&A markets in Q3, though it will be a long time before still emerging China can single handedly affect the still US and Europe dominated global M&A league tables.

Political Risk in the World’s Largest MarketToday, the astute financial analyst must also be a political analyst to assess confidence. American companies are involved in roughly half of global M&A even though the American economy is below one quarter of world GDP. Most capital markets shrug off Washington paralysis as beltway psychosis that need not ruin a good party. In the 2011 US budget crisis, S&P’s historic downgrading of the US government’s AAA annoyed more than frightened markets as investors bid up the price of Treasuries, since these remained the only reserve currency anyway. In this context, Warren Buffet could reassure markets on the enduring strength of American capitalism and be proved right in real time. In 2013, even with a federal shutdown, equities barely stumbled.

In both US debt crises in 2011 and 2013, M&A bedded down. In each such crisis, equity momentum at worst momentarily stalled, but M&A markets were more broadly spooked. Those of us who do deals for living saw deal timetables stretch as buyers and sellers become distanced. Deals that would normally get done in two quarters were still “in process” in three or even four quarters. In this new paradigm, patience and hunting is rewarded, as illustrated this year in Warburg Pincus’s highly impressive $9 billion exit for Bausch & Lomb. The two notable facts about that deal were (a) it took far longer than usual and (b) the buyer, Valeant, is a high flying pharma stock that the global momentum markets traded at a breathtaking 10x revenues. Of course such a buyer could pay up; but how much is that a proxy for fundamentals?

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Quality of Deal FlowIf body counts are not enough, then one must do the heavier lifting of assessing M&A data by sector to illuminate the question of prospects for global economic recovery. Looking at long term sectorial trends over the past half dozen years, one finds the most global deal volume in Finance (13% of global mergers), Real Estate / Property (9%), Telecom (8%), Oil & Gas (9%), Computers and Electronics (7%) and Food and Beverage (5%).10 This is interesting, though perhaps too broad to answer questions about recovery now, in 2013 – though here again a different source, Thomson Reuters, notes that the same 3 sectors (Telecom, Energy and Power, and Real Estate) dominated the merger market in the first 3 quarters of 2013.

What is it about Telecom, Real Estate and Energy that is so robust in M&A, which, after all, is a pan sectorial phenomenon? Telecom is about the wireless revolution, a play on technology ubiquitously stimulating communications which in turn drive economic activity. This must be pro recovery, whether or not the individual deals are well priced for buyers or sellers. Similarly, energy is about demand for oil, again one of those macro inputs that must be pro recovery. And property, always a pro cyclical phenomenon, also bodes well for recovery. Telecom, Technology, Energy and Real Estate are all important indicators of a broad based expectation of improved economic conditions.

In addition, one sees resuming deal activity in financial categories like asset management and healthcare sectors in response to both technology and market reform. Whether Blackrock or Blackstone will acquire financial firm X or Y is interesting to equity investors to contemplate; for our purposes it is sufficient to note that asset managers are combining, presumably because they see growth ahead and want to find cross selling and infrastructure synergies.

There can be no real economic recovery without consumers. In this context, the financial press obsessed about JC Penny and its ill-advised activist inspired strategies, and about Wal Mart and its likely stagnating mature results. Alongside these stories, one has to be pleased to see buyouts of retailers (even premium ones) like Niemen Marcus (curiously by a Canadian pension investing direct) and Hudson Bay’s announced acquisition Saks Fifth Avenue.

When it comes to deals targeting the Consumer, one will be more reassured to see renewed M&A by the Tesco’s and Carrefours and the like, which have instead retrenched. Similarly, one would like to see additional large scale buyouts of big consumer companies like the almost $10 billion buyout of DE Master Blenders by Germany’s family controlled Joh. H. Benckiser together with private equity partner BDT Capital. This big consumer deal was notable mostly for its exceptionalism in European M&A, though it somewhat mirrored the larger 3G – Berkshire Hathaway consortium in the Americas that would buy out Heinz. (Interestingly, a principal of BDT, Byron Trott, has been an adviser to Berkshire Hathaway.)

10. Source: F. Thevenaeau, A. Kayaman, S. Surtoes, M&A: We Have Lift-Off!, Societe Generale Research, 19 September 2013, page 6.

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Still, one is inclined to see a note of contrarian opportunism in all this. The Benckisers had been rebuffed in their attempt a year earlier to acquire US cosmetics public company Avon, arguably on the cheap, for $10 billion; this time they successfully pursued Dutch coffee and tea group Master Blenders, in which they had already built a minority position, and then tendered for the remaining with their capital partner in a deal that positions them to compete against Nestle’s much larger coffee and tea group. Here, at least, is capital making a statement of conviction to acquire a consumer group, one with caffeine presumably to reflect a mood in Europe geared towards working more hours and more years as the Continent would become more austere. Call it a bet on caffeine in a time of austerity.

Further good news on fundamentals: the airline industry, an excellent index of global travel and world GDP, is reporting global profits exceeding $10 billion, and aviation finance companies are plentifully being financed by banks and now trade at book values, having struggled with steep discounts to book for the last several years.11 On the M&A side, some decent scale portfolio deals have evolved in this specialty finance category.

Private Equity remains a moderate source of M&A deal volume at just under 15%, broadly where it has been post crisis.12 But here again there is more to the story beyond the deal count and volume data. Indeed, the lackluster deal count data misses a range of pro M&A signposts from within PE, including strong fundamental investor demand for the asset class and capital on reserves approaching $400 billion. And in some pre-crisis mega deals, notably Blackstone’s $25 billion acquisition of Hilton Hotels, fundamentals have improved considerably. Hotels, like air travel, are a good indicator of business and consumer spending. Further, and perhaps more important still, the large diversified PE firms continue to expand in growth capital, mezzanine and other financing activities globally, and these corporate finance activities will nourish enhanced strategic and financial M&A activity over the medium term.

M&A and the Shape of the Recovery CurveM&A is recovering, though the recovery has been cautious and one has to assess quality, not mere quantity, of deals to discern evidence of expected recovery. In the half decade post the 2008 Financial Crisis, virtually all markets are recovering. But M&A is a slower-to-heal patient in the recovery room precisely because it is all about the shape of the curve for real economic recovery as opposed to near term financial market momentum. Financial markets are about funds flows – the supply and demand for specific financial products like stocks, bonds and derivatives, each relative to its alternatives. But M&A is mostly about demand for much bigger things – fundamentals, seats at industry tables, and control over business enterprises.

If one evaluates the demand for these grander opportunities, one can discern some tangible if mixed signs of signals pointing to recovery. The road to recovery remains a long slog.

11. Source: Flightglobal Insight Aircraft Finance 2013 12. Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 1.

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Global M&A Deal Volume, S&P 500 and World Market Capitalization from 1985 to Present

Sources: Left Axis: Thomson Reuters. M&A data from 1985 – 2012. Right Axis: Bloomberg. S&P 500 and World Market Capitalization indexed at 100. S&P 500 data from 1/1/1985 – 10/22/2013. World Market Capitalization data from 9/22/2003 – 10/23/2013.

The great de-coupling continues but will reverse

as M&A ultimately strengthens

It is too simplistic to speak of a U Shaped Recovery for M&A, though it is likely that M&A, like most financial markets, will surge when conditions are spontaneously perceived as favorable. Those conditions are most importantly about fundamental confidence in macroeconomic growth. And that confidence will require strengthening of the financial infrastructure of Europe, reform of the financial and political infrastructure of Washington, renewed growth in those emerging markets (particularly in Latin America) that have sagged, and reduction in perceived threat of financial and geopolitical shocks.

With these requirements for surge, one should expect global M&A data to be modestly higher for the full year 2013 versus 2012, and to grow respectably again in 2014. In the longer term, M&A will return to robustness. Rumors of a near term snap back, however, like those of Mark Twain’s demise, remain premature.

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Global M&A’s Downward Curve is Slowly ReversingIn our report last year we noted that the operative word for M&A was decline, given a global market that had just about reached $4 trillion before the 2008 Financial Crisis and since then had stagnated at below $2.5 trillion. The trend in 2013 suggests a slow reversal of this decline. M&A and Equity markets remain largely decoupled relative to pre-crisis behavior, but in the thicket of mixed signals one can discern some early indications of some cautious return towards more normal conditions.

One should view cautiously flashes of deal activity that may not be sustained. There was a brief flash of recovery in the first half of 2011, but that flash disappeared under the weight of the 2011 U.S. fiscal crisis and European sovereign debt and banking crisis, such that the second half of that year constituted yet another period of decline. 2012 looked like more of the same though it would benefit from an unusually strong Q4, which reflected in pertinent part the rush to close deals before an expected increase in US capital gains rates would take effect. This was important for global activity since US involved deals constituted close to half of global M&A (although closer to only 42% in the current year).

Similarly, one has to normalize for the occasional whopper deals that can skew quarterly data – such as the $50 billion plus single shots by Glencore (acquiring Xtrata in 2012) or Rosneft (acquiring TNK-BP in 2013) or the Q3 2013 mother lode of all M&A deals, Verizon’s $130 billion buyout of Vodafone’s 45% stake in Verizon Wireless. On the other hand, large ticket M&A in generally drives quarterly spikes, though in M&A big is $25 billion (e.g. Heinz, Dell, Publicis / Omnicom) whereas $50 or $100 billion is mammoth (one hesitates to use the now shopworn analogy to whales) and arguably “extraordinary.”

As will be discussed in more detail later in this paper, one ought not get overly excited about current deals in the $20 to $30 billion range. There were many of these deals, on the strategic side, even in 2009 (i.e. just post crisis), particularly in high impact global strategic deals in pharma or healthcare (e.g. Johnson & Johnson / Synthes and a series of large deals by most major pharma companies) and Energy. Further, it would takes an unreasonable number of $25 billion dollar deals to add a trillion or more to the global M&A recovery scene; much of this gap still must be closed by smaller deals as that is the nature of fundamental M&A recovery cycles.

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13. Q3 2013 numbers as of September 2013 14. Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013

Global Markets

Through the third quarter of 2013, Global M&A volume was up a weak 2% over the prior period, but it bears noting that volume through Q3 2012 was down about 15% year-over-year versus 2011.14 One is arguably safe calling a bottom and suggesting a reversal of the decline, with the principal question being the pace of growth.

One difference this year is the geographic mix. This time last year, one noted a half decade long slide that was fairly agnostic, affecting all regions, with pronounced declines in the Americans and APAC and less steep declines in Europe, partly reflecting opportunistic acquisitions within the troubled Eurozone. But this year the components of change are themselves changing, with the U.S. leading the reversal while most other major markets continue to slide:

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Global Markets

Global M&A Quarterly Volume14

Source: Bloomberg Global Financial Advisory Mergers & Acquisitions Rankings Q3 2013.

Through the third quarter of 2013, Global M&A volume was up a weak 2% over the prior period, but it bears noting that volume through Q3 2012 was down about 15% year-over-year versus 2011.15 One is arguably safe calling a bottom and suggesting a reversal of the decline, with the principal question being the pace of growth.

One difference this year is the geographic mix. This time last year, one noted a half decade long slide that was fairly agnostic, affecting all regions, with pronounced declines in the Americans and APAC and less steep declines in Europe, partly reflecting opportunistic acquisitions within the troubled Eurozone. But this year the components of change are themselves changing, with the U.S. leading the reversal while most other major markets continue to slide:

14 Q3 2013 numbers as of September 2013 15 Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013

Driven by US tax law changes, Q4

2012 rose to $800B Bn

2013 quarterlies steadily rebuilding

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Global M&A Through Q3 By Major Region

2013 2012 % Change

US $790 $597 32.5%Europe $402 $514 (21.8%)APAC $291 $300 (2.8%)Japan $61 $63 (3.6%)Rest of World $197 $231 (15.0%)Global $1,741 $1,705 2.1%

Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 2.

In Big America and Big Europe

America is at best, at least in the current quarter, a cautious M&A growth market. Some of this of course is explained by the mere fact that the largest deals this year to date have been dominated by US corporate involvement on at least one side – examples include Verizon / Vodafone, 3G / Heinz, Liberty / Virgin Media, Comcast / NBC, Omnicom / Publicis, Thermo Fisher / Life Technologies and Mid-American Energy / NV Energy. But European M&A took a step backwards in 2013, presumably reflecting another trend – the pernicious and protracted stagnation of Europe and the declining growth rates in many emerging markets that trade with Europe.

America has had its own annus horribilis, marked by continued chronic unemployment and embarrassments at home by a government shutdown and abroad by spies shielded by China and Russia. But that is geo political context, not corporate finance. In the final analysis, the US still has the world’s largest economy, the world’s largest companies and the world’s only reserve currency. Decades ago, French President Valery Giscard d’Estaing complained that its reserve currency status conferred on Americans an “exorbitant privilege.” The French were right even if they were merely whining. In all events, this time last year U.S. companies M&A had slouched below $600 billion; but as of the end of Q3 2013 the Americas are closing in on $800 billion and poised for full year 2013 to once again surpass $1 trillion of a global M&A market struggling to reassert $2.5 trillion. Indeed, U.S. M&A is up 33% for the third quarter alone this year versus last; yes, 20% of that is Verizon, but 13% of it is not Verizon. 16

Also noteworthy is the extent to which U.S. and global M&A markets had broadly grown alongside equity markets through the financial crisis but then parted ways, declining over the past four years even as the U.S. and several other public equity markets have substantially recovered. U.S. equities, handily trade above their pre financial crisis levels and this year rose by some 15% for the first 9 months (and a staggering 22% for the NASDAQ) with continued strength in Q3; U.S. M&A is just starting to a cautious game of play catch up though still has a ways to go.17 Meanwhile, American corporations continue to stockpile an ever larger cash horde, now estimated at several trillion dollars though at least we are presently seeing some economic and M&A growth.18 16 Source: Bloomberg Global Financial Advisory Mergers & Acquisitions Rankings Q3 2013. Page 2. 17 Source: Bloomberg. Market data as of October 14, 2013. 18 Source: Capital IQ. The summation of total cash and short term investments on the balance sheets of all S&P 500 companies is approximately $6.0 trillion. Market data as of November 6, 2013.

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In Big America and Big EuropeAmerica is a relative M&A growth market at the moment. Some of this of course is explained by the mere fact that the largest deals this year to date have been dominated by US corporate involvement on at least one side – examples include Verizon / Vodafone, 3G / Heinz, Liberty / Virgin Media, Comcast / NBC, Omnicom / Publicis, Thermo Fisher / Life Technologies and Mid-American Energy / NV Energy. But European M&A took a step backwards in 2013, presumably reflecting another trend – the pernicious and protracted stagnation of Europe and the declining growth rates in many emerging markets that trade with Europe.

America has had its own annus horribilis, marked by continued chronic unemployment and embarrassments at home by a government shutdown and abroad by spies shielded by China and Russia. But that is geo political context, not corporate finance. In the final analysis, the US still has the world’s largest economy, the world’s largest companies and the world’s only reserve currency. Decades ago, French President Valery Giscard d’Estaing complained that its reserve currency status conferred on Americans an “exorbitant privilege.” The French were right even if they were merely whining. In all events, this time last year U.S. companies M&A had slouched below $600 billion; but as of the end of Q3 2013 the Americas are closing in on $800 billion and poised for full year 2013 to once again surpass $1 trillion of a global M&A market struggling to reassert $2.5 trillion. Indeed, U.S. M&A is up 33% for the third quarter alone this year versus last; yes, 20% of that is Verizon, but 13% of it is not Verizon.15

Also noteworthy is the extent to which U.S. and global M&A markets had broadly grown alongside equity markets through the financial crisis but then parted ways, declining over the past four years even as the U.S. and several other public equity markets have substantially recovered. U.S. equities, handily trade above their pre financial crisis levels and this year rose by some 15% for the first 9 months (and a staggering 22% for the NASDAQ) with continued strength in Q3; U.S. M&A is just starting to a cautious game of play catch up though still has a ways to go.16 Meanwhile, American corporations continue to stockpile an ever larger cash horde, now estimated at several trillion dollars though at least we are presently seeing some economic and M&A growth.17

By contrast, and consistent with the theory of “beware the flash,” European M&A has sagged again this year, despite some growth in 2012, even as its largest equity markets have all performed well or very well (the FTSE is up almost 7%, DAX almost 13%, CAC almost 14%).18 What causes this divergence? The answer must be the uncertainty that still is Europe. The global Financial Crisis of 2008 was made in America, but the continuing nausea is today felt more acutely in Europe where most economies remain at best in stagnation territory, and some (such as Spain, Portugal, Italy and Greece) remain in depression.

15. Source: Bloomberg Global Financial Advisory Mergers & Acquisitions Rankings Q3 2013. Page 2. 16. Source: Bloomberg. Market data as of October 14, 2013. 17. Source: Capital IQ. The summation of total cash and short term investments on the balance sheets of all S&P 500 companies is approximately $6.0 trillion. Market data as of November 6, 2013. 18. Source: Bloomberg. Market data as of October 14, 2013.

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If the American body politic is hamstrung by its D.C. gridlock, the European is hamstrung by its own GU (Gridlock Union) in which Austerians and Socialists are at least as uncooperative as are Republicans and Democrats. In America, gridlock is maddening; in Europe it is downright suffocating. On both sides of the pond, money will still make bets on equities, where one has diversification and an exit, but remains more cautious on mergers, which demand concentration risk, illiquidity and governance responsibility, all of which require a higher order of conviction.

Across the Globe, Markets Can Heat Up Stocks Even as they Cool Down DealsSome of this slack might have been taken up by Asia, but alas their growth is slowing, most notably in China, and so is overall Asian Pacific M&A, even with an increase in China acquisitions. In Japan, no amount of equity market momentum – even a 35% up year – will loosen corporate the purse strings on the $2 trillion in cash on corporate balance sheets.19 Abenomics has not been a confidence booster to this extent just yet. And India presently barely makes a dent on the global M&A scene – its stocks are up but its growth outlook has softened (the IMF has reduced growth outlooks by 1 to 2 points, to 3.8% this year and 5.1% next).20

Similarly, in Latin America, the M&A markets have softened. This could be expected given the sharp decline in May and June of Mexico and Brazil’s equity markets; however, the lack of M&A activity in Argentina’s is surprising given that the country market capitalization has increased nearly 66%.21 In the largest two markets, Mexico related M&A declined for the 9 months period to $16 billion this year from $22 billion in 2012. In Brazil the M&A decline in 9 month data went from $46 billion last year to $32 billion this year.22 At least in Brazil equities declined too this year,

19. Source: Japan Awaits Abe’s Third Arrow as Companies Urged to Invest, Bloomberg, October 2, 2013. 20. Source: International Monetary Fund – World Economic Outlook, October 2013. Page 18 21. Source: Bloomberg. Market data as of November 4, 2013. 22. Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 2

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Stock Market Indices Growth

Source: Bloomberg. Market data as of October 23, 2013. All markets are indexed at 100 in 1995.

Global M&A by Value (US$ in millions)

Source: Bloomberg M&A data. Market data as of October 23, 2013.

Money for Stocks and Planes

We wrote last year, and still assert, certainly for Europe, the world’s second largest M&A market, that if M&A normally had been broadly correlated with equity markets pre-crisis, something had changed post-crisis. Some of this change was in the first couple of years post 2008 attributable to over-leverage in global financial markets and the diversion of credit to de-lever financial, corporate, household and now sovereign credit markets. But credit shortage, while surely an important impairment to M&A activity, cannot explain the current tepid M&A market – after all, as noted,

A $700B Q4 would reestablish $2.5 trillion annually

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though importantly so has the IMF growth forecast for 2014, which was over 3% and is now at held flat 2.5%.23

All these observations would support the overall theory which we may as well summarize as “It’s about Economic Growth, Stupid.”

Money for Stocks and PlanesWe wrote last year, and still assert, certainly for Europe, the world’s second largest M&A market, that if M&A normally had been broadly correlated with equity markets pre-crisis, something had changed post-crisis. Some of this change was in the first couple of years post 2008 attributable to over-leverage in global financial markets and the diversion of credit to de-lever financial, corporate, household and now sovereign credit markets. But credit shortage, while surely an important impairment to M&A activity, cannot explain the current tepid M&A market – after all, as noted, credit is relatively more available and certainly cheap by historical standards and cash equity is plentiful.

Further, banks really are lending. Aircraft finance, a multi trillion dollar financing demand sector that is generally viewed as a good barometer of continued or growing business and leisure travel and hence world GDP. 24 And banks and debt markets certainly are highly supportive of deals seen as very high quality and predictable mega franchises, as in the oversubscribed bank and bond financing for Verizon’s mammoth deal.

But in the more garden variety M&A world – a world in which 95%+ of deals by number are below $500 million in value – the world of capital seems at present comfortable bidding up equities to beyond pre-crisis levels, but remains selective in financing buyouts.25 In financing

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Stock Market Indices Growth

Source: Bloomberg. Market data as of October 23, 2013. All markets are indexed at 100 in 1995.

Global M&A by Value (US$ in millions)

Source: Bloomberg M&A data. Market data as of October 23, 2013.

Money for Stocks and Planes

We wrote last year, and still assert, certainly for Europe, the world’s second largest M&A market, that if M&A normally had been broadly correlated with equity markets pre-crisis, something had changed post-crisis. Some of this change was in the first couple of years post 2008 attributable to over-leverage in global financial markets and the diversion of credit to de-lever financial, corporate, household and now sovereign credit markets. But credit shortage, while surely an important impairment to M&A activity, cannot explain the current tepid M&A market – after all, as noted,

A $700B Q4 would reestablish $2.5 trillion annually

23. Source: International Monetary Fund – World Economic Outlook, October 2013. Page 2 24. Source: Flightglobal Insight Aircraft Finance 2013 25. Source: Bloomberg Global Financial Advisory Mergers & Acquisitions Rankings Q3 2013

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buyouts, we remain in a flight to quality market, whereas in broader securities markets we remain in a flight to equity markets. Hence the de-coupling.

How Hot Are Some Stocks?Anyone who doubts this even after seeing the equity market versus M&A market data would do well to take a look at select equity quotes, particularly in technology. Facebook, by all measures a horribly bungled IPO, now trades at a breathtaking $125+ billion market cap,26 well above the $100 billion market cap it failed to assert a year ago when it went public. This for a company that is less than a decade old, while the most storied newspaper in America, the New York Times, has a market cap of just $2 billion.27 In technology, new 3D prototyping companies have taken the world by storm, trading in the billions of dollars of market cap at levels that exceed 10x revenues.28 Twitter, expecting a crowd at IPO time, had enough leverage to demand loans from its IPO underwriters and dictate the price of underwriting to about half its normal levels.

Amazon, a company that has barely made a profit, goes only up. And Netflix, an amazing turnaround story in which Orange became the new Black and ended years of Red with it, is now broadly accepted as Amazon or Apple II, meaning that investors will bid its shares to stratospheric levels on the assumption (in Netflix’s case a reasonable one) of long term success in the new media landscape, though sound assumptions and sound prices are usually held to tighter standards of quantification. In all events, the point remains: the world is not bereft of vision, but investors still want an easy exit (shares) and remain more demanding about their “flight to quality” when it comes to M&A, though there has been some “give” here as the year progressed.

In new healthcare stocks, Intuitive Surgical continues to ride high at 8x revenues even after a correction.29 At least in an M&A move, its distant cousin MAKO was able to extract an even higher multiple in its merger with Stryker.30 Valeant, a relatively somewhat obscure and high flying pharma and healthcare concern founded in Central Europe and Canada, outbid all the usual suspects bidding on Bausch & Lomb, winning that deal at a surprising $9 billion, presumably because Valeant itself trades at almost 10x sales, sporting a market cap of $25+ billion.31 But these deals are plays on the particular ; they are not proxies for a generalized buyout fever. Still, they help lift M&A sites by asserting that at least some will bid M&A premia to premium stock quotes.

Are We There Yet?In this context, each time this year a television interviewer inquired when M&A will resume, my answer remained broadly the same – in time, but for right now it is one thing for money,

26. Source: Capital IQ. Market data as of October 23, 2013. 27. Source: Capital IQ. Market data as of October 23, 2013. 28. Source: Capital IQ. Market data as of October 23, 2013. 3D Systems’ market capitalization was13.9x LTM revenue. Stratasys’ market capitalization was 14.4x LTM revenue. ExOne’s market capitalization was 20.2x LTM revenue. 29. Market data as of October 23, 2013. Intuitive Surgical’s market capitalization was 6.2x LTM revenue. 30. Market data as of October 23, 2013. Stryker announced the acquisition of MAKO Surgical on September 25, 2013, for an implied equity value to LTM revenue multiple of 12.9x. 31. Valeant announced its acquisition of Bausch & Lomb on May 27, 2013. On May 26, 2013, Valeant’s market capitalization was $25.5 billion, 7.0x LTM revenue. Valeant’s TEV to LTM revenue multiple was 9.8x.

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unwilling to accept anemic interest rates in a recovery period, to bid up liquid shares in a big public liquid market; it is quite another thing for money to buy whole companies at premium prices and say here we are, with confidence and at premium prices, taking full and illiquid

responsibility for this business enterprise. Still, one does see the beginning of a shift in the wind, in favor, cautiously, of saying, alright, then, we will buy this one. The sound bites of television pundits are cautiously evolving.

AmericasDeal volumes in the Americas year to date through Q3 rose to close to over $930 billion with over $1.1 trillion including all new announced deals.32,33 Some 75% is U.S., buoyed in pertinent part by the $130 billion Verizon buyout of Vodafone’s 45% stake in its wireless business in Q3, making that quarter an especially strong one at about a half trillion dollars.34 The half trillion quarterly level in the Americas was last reached only briefly in Q4 of 2012, aided in that quarter by deals rushing to close before U.S. capital gains rates would rise. There were also half trillion dollar quarters in the first half of 2011, before the U.S. debt crisis triggered the first ever downgrade of US Treasury bonds by S&P. Tellingly, post that mid 2011 U.S. debt crisis and downgrade, the confidence driven M&A market declined in the Americas immediately thereafter until Q4 of 2012. The ebb and flow of this data, of which some three quarters is the US, is important since, as noted, the Americas constitute over 40% of the global M&A industry.

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multiple in its merger with Stryker.31 Valeant, a relatively somewhat obscure and high flying pharma and healthcare concern founded in Central Europe and Canada, outbid all the usual suspects bidding on Bausch & Lomb, winning that deal at a surprising $9 billion, presumably because Valeant itself trades at almost 10x sales, sporting a market cap of $25+ billion.32 But these deals are plays on the particular; they are not proxies for a generalized buyout fever. Still, they help lift M&A sites by asserting that at least some will bid M&A premia to premium stock quotes.

Are We There Yet?

In this context, each time this year a television interviewer inquired when M&A will resume, my answer remained broadly the same – in time, but for right now it is one thing for money, unwilling to accept anemic interest rates in a recovery period, to bid up liquid shares in a big public liquid market; it is quite another thing for money to buy whole companies at premium prices and say here we are, with confidence and at premium prices, taking full and illiquid responsibility for this business enterprise. Still, one does see the beginning of a shift in the wind, in favor, cautiously, of saying, alright, then, we will buy this one. The sound bites of television pundits are cautiously evolving.

M&A Volume by Region


31 Market data as of October 23, 2013. Stryker announced the acquisition of MAKO Surgical on September 25, 2013, for an implied equity value to LTM revenue multiple of 12.9x. 32 Valeant announced its acquisition of Bausch & Lomb on May 27, 2013. On May 26, 2013, Valeant’s market capitalization was $25.5 billion, 7.0x LTM revenue. Valeant’s TEV to LTM revenue multiple was 9.8x.

32. Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 3. 33. Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 6. 34. Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 2.

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The base of U.S. acquisitions this year remained decidedly strategic. Long gone are the pre-crisis days during which private equity constituted over a third of M&A.36 Private equity is more in the 15% range, though it did increase moderately in Q3.37 The current drivers of M&A at the high end remain strategic: there are no mega sized PE deals this year other than the finally approved $25 billion Silver Lake / Dell deal, and the similar sized 3G / Heinz deal – and in both cases the PE firms needed partners to get those deals done (Silver Lake partnered with Michael Dell and Microsoft and 3G with Berkshire Hathaway). PE is slowly working its way through its refinancing backlog of some $860 billion in 2014 - 16 debt maturities for present portfolio companies.38

Unlike the U.S. market, the Latin American M&A market is still struggling to gain traction. Nine month deal volume was $60 billion in 2013, down from $85 billion in 2012. This decline occurred in virtually all sectors except financial services. Q3 deal volume might have been inflated by American Movil’s $22 billion tender offer for European wireless group KPN (which KPN subsequently rebuffed). Brazil and Mexico continue to serve as the two largest sources for M&A activity in Latin America. Brazil captured 50% of all inbound deals by value, with 7% of inbound deal volume representing purchases by foreign private equity firms. Mexico received a larger portion of foreign interest, with 10% of inbound deal volume resulting from foreign private equity buyouts. Inbound acquisitions, such as the $400 million purchase of Red de Carreteras de Occidente by GS Capital Partners, may signal potential increased interest by private equity firms to Mexico and the Latin American region.39

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Americas

Deal volumes in the Americas year to date through Q3 rose to close to over $930 billion with over $1.1 trillion including all new announced deals.33,34 Some 75% is U.S., buoyed in pertinent part by the $130 billion Verizon buyout of Vodafone’s 45% stake in its wireless business in Q3, making that quarter an especially strong one at about a half trillion dollars.35 The half trillion quarterly level in the Americas was last reached only briefly in Q4 of 2012, aided in that quarter by deals rushing to close before U.S. capital gains rates would rise. There were also half trillion dollar quarters in the first half of 2011, before the U.S. debt crisis triggered the first ever downgrade of US Treasury bonds by S&P. Tellingly, post that mid 2011 U.S. debt crisis and downgrade, the confidence driven M&A market declined in the Americas immediately thereafter until Q4 of 2012. The ebb and flow of this data, of which some three quarters is the US, is important since, as noted, the Americas constitute over 40% of the global M&A industry.

Americas M&A Quarterly Volume36


33 Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 3. 34 Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 6. 35 Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 2. 36 Q3 2013 numbers as of September 2013

Q3 spike partly due to Verizon, but still shows growth

35. Q3 2013 numbers as of September 2013 36. “Credit markets are helping to fund larger private equity deals, but it also is raising the seller’s price expectations…which means that a lot of those big deals may not materialize any time soon” – Michael Abraham, co-head of financial sponsors in Europe for UBS (Financial Times, “M&A activity shows signs of revival”, March 12, 2013) 37. Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 1. 38. Source: Preqin 39. Source: MergerMarket Latin America M&A Trend Report: Q1 – Q3 2013

35

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The continued drumbeat of strategic M&A as the driver is not new. Indeed, it has been the story of M&A since the crisis, which separated a credit bubble driven LBO craze from the post crisis cautious recovery period. What is remarkable is how robust strategic M&A remains not only now but even in the very immediate aftermath of the financial crisis, when big strategic deals continued to occur in virtually every major category of business from Media to Consumer, Energy, Financials (reflecting global financial services restructuring), Healthcare and Pharma, Industrials, Technology, materials, Telecommunications and Utilities.

Post crisis, the world of financial buyouts grinded down, but the demand for strategic deals at the very high end persisted. In some cases such as financial services mergers this was in response to the crisis itself. In some cases such as automotive and energy, this was defensive or opportunistic regrouping in response to the crisis’s global dislocations. In some cases this was simply long term strategy powering through near to medium term mayhem.

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Top 2009 M&A By Sector (US$ in billions)

Media Consumer Discretionary

Target Acquiror Amount Target Acquiror AmountLiberty DirecTV $12.7 Porsche Volkswagen $5.8NBC Universal General Electric 5.8 Black and Decker Stanley Works 5.2Unitymedia UPC Germany 5.5 Delphi Auto JPMorgan, et al. 3.5Marvel Entertainment Disney 4.0 USJ Co. Owl Creek, et al. 1.7Busch Entertainment Blackstone 2.7 Nexteer Auto Motors Liquidation 1.1Ticketmaster Live Nation 1.4 Simmons Ares Capital, et al. 0.7

Consumer Staples Energy

Target Acquiror Amount Target Acquiror AmountPepsi Bottling Pepsico $12.3 Petro-Canada Suncor $19.5Sadia Brasil Foods 5.6 Addax Mirror Lake 8.9Lion Nathan Kirin 3.7 BJ Services Baker Hughs 5.8Pilgrim's Pride JBS 2.9 PTT Refining PTT Chemical 4.5Busch InBev CVC 2.9 Co. Esp. de Petroleos Int'l Petroleum 4.5Sara Lee Assets Unilever 1.9 Harvest En. Trust Korea National 3.6

Financials Healthcare Equipment & Services

Target Acquiror Amount Target Acquiror AmountBarclays Global BlackRock $13.3 IMS Health CPP, TPG $5.4AXA AMP 13.2 Sinopharm Mitsubishi, MedlPal 4.1Nikko Cordial Sumitomo Mitsui 7.8 AMO Abbot Labs 2.7Friends Provident Resolution Limited 5.0 HLTH Corp. WebMD 1.9Aioi Insurance Mitsui Sumitomo 3.8 Varian Agilent Tech 1.6Nipponkoa Sompo Japan 3.7 CoreValve Medtronic 0.9

Pharmaceuticals Industrials

Target Acquiror Amount Target Acquiror AmountWyeth Pfizer $78.6 Burlington Northern Santa Fe Berkshire Hathaway $36.9Schering-Plough Merck 50.7 Shanghai Airlines China Eastern 3.1Solvay Abbott Labs 7.7 Tianjin Port Co. Grand Point 2.8Merial Sanofi-Aventis 4.0 Gatwick Airport Global Infra. Partners 2.5Stiefel Labs GlaxoSmithKline 3.6 Camillo Eitzen PT Berlian Laju 1.8Sepracor DainIppon Sumitomo 2.8 Cegelec Vinci 1.7

Information Technology Materials

Target Acquiror Amount Target Acquiror AmountAffiliated Computer Xerox $8.8 Aracruz Celulose Votorantim Celulose $5.5Sun Microsystems Oracle 8.3 CF Industries Agrium 4.6Metavante Fidelity 4.9 Terra Industries CF Industries 4.5Perot Systems Dell 4.1 Nufarm Sinochem 3.4Data Domain EMC 2.6 Reynolds Packaging Beverage Packaging 3.0Skype Silver Lake, et al. 2.0 Asarco Sterlite 2.8

Telecommunications Utilities

Target Acquiror Amount Target Acquiror AmountKSC Mobile Vavasi $12.3 Essent RWE $12.3Global Village Telecom Vivendi 4.6 Endesa Enel 12.1Comstar OJSC Mobile 2.6 Union Fenosa Gas Natural SDG 10.5Partner Communications Scallex 1.9 Nuoh Energy Vattenfall 6.1Bezeq Israel 012 Smile 1.8 Italgas SNAM Rete Gas 5.3Brasil Telecom Participacoes Telemar Norte Leste 1.5 British Energy Centrica 3.5

2009

Sources: Capital IQ. Data as of 12/1/2009.

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Top 2009 M&A By Sector (US$ in billions)

Media Consumer Discretionary

Target Acquiror Amount Target Acquiror AmountLiberty DirecTV $12.7 Porsche Volkswagen $5.8NBC Universal General Electric 5.8 Black and Decker Stanley Works 5.2Unitymedia UPC Germany 5.5 Delphi Auto JPMorgan, et al. 3.5Marvel Entertainment Disney 4.0 USJ Co. Owl Creek, et al. 1.7Busch Entertainment Blackstone 2.7 Nexteer Auto Motors Liquidation 1.1Ticketmaster Live Nation 1.4 Simmons Ares Capital, et al. 0.7

Consumer Staples Energy

Target Acquiror Amount Target Acquiror AmountPepsi Bottling Pepsico $12.3 Petro-Canada Suncor $19.5Sadia Brasil Foods 5.6 Addax Mirror Lake 8.9Lion Nathan Kirin 3.7 BJ Services Baker Hughs 5.8Pilgrim's Pride JBS 2.9 PTT Refining PTT Chemical 4.5Busch InBev CVC 2.9 Co. Esp. de Petroleos Int'l Petroleum 4.5Sara Lee Assets Unilever 1.9 Harvest En. Trust Korea National 3.6

Financials Healthcare Equipment & Services

Target Acquiror Amount Target Acquiror AmountBarclays Global BlackRock $13.3 IMS Health CPP, TPG $5.4AXA AMP 13.2 Sinopharm Mitsubishi, MedlPal 4.1Nikko Cordial Sumitomo Mitsui 7.8 AMO Abbot Labs 2.7Friends Provident Resolution Limited 5.0 HLTH Corp. WebMD 1.9Aioi Insurance Mitsui Sumitomo 3.8 Varian Agilent Tech 1.6Nipponkoa Sompo Japan 3.7 CoreValve Medtronic 0.9

Pharmaceuticals Industrials

Target Acquiror Amount Target Acquiror AmountWyeth Pfizer $78.6 Burlington Northern Santa Fe Berkshire Hathaway $36.9Schering-Plough Merck 50.7 Shanghai Airlines China Eastern 3.1Solvay Abbott Labs 7.7 Tianjin Port Co. Grand Point 2.8Merial Sanofi-Aventis 4.0 Gatwick Airport Global Infra. Partners 2.5Stiefel Labs GlaxoSmithKline 3.6 Camillo Eitzen PT Berlian Laju 1.8Sepracor DainIppon Sumitomo 2.8 Cegelec Vinci 1.7

Information Technology Materials

Target Acquiror Amount Target Acquiror AmountAffiliated Computer Xerox $8.8 Aracruz Celulose Votorantim Celulose $5.5Sun Microsystems Oracle 8.3 CF Industries Agrium 4.6Metavante Fidelity 4.9 Terra Industries CF Industries 4.5Perot Systems Dell 4.1 Nufarm Sinochem 3.4Data Domain EMC 2.6 Reynolds Packaging Beverage Packaging 3.0Skype Silver Lake, et al. 2.0 Asarco Sterlite 2.8

Telecommunications Utilities

Target Acquiror Amount Target Acquiror AmountKSC Mobile Vavasi $12.3 Essent RWE $12.3Global Village Telecom Vivendi 4.6 Endesa Enel 12.1Comstar OJSC Mobile 2.6 Union Fenosa Gas Natural SDG 10.5Partner Communications Scallex 1.9 Nuoh Energy Vattenfall 6.1Bezeq Israel 012 Smile 1.8 Italgas SNAM Rete Gas 5.3Brasil Telecom Participacoes Telemar Norte Leste 1.5 British Energy Centrica 3.5

2009

Sources: Capital IQ. Data as of 12/1/2009.

The following table tells the story of big ticket Strategic M&A in the immediate aftermath of the Crisis.

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Not only was high end strategic M&A still strong in the immediate aftermath of the 2008 Financial Crisis, but in aggregate scale it was broadly comparable to current high end strategic M&A. The mix was different – in 2009 large ticket mergers tended to cluster more in Energy and Financial Services, whereas in 2013 they tend to cluster more in Telecom and Media – but a comparison of Top15 Deals in 2009 and 2013 shows a remarkable similarity in average deal size, breadth, and most importantly the tendency for top deals to be almost entirely strategic.

Gone are the mega buyouts of earlier LBO eras – there are today remarkably few 80’s style KKR / RJR mega deals, though there was a broad spate of these in 2006 – 07 just before the financial crisis including the sponsor led leveraged buyouts of 9 major US corporations larger than $25 billion: Texas utility giant TXU for $45 billion, Equity Office Properties for $37 billion, hospital giant HCA for $34 billion, energy group Kinder Morgan for $30 billion, First Data for $29 billion, Harrah’s Entertainment for $28 billion, telecoms group Alltel for $28 billion, radio and media group Clear Channel for $27 billion, and Hilton Hotels for $25 billion. Of these, it bears noting that TXU and Clear Channel and perhaps others were poor deals for the private equity sponsors.40,41 One might have added to the list a tenth deal for Sallie Mae, which JC Flowers had agreed to buy out but litigated its way out of when the financial crisis hit.

On the other hand, HCA, Hilton and EOP all have been successful, as has Kinder Morgan, and these successes will nourish new deal spirits. Indeed, in the current year we saw the reappearance of two c. $25 billion financial buyouts – Heinz and Dell, though in each case the financial sponsor needed financial partners from outside the PE industry to finance these deals (In Europe’s $10 billion buyout of coffee and tea group Master Blenders, Benckiser brought in a PE firm as a partner). In all events, the large ticket LBO is at present a novelty, but the large ticket strategic deal remains a staple in global business across sectors and had so remained even in the immediate aftermath of the crisis.

Most importantly, commentators that cite the big deals of 2013 – from Dell at $25 billion to Verizon at $130 billion - often miss the forest for the tallest trees. Yes, 2013 had its share of mega mergers. So did 2009, 2010, 2011 and 2012. But these tall trees do not define the forest. First, they are principally strategic, with a dollop of financial deals where heaps were in the mix pre crisis. Second, big deals make headlines but do not by themselves make the market whole. Most of M&A remains middle market, and beneath these big deals remains a shorter supply of the rest. Third, about the best one can say about 2013 is that the top 15 deals add up to about 20% more volume than did the top 15 in 2009 – but this is little comfort to M&A bankers who once plied their trade in a market that approached $4 trillion and presently remains the lower $2 trillion range.

40. “Energy Future Holdings Corp. (EFH) [the parent company of TXU] is likely to announce a material restructuring by the end of the year in a bankruptcy filing that could be one of the 10 largest non-financial corporate bankruptcies in the US since 1980. “ (Moody’s, “Energy Future Holdings Corp. Bankruptcy Likely by End of Year”, September 9, 2013) 41. “Clear Channel’s Caa2 (CFR) reflect the very high leverage levels of 11.4x on a consolidated basis…and its weak free cash flow... We anticipate revenue, EBITDA and leverage will be largely unchanged in 2013 as weakness at International outdoor and its traffic business offset growth in Americas outdoor.” (Moody’s, “Moody’s assigns Ca ratings to Clear Channel Communications New Senior Unsecured Exchange Notes”, May 24, 2013)

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The driver of the Americas remains the US. Canada and Latin America are down; US is up. And the drivers within American business are mixed, though with a strong tilt towards Media, Communications and Technology, with continued strength in Healthcare and Real Estate.42

Energy was a major driver over the past several years, but by 2013 that sector had reached its cyclical crest for now. And as banks have rebuilt their balance sheets the spate of bank mergers has declined significantly, leaving Financial Institutions a much lower contribution to overall M&A activity currently. If the Too Big to Fail voices triumph (or their close cousins, Too Big to Regulate or Too Big to Manage) then we may see a wave of divestitures or spinoffs from large banks. But for the moment, the financial institutions are not driving the current uptick in M&A.

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2013 vs. 2009 Top 15 Worldwide Announced Deals (US$ in billions)

2013

Target Sector Acquiror Amount

Verizon Wireless Telecom Verizon Communications $130.1H. J. Heinz Consumer Berkshire Hathaway, 3G Capital 27.4Virgin Media Media Liberty Global 25.5KPN Telecom America Movil 22.7Omnicom Group Advertising Publicis Groupe 19.3Dell Tech Michael Dell, Silver Lake 19.3NBCUniversal Media Comcast 16.7Life Technologies Health Thermo Fisher Scientific 15.4CDC's SME Financing Business Financial French Government 13.7Kabel Deutschland Telecom Vodafone 13.5Zoetis Health Zoetis 13.2Shoppers Drug Mart Retail Loblaw Companies 13.0Bausch & Lomb Health Valeant Pharmaceuticals 11.6E-Plus Mobilfunk Telecom Telefonica 11.4NV Energy Energy MidAmerican Energy 10.4

Total: $363.3Median: 15.4

2009


Wyeth Healthcare Pfizer $78.6Schering-Plough Healthcare Merck 50.7Burlington Northern Santa Fe Transport Berkshire Hathaway 36.9Petro-Canada Energy Suncor 19.5Barclays Global Financials BlackRock 13.3AXA Financials AMP 13.2Liberty Media DirecTV 12.7Pepsi Bottling Consumer Pepsico 12.3KSC Mobile Telecom Vavasi 12.3Essent Utilities RWE 12.3Endesa Utilities Enel 12.1Union Fenosa Utilities Gas Natural 10.5Addax Energy Mirror Lake 8.9Affiliated Computer Tech Xerox 8.8Sun Microsystems Tech Oracle 8.3


Sources: 2009: Capital IQ. Data as of 12/1/2009. 2013: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013.

The driver of the Americas remains the US. Canada and Latin America are down; US is up. And the drivers within American business are mixed, though with a strong tilt towards Media, Communications and Technology, with continued strength in Healthcare and Real Estate.43 Energy was a major driver over the past several years, but by 2013 that sector had reached its cyclical crest for now. And as banks have rebuilt their balance sheets the spate of bank mergers has declined significantly, leaving Financial Institutions a much lower contribution to overall M&A activity 43 “I expect telecoms, media and technology to continue to be one of the busiest sectors this year. Many of its most mature companies are growth challenged for the first time and need to find ways to expand into new markets or technology” – Gregg Lemkau, Co-Head of Global M&A at Goldman Sachs (Financial Times, “M&A activity shows signs of revival”, March 12, 2013)

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2013 vs. 2009 Top 15 Worldwide Announced Deals (US$ in billions)

2013


Verizon Wireless Telecom Verizon Communications $130.1H. J. Heinz Consumer Berkshire Hathaway, 3G Capital 27.4Virgin Media Media Liberty Global 25.5KPN Telecom America Movil 22.7Omnicom Group Advertising Publicis Groupe 19.3Dell Tech Michael Dell, Silver Lake 19.3NBCUniversal Media Comcast 16.7Life Technologies Health Thermo Fisher Scientific 15.4CDC's SME Financing Business Financial French Government 13.7Kabel Deutschland Telecom Vodafone 13.5Zoetis Health Zoetis 13.2Shoppers Drug Mart Retail Loblaw Companies 13.0Bausch & Lomb Health Valeant Pharmaceuticals 11.6E-Plus Mobilfunk Telecom Telefonica 11.4NV Energy Energy MidAmerican Energy 10.4


2009


Wyeth Healthcare Pfizer $78.6Schering-Plough Healthcare Merck 50.7Burlington Northern Santa Fe Transport Berkshire Hathaway 36.9Petro-Canada Energy Suncor 19.5Barclays Global Financials BlackRock 13.3AXA Financials AMP 13.2Liberty Media DirecTV 12.7Pepsi Bottling Consumer Pepsico 12.3KSC Mobile Telecom Vavasi 12.3Essent Utilities RWE 12.3Endesa Utilities Enel 12.1Union Fenosa Utilities Gas Natural 10.5Addax Energy Mirror Lake 8.9Affiliated Computer Tech Xerox 8.8Sun Microsystems Tech Oracle 8.3


Sources: 2009: Capital IQ. Data as of 12/1/2009. 2013: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013.

The driver of the Americas remains the US. Canada and Latin America are down; US is up. And the drivers within American business are mixed, though with a strong tilt towards Media, Communications and Technology, with continued strength in Healthcare and Real Estate.43 Energy was a major driver over the past several years, but by 2013 that sector had reached its cyclical crest for now. And as banks have rebuilt their balance sheets the spate of bank mergers has declined significantly, leaving Financial Institutions a much lower contribution to overall M&A activity 43 “I expect telecoms, media and technology to continue to be one of the busiest sectors this year. Many of its most mature companies are growth challenged for the first time and need to find ways to expand into new markets or technology” – Gregg Lemkau, Co-Head of Global M&A at Goldman Sachs (Financial Times, “M&A activity shows signs of revival”, March 12, 2013)

42. “I expect telecoms, media and technology to continue to be one of the busiest sectors this year. Many of its most mature companies are growth challenged for the first time and need to find ways to expand into new markets or technology” – Gregg Lemkau, Co-Head of Global M&A at Goldman Sachs (Financial Times, “M&A activity shows signs of revival”, March 12, 2013)

22


As noted, other markets (Europe, Canada, Latin America, Japan) have largely dipped while the US has advanced. As a result, cross border M&A is down. According to Thomson Reuters, cross border is down 20% to just over $500 billion, and all of Emerging Market M&A is up only marginally to $465 billion (and there is some double counting in these data points) leaving for the moment a more domestic M&A market than we have seen in some time.43,44 It is possible that just as the Financial Crisis was made in America, so may be the recovery of the global M&A market, once again underscoring Giscard d’Estaing’s complaint about America’s “exorbitant privilege” in global finance.

If we do see a real resurgence in deal activity, whether on the current slow timetable or an accelerated one, the results could be material, since equities are above pre-crisis levels but M&A is still more than a trillion dollars behind those levels.45 Indeed, in the world’s largest economy, M&A volume as a percent of U.S. aggregate equity market capitalization is now at its lowest level in a decade, since the tech bubble collapse and the bleak financial markets following 9/11.

EMEAIn the spirit of “flash sales” as false starts, European M&A is down this year notwithstanding that it grew in 2012 and most of its major equities markets increased meaningfully in 2013. One is left attributing this to the deep and persistent economic challenges that undercut M&A activity generally and are the essential theme of this paper specifically.

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currently. If the Too Big to Fail voices triumph (or their close cousins, Too Big to Regulate or Too Big to Manage) then we may see a wave of divestitures or spinoffs from large banks. But for the moment, the financial institutions are not driving the current uptick in M&A.

As noted, other markets (Europe, Canada, Latin America, Japan) have largely dipped while the US has advanced. As a result, cross border M&A is down. According to Thomson Reuters, cross border is down 20% to just over $500 billion, and all of Emerging Market M&A is up only marginally to $465 billion (and there is some double counting in these data points) leaving for the moment a more domestic M&A market than we have seen in some time.44,45 It is possible that just as the Financial Crisis was made in America, so may be the recovery of the global M&A market, once again underscoring Giscard d’Estaing’s complaint about America’s “exorbitant privilege” in global finance.

If we do see a real resurgence in deal activity, whether on the current slow timetable or an accelerated one, the results could be material, since equities are above pre-crisis levels but M&A is still more than a trillion dollars behind those levels.46 Indeed, in the world’s largest economy, M&A volume as a percent of U.S. aggregate equity market capitalization is now at its lowest level in a decade, since the tech bubble collapse and the bleak financial markets following 9/11.

U.S. M&A Activity as a Percentage of Market Capitalization

Source: Bloomberg M&A data compared against total combined market capitalization of all publicly traded US companies. Market data as of October 23, 2013.

EMEA

44 Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 1. 45 “Another theme is North American and Western Europe businesses streamlining their holdings in Latin America as they seek to refocus on core operations in their home markets and improve their balance sheets.” – Intralinks Deal Flow Indicator Q2 2013 46 Source: Bloomberg M&A data. Market data as of October 23, 2013.

A strong Q4 can bring M&A back towards 5% level

43. Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 1. 44. “Another theme is North American and Western Europe businesses streamlining their holdings in Latin America as they seek to refocus on core operations in their home markets and improve their balance sheets.” – Intralinks Deal Flow Indicator Q2 2013 45. Source: Bloomberg M&A data. Market data as of October 23, 2013.

23


The year began with some sense of enthusiasm as the M&A following a precipitous drop off in 2009 had grown in 2010 and at least plateaued for much of 2011 – 12 and then grew again strongly in the fourth quarter of 2012. Thus, by early 2013, the facile argument was advanced, like this one from Citibank that “the ongoing rally in the equity market is likely to feed into corporate confidence and M&A activity should follow, if history is a good guide.” History proved once again not to be a good guide as 2013 witnessed a return to M&A remaining decoupled from equities. Indeed, even the strong cash flowing companies apparently mentioned as targets in this report, such as Easy Jet, WH Smith and Trinity Mirror, remain independent.46

In this game of “Guess When De-Coupling Ends,” one must read facile arguments skeptically. And this even in a year in which the $75 billion Glencore / Xtrata plc merger finally closed – amidst shareholder lawsuits crying foul over executive payouts exceeding $200 million. It is one thing to close the occasional big strategic deal – and Glencore Xtrata is surely that, with its global merger clearly designed to create mining, trading and pricing muscle against titans – but it is quite another to predict when the bigger general market merger business will revive. Sure, there are selected examples of those too, like British bootmaker Dr Martens, with its punk rock lace up boots, selling to European private equity leader Permira, which plans to expand through store openings and new product introductions in European, US and Chinese markets. On the other hand, this was the second time the footwear group sought a buyer, and it hardly spells deals for the broader swath of European consumer companies or companies generally as the spike in Q4 2012 quickly turned south for the first half of 2013, until rebuilt by Verizon Vodafone in Q3:

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EMEA M&A Quarterly Volume48


The mere presence of a handful of other headline grabber deals does not establish that the great game of M&A Catching up to Equities is upon us. First, as noted, most of these are big strategic deals whose global rationale defies passing capital flows trends in ways that more terrestrial mid-market M&A does not tend to do. Thus, one notes but ought not wildly generalize from Vodafone’s sale of its wireless interest to Verizon, the $20 billion Publicis / Omnicom merger which checks Dentsu / Aegis plc of the prior year and attempts to deal with WPP head on, the Actavis buyout of Irish based pharma player Warner Chilcott, or the $7 billion sale of ailing Nokia device and other businesses to Microsoft (few blamed Nokia, though some wondered about Microsoft). One can hardly generalize from those to a buyout of Burberry’s (a name the afore referenced CNBC article flagged) simply because it is a much discussed good brand with good cash flows in a good UK format. In the end, the news for much discussed Burberry’s was (a) excellent results, (b) bought in its own China operations, and (c) lost its CEO to head Apple’s online division. But alas, no merger for the iconic British apparel player.

Indeed, if one focuses on the UK market alone, M&A in the first 9 months of 2013 declined to less than $100 billion from almost $150 billion in the prior period 2012.49 On the flip side, German involved M&A even excluding Verizon was up in Q3, helped by Vodafon’e also using cash to buy out German triple play cable provider Kabel Deutschland for $13.7 billion. Meanwhile, in a deal that demonstrates the difficulty buyers and sellers have in pricing companies in uncertain times, Carlos

48 Q3 2013 numbers as of September 2013 49 Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 8.

47

46. “Why a Wave of European Deals Could be Next”, CNBC.com, 18 Feb. 2013 at hhtp://www.cnbc.com/100467555 47. Q3 2013 numbers as of September 2013.48. Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 8.

24


The mere presence of a handful of other headline grabber deals does not establish that the great game of M&A Catching up to Equities is upon us. First, as noted, most of these are big strategic deals whose global rationale defies passing capital flows trends in ways that more terrestrial mid-market M&A does not tend to do. Thus, one notes but ought not wildly generalize from Vodafone’s sale of its wireless interest to Verizon, the $20 billion Publicis / Omnicom merger which checks Dentsu / Aegis plc of the prior year and attempts to deal with WPP head on, the Actavis buyout of Irish based pharma player Warner Chilcott, or the $7 billion sale of ailing Nokia device and other businesses to Microsoft (few blamed Nokia, though some wondered about Microsoft). One can hardly generalize from those to a buyout of Burberry’s (a name the afore referenced CNBC article flagged) simply because it is a much discussed good brand with good cash flows in a good UK format. In the end, the news for much discussed Burberry’s was (a) excellent results, (b) bought in its own China operations, and (c) lost its CEO to head Apple’s online division. But alas, no merger for the iconic British apparel player.

Indeed, if one focuses on the UK market alone, M&A in the first 9 months of 2013 declined to less than $100 billion from almost $150 billion in the prior period 2012.48 On the flip side, German involved M&A even excluding Verizon was up in Q3, helped by Vodafon’e also using cash to buy out German triple play cable provider Kabel Deutschland for $13.7 billion. Meanwhile, in a deal that demonstrates the difficulty buyers and sellers have in pricing companies in uncertain times, Carlos Slim’s American Movil remains a suitor but not yet a successful buyer of KPN, a company relying on its poison pill to hold at bay its 30% Mexican shareholder.

The real problem for Europe is that its stock market advances reflect the global hunt for yield in a low rate environment that reflects low growth and high uncertainty. If the US de-leveraging program is largely complete on the private side, the program has far longer to go in Europe, where banks remain over levered and fundamental growth rates remain anemic, with Europe as a whole contracting this year and even its strong man Germany growing at less than 1%.

Germany’s continued growth, like its continued trade surplus, is of course the other side of the periphery’s woes, as these countries have been forced into austerity programs to contend with low capital supplies, high unemployment and deep structural reforms. In this context, to buy a middle market company (as opposed to merging with a global powerhouse) at a premium M&A value would require intestinal fortitude or a very accommodating seller or both. This is not happening in volume. Yes, financial capital has flowed into liquid stocks, but this has not been matched by acquisition capital buying out companies in volumes anywhere near pre-crisis levels.

To be sure, European M&A will at some point resume – perhaps even by surge – levels more commensurate with equities. Every analyst of the situation predicts it. But every one of these predictions has to date been premature. The surge simply has not yet happened. The missing ingredient is confidence or at least relatively coherent views about the future.

48. Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 8.

25


Last year the third quarter weakened further to $175 billion but included corporate and industrial consolidation (e.g. Volkswagen / Porsche, Heineken NV / Asia Pacific Breweries Ltd., Linde / Lincare Holdings) and signs of life in private equity courtesy of two ambitious new Carlyle deals (DuPont’s Performance Coatings and United Technology’s pump manufacturer). In addition, in an obvious move to grab share in global advertising and media and marketing services, Dentsu spent $4.5 billion to purchase British global marketing group Aegis a deal that seems to have presaged the much larger 2013 cross border advertising merger, Omnicom / Publicis. None of these 2012 deals reached the $10 billion mark, a level that had achieved some frequency pre and even post the 2008 financial crisis, so even with these headlines European M&A remained at best mixed to weak, though there was some European mirroring of American increased activity in Q4 of 2012 and there is some momentum in Q3 2013 including Vodafone.

The question is when European growth will resume for real and when will its weakest markets including Spain and Italy recover for real. These are slow processes. If one takes a more medium term view, there is ample reason to see resurgence in European strategic M&A, as companies in core major sectors like Aerospace and Defense, Food and Beverages, Basic Industry, Media and Pharma among others.49 Indeed, one would have to say that when Europe wakes up, the impact on global M&A activity is likely to be quite meaningful.50 But the results to date remain weak, with aggregate volumes at some 5% of aggregate market capitalization, down from almost twice that level pre-crisis.

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Slim’s American Movil remains a suitor but not yet a successful buyer of KPN, a company relying on its poison pill to hold at bay its 30% Mexican shareholder.

The real problem for Europe is that its stock market advances reflect the global hunt for yield in a low rate environment that reflects low growth and high uncertainty. If the US de-leveraging program is largely complete on the private side, the program has far longer to go in Europe, where banks remain over levered and fundamental growth rates remain anemic, with Europe as a whole contracting this year and even its strong man Germany growing at less than 1%.

Germany’s continued growth, like its continued trade surplus, is of course the other side of the periphery’s woes, as these countries have been forced into austerity programs to contend with low capital supplies, high unemployment and deep structural reforms. In this context, to buy a middle market company (as opposed to merging with a global powerhouse) at a premium M&A value would require intestinal fortitude or a very accommodating seller or both. This is not happening in volume. Yes, financial capital has flowed into liquid stocks, but this has not been matched by acquisition capital buying out companies in volumes anywhere near pre-crisis levels.

European M&A Activity as a Percentage of Market Capitalization

Source: Bloomberg M&A data compared against on total combined market capitalization of all publicly traded European companies. Market data as of October 18, 2013.

To be sure, European M&A will at some point resume – perhaps even by surge -- levels more commensurate with equities. Every analyst of the situation predicts it. But every one of these

49. Source: F. Thevenaeau, A. Kayaman, S. Surtoes, M&A: We Have Lift-Off!, Societe Generale Research, 19 September 2013, page 6. 50. “The ongoing rally in the equity market is likely to feed into corporate confidence and M&A activity should follow, if history is a good guide.” – CNBC.com, “Why a Wave of European Deals Could Be Next”, October 23, 2013.

26


Asia-Pacific

Asia Pacific’s (APAC) M&A volume has remained stable over the past year, holding relatively firm at approximately $150 billion per quarter per Bloomberg data.

APAC, representing approximately19% of global M&A volume, is driven first by China ($113 billion in first nine months of 2013) and second by Japan ($50 billion in the first nine months of 2013).52 In the recovering global M&A market, M&A in APAC has continued to surpass M&A in Europe in the total number (though not value) of announced transactions. Asian investors are also warming up as shareholders believe M&A can deliver yield in the current low interest rate environment.53

Within China, there has been a significant shift in demand for M&A from state-owned-enterprises securing natural resources to private companies seeking opportunities for growth. Chinese pork producer Shuanghui International’s $7.1billion acquisition of U.S. food producer Smithfield Foods not only highlights desire for international expansion, but strong support from Chinese and international banks through the $4 billion in financing.54 The same must be said for CITIC, which is now launching a private equity fund, in response to a growing presence of Western PE funds in China. These are signs of structural change. And in other headline China deals, two Chinese electrical equipment companies, Beijng Xinwei and Beijing Zhongchunc, merged for $3 billion, as did two industrial distributors, as did two consumer companies, GD Midea and Midea Group.

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Asia-Pacific Asia Pacific’s (APAC) M&A volume has remained stable over the past year, holding relatively firm at approximately $150 billion per quarter per Bloomberg data.

APAC M&A Quarterly Volume52


APAC, representing approximately 19% of global M&A volume, is driven first by China ($113 billion in first nine months of 2013) and second by Japan ($50 billion in the first nine months of 2013).53 In the recovering global M&A market, M&A in APAC has continued to surpass M&A in Europe in the total number (though not value) of announced transactions. Asian investors are also warming up as shareholders believe M&A can deliver yield in the current low interest rate environment.54

Within China, there has been a significant shift in demand for M&A from state-owned-enterprises securing natural resources to private companies seeking opportunities for growth. Chinese pork producer Shuanghui International’s $7.1 billion acquisition of U.S. food producer Smithfield Foods not only highlights desire for international expansion, but strong support from Chinese and international banks through the $4 billion in financing.55 The same must be said for CITIC, which is now launching a private equity fund, in response to a growing presence of Western PE funds in China. These are signs of structural change. And in other headline China deals, two Chinese

52 Q3 2013 numbers as of September 2013 53 Source: Bloomberg Global Financial Advisory Mergers & Acquisitions Rankings Q3 2013 54 Source: Asian M&A Activity Lags, but Outlook Is Brighter, Wall Street Journal April 3, 2013 55 Source: Shuanghui's $4 billion loan raises $5 billion so far, Reuters July 7, 2013

51

51. Q3 2013 numbers as of September 2013 52. Source: Bloomberg Global Financial Advisory Mergers & Acquisitions Rankings Q3 2013 53. Source: Asian M&A Activity Lags, but Outlook Is Brighter, Wall Street Journal April 3, 2013 54. Source: Shuanghui’s $4 billion loan raises $5 billion so far, Reuters July 7, 2013

27


China is its own case. As this article goes to press, China is about to release details on structural reform in response to increased domestic leverage levels, declining growth rates, and nervousness about the effects of the lingering recession in Europe and slow recovery in the US. These structural reforms, like all structural reforms, will have winners and losers, and the uncertainties attendant to this particular nexus of politics and business has a dampening effect on domestic Chinese M&A. In time the situation will clarify. Meanwhile, much of what happens in private capital in China is really growth capital such as Temasek and Goldman investing in ebook player Cloudary or the taking of partial interests in companies like KKR buying a 10% stake in the China appliance maker Qingdao Haier Co.

One deal that did not happen, but had been announced at the end of 2012, was the China Trust Consortium, a group of financial investors including Barclays that would have purchased International Lease finance Corporation, the world’s second largest aircraft finance company, owned by AIG. The bid was apparently full for the almost 1,000 planes, with asset values (levered) approaching some $30 billion, but in the end the consortium seemed unable to complete, leaving AIG with some retained deposits and a question as to what to do next with its non-core aircraft finance unit. By contrast, when Japanese bank Sumitomo Mitsui agreed to purchase about $7 billion in financed aircraft from ailing Royal Bank of Scotland a year ago, it closed.

In Japan, for very different reasons, deal activity seems again to reflect geopolitical developments. The long recession – really two lost decades – seems to have some real hope of change now, particularly with the rise of the populist reformer Abe. The equity market, with the Nikkei up some 35% this year to date, is a shockingly robust supposed leading indicator of economic growth ahead.55 And to be sure, the tone of the market feels improved, with deal makers citing a 30% rise in Q3 deals by number (albeit many of these are smaller deals. Some of these are survival deals designed to augment competitiveness against cheaper manufacturers in other Asian countries. Some are non-core divestitures designed to improve managerial focus.

On the headline side, chip maker Applied Materials bought Tokyo electron for almost $10 billion, combining the number 1 and number 3 players assuming antitrust approval. And this is the second largest foreign purchase of a Japanese company after Citigroup’s acquisition of Nikko Cordial for $8 billion in 2007.56 We are a long way from 1990 when Japan was essentially always a buyer and almost never a seller.

Also on the headline side of Japanese M&A, Japanese building products group LIXIL, with Development Bank of Japan as a financial partner, announced the $4.1 billion acquisition of German bathroom fittings company Grohe, Suntory purchased the Lucozade and Ribena businesses from Glaxo Smith Kline for over $2 billion, and KKR agreed to purchase the Panasonic Healthcare division for close to $1.7 billion. Bank of Tokyo Mitsubishi bid almost $5 billion for Thai Bank of Ayydhyu. Sumitomo Mitsui paid about $1.5 billion for a 40% stake in Indonesia’s PT Bank. Still, for the moment, all this is good tonality but the absolute numbers for Japanese M&A in dollar volume are hardly robust.

55. Source: Bloomberg. Stock market data is based off of Nikkei Index. Market data as of October 14, 2013. 56. “Applied Materials, Tokyo electron deal would create titan”, Reuters, September 24, 2013.

28


Finally, one has to note explicitly what has been discussed above, that today’s Asia Pacific is not one block, as M&A data often pretend, but several very different stories, being China, Japan, India, Australia and emerging Asia. In Thailand, convenience store leader CP All bid $6.6 billion (debt financed) for wholesaler Siam Makro, owned by Dutch conglomerate SHV Holdings. This offer came just two months after CP completed a $9.4 billion stake in China insurance leader Ping An.57

57. Source: “Thai Tycoon Adds to Record Debt Pile with $6.6 billion Siam Makro Offer”, Reuters, April 23, 2013 58. Source: Bloomberg. Charts represent market capitalization of all companies in each geography indexed at 100. Market data as of October 23, 2013.Page | 32

A Tale of Differing Markets59

59 Source: Bloomberg. Charts represent market capitalization of all companies in each geography indexed at 100. Market data as of October 23, 2013.

China

6080

100120140160180200220

India

406080

100120140160180200

Japan

405060708090

100

Australia

40

60

80

100

120

140

Korea

30

50

70

90

110

130

APAC

5060708090

100110120130

Weaker 2013, but re-approaching pre-crisis levels

Strong rebound following Abe reforms

Slowing growth and corruption leaves markets well off pre-crisis levels

Economy suffered less, buffered by sound banks and strong natural resources; markets close to pre-

crisis levels

Strength especially given strong top global conglomerates; markets

essentially at pre-crisis levels

A region back to pre-crisis levels in equities but not in M&A

58

29


But emerging Asia, like other regions, has its big ticket headlines and its facts in the ground. In this time of geopolitical unease, with volatile equity and currency markets, and the potential for further credit problems in emerging markets, the complexities may spell opportunity for some, but they do not spell clarity and coherence of the type that moves large volumes of companies in middle M&A markets. This remains a corporate selector’s market, not a go go market for mergers.

AustraliaAustralia’s M&A continues to remain slow as volume reached $41 billion over the first 9 months of 2013.59 One sector to highlight recovery from though is the industrials sector, where M&A activity reached $7.7 billion over the first half of 213, a 95.6% increase from the first half of 2012. The New South Wales Port Consortium’s $4.5 billion acquisition of a 99-year lease of Port Botany highlights the robust demand for industrials.60

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Australia

Australia’s M&A continues to remain slow as volume reached $41 billion over the first 9 months of 201360. One sector to highlight recovery from though is the industrials sector, where M&A activity reached $7.7 billion over the first half of 213, a 95.6% increase from the first half of 2012. The New South Wales Port Consortium’s $4.5 billion acquisition of a 99-year lease of Port Botany highlights the robust demand for industrials.61

Australian M&A Activity as a Percentage of Market Capitalization

Source: Bloomberg M&A data compared against total combined market capitalization of all publicly traded Australian companies. Market data as of October 18, 2013.

60 Source: Bloomberg Global Financial Advisory Mergers & Acquisitions Rankings Q3 2013 61 Source: Australia M&A Review for First Half 2013, Thomson Reuters, June 24, 2013

59. Source: Bloomberg Global Financial Advisory Mergers & Acquisitions Rankings Q3 2013 60. Source: Australia M&A Review for First Half 2013, Thomson Reuters, June 24, 2013

30


Explaining the Long SlogThe long slog back for M&A occurs in the long shadow of the Great Financial Crisis of 2008 with its U shaped recovery, its shattered assumptions about growth and markets, its various shocks and their ripples across global economic activity. In this, the long slog back is also about how M&A is essentially different from other financial markets post the Great Crisis of 2008. M&A is the last of the major financial markets globally to recover. Equities have had a remarkable run as have debt and new funds flows into alternatives and derivatives. The fact that M&A is normally correlated with other financial markets, particularly equities, and in the first half decade post crisis has remained stubbornly non correlated is simply testament to the ways in which life post the 2008 Crisis simply is not normal.

Normally, cheap capital drives investment including M&A because cheap capital is a luxury to acquirers. In the current environment, however, cheap capital is really a symptom of weak demand and weak growth post Crisis. This is a problem squarely facing the developed markets, particularly Europe and to a lesser extent the US, China as the major exporter and creditor of the US, Japan as an industrial leader trying to rouse itself after a 20 year recession, and the emerging markets, where slowing growth in 2013 spells danger in numerous quarters. So whether you are “DM” or “EM” you are looking at some form or another of declining or at best uncertain growth. A review of the IMF’s Q3 Growth Outlook, with its across the board reductions, tells this story:

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Declining Growth Outlooks (% change)

Difference fromJuly 2013 WEO

Projections Projections2011 2012 2013 2014 2013 2014

World Output 3.9 3.2 2.9 3.6 (0.3) (0.2)Advanced Economies 1.7 1.5 1.2 2.0 -- --United States 1.8 2.8 1.6 2.6 (0.1) (0.2)Euro Area 1.5 (0.6) (0.4) 1.0 0.1 --

Germany 3.4 0.9 0.5 1.4 0.2 0.1France 2.0 -- 0.2 1.0 0.3 0.1Italy 0.4 (2.4) (1.8) 0.7 -- --Spain 0.1 (1.6) (1.3) 0.2 0.3 0.1

Japan (0.6) 2.0 2.0 1.2 (0.1) 0.1United Kingdom 1.1 0.2 1.4 1.9 0.5 0.4Canada 2.5 1.7 1.6 2.2 (0.1) (0.1)Other Advanced Economies 3.2 1.9 2.3 3.1 -- (0.2)

Emerging and Developing Economies 6.2 4.9 4.5 5.1 (0.5) (0.4)Central and Eastern Europe 5.4 1.4 2.3 2.7 0.2 (0.1)Commonwealthy of Independent States 4.8 3.4 2.1 3.4 (0.7) (0.3)

Russia 4.3 3.4 1.5 3.0 (1.0) (0.3)Excluding Russia 6.1 3.3 3.6 4.2 0.1 (0.1)

Developing Asia 7.8 6.4 6.3 6.5 (0.6) (0.5)China 9.3 7.7 7.6 7.3 (0.2) (0.4)India 6.3 3.2 3.8 5.1 (1.8) (1.1)ASEAN-51 4.5 6.2 5.0 5.4 (0.6) (0.3)

Latin American and the Caribbean 4.6 2.9 2.7 3.1 (0.3) (0.3)Brazil 2.7 0.9 2.5 2.5 -- (0.7)Mexico 4.0 3.6 1.2 3.0 (1.7) (0.2)

Middle East, North Africa, Afghanistan, and Pakistan 3.9 4.6 2.3 3.6 (0.7) (0.1)Sub-Saharan Africa 5.5 4.9 5.0 6.0 (0.2) 0.1

South Africa 3.5 2.5 2.0 2.9 -- --

Source: IMF, World Economic Outlook, October 2013. (1) Indonesia, Malaysia, Philippines, Thailand, and Vietnam.

M&A is Different

M&A is different from other capital markets because of the nature of the commitment to an enterprise. Public equities are liquid and thus investors take comfort in crowds, presumably assuming that (a) markets are efficient and thus probably sound and (b) in the event of panic one can head for the exit before the rest. These faulty assumptions of markets have been debunked by the Crisis and the skeptical refrain of Behavior Economics post crisis, but they persist, probably because they reflect some hard wiring in human beings, who oddly are at once pack animals following crowds and simultaneously given to narcissistic beliefs that we can outsmart the herd and beat the hastiest retreat to the exit. In all events, in public markets, the search for yield in this low yielding environment has sponsored one hell of a bull market recovery, but not for M&A, not yet. This will change, but the change requires a consensus about recovery that, when reached, will cause an unleashing of pro M&A animal spirits. This will happen. But conditions not yet achieved are required for this unleashing to occur for real not only in rarified circles of big ticket strategic deals

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M&A is DifferentM&A is different from other capital markets because of the nature of the commitment to an enterprise. Public equities are liquid and thus investors take comfort in crowds, presumably assuming that (a) markets are efficient and thus probably sound and (b) in the event of panic one can head for the exit before the rest. These faulty assumptions of markets have been debunked by the Crisis and the skeptical refrain of Behavior Economics post crisis, but they persist, probably because they reflect some hard wiring in human beings, who oddly are at once pack animals following crowds and simultaneously given to narcissistic beliefs that we can outsmart the herd and beat the hastiest retreat to the exit. In all events, in public markets, the search for yield in this low yielding environment has sponsored one hell of a bull market recovery, but not for M&A, not yet.

This will change, but the change requires a consensus about recovery that, when reached, will cause an unleashing of pro M&A animal spirits. This will happen. But conditions not yet achieved are required for this unleashing to occur for real not only in rarified circles of big ticket strategic deals and occasional special situation plum buyouts, but in the broad middle market of corporate and financial mergers spawned by a herd of willing buyers and willing sellers acting in a business culture in which buyers and sellers largely agree on fundamentals. That will drive the next trillion dollars or more of M&A activity above the current trend line in the low $2 trillion range globally. And those Clarifying Conditions are likely to unleash both pent up corporate and consumer savings.

Waiting for Clarifying ConditionsWhat are those Clarifying Conditions? No one can state these with precision, and markets have a way of suddenly shifting in favor of newly conceptualized public understandings, sometimes in ways that turn out to have been right even though they were not at the time self-evident. At a guess, some combination of the following Clarifying Conditions will make the big difference in broad M&A markets:

• In the US, clarity could include consensus around growth that is closer to 3%, increased corporate investment, a reduction in unemployment levels (which are likely understated in the current metric) and a corresponding increase in wage levels to sponsor stronger spending in consumer markets. Further, whenever Quantitative Easing may taper, it will help to see the extent to which the stock market can withstand that tapering. One also seeks a return to a level of public functionality that does not leave the government hamstrung, hijacked or closed for periods of time. We do not yet have those conditions.

• In Europe, clarity might include a reduction in unemployment, a completion of the financial and public sector de-leveraging process and a corresponding rebuilding of adequate capital in banks. There may also be a clarification of the dysfunctional conflict between Germany and periphery and the sword of Damacles held above by the mere utterance of the phrase “Future of the Euro.”

• In China, Clarifying Conditions relate to economic and legal reforms, improved per capita income, and greater transparency about economic and financial data, particularly internal indebtedness, which continue to bedevil the outside observer’s confidence.

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• Clarity in Japan would likely result from all the things that the Abe economic revolution promise – stimulus, structural reform, tax incentives to invest, increased global competitiveness in place of protectionism and cronyism inside a democratic system that otherwise could be brilliant.

• In Latin America, clarity would arise from a cleaning of house of excesses that threaten a repeat of Boom Bust Latin America that financial elites naively thought the continent had outgrown.

• In geopolitical terms, clarity and conviction will be enhanced to the extent that (a) we have fewer potential shoes to drop in the Middle East and (b) the US can improve the chill in diplomatic relations with Russia, China and more recently other countries that have expressed new political wariness about the world’s largest economy.

• In equity markets, while it is good that we have seen more funds flow into equity than bond funds, what would be more impressive is if equity trading volumes were more robust. The thin volume phenomenon adds a layer of skepticism to the otherwise bull market.

• In corporate finance markets, one would take positive signaling from a real increase in capital expenditures as opposed to business as usual stock buyback programs or continued stockpiling of cash.

• In the economic base, one would like to see increased per capita income in the emerging markets and increased employment and consumer discretionary spending in the developed markets. Without this enhanced base, recovery remains a favorite topic of plutocrats who sometimes forget that there can never be adequate growth off a absent or adequate base.

When one paints the list thusly, is it really any wonder that M&A, which is the ultimate financial play on confidence and conviction about the future, is not fully back? In other financial markets, money searches for yield with some fluidity, filtering here and there across markets like water across rocks. But M&A is not like water. In M&A a buyer and seller must agree on a one time premium, and thereafter the acquirer owns and is responsible for the enterprise for better or for worse. Capital markets are akin spending money in small amount in many stores in a mall; M&A is akin to buying a wedding ring.

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A Peek into 2014Despite the current state of the M&A market, there remain persistent potential signs of growth in numerous M&A markets and sectors. The global M&A trend is net up, even if cautiously and even if with a standard saw tooth upward slope. At an educated guess, we expect to see some moderate increases in the following areas:

• Continued deal activity in Media, Telecom and Technology as potent public companies with outstanding market caps continue buying companies that continue consolidating in anticipation of the same;

• Resumed activity in financial services as too big to manage (or regulate) banks in the US are pressured to downsize and under capitalized banks in Europe merge;

• Continued and increasing Healthcare deals as US companies continue to wrest out excess cost and deal more meaningfully and accountably with consumer facing requirements, which are the twin goals of US reform, whatever one thinks of the Affordable Care Act;

• Increased investment in Real Estate and Hotel and Lodging in expectation of improved economic activity;

• Increased deployment of private equity capital in growth initiatives in emerging markets and resumed buyout activity in developed markets, particularly as refinancing burdens in existing portfolio companies settle out;

• Increased cross border activity, which took a significant step backward in 2013, declining some 20% for the first 9 months;

• Continued disaggregation, inspired by management teams or in some cases shareholder activists, inspiring spinoffs and divestitures;

• Some renewed hostile takeover activity as had begun cautiously in 2011 – 12 and then reduced in 2013;

• Increased corporate capital expenditures and consumer spending, both of which would reflect increased conviction about the future.

We do not expect any of these trends to change dramatically on a dime (or ten trillion dimes). We expect these to increase in the year ahead, in saw tooth but net upward fashion, as the global merger markets struggle to reclaim $3 trillion as a goal.

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ConclusionMost financial markets, other than M&A, have had a bull run as the world has regrouped in this first half decade post the great crisis of 2008. But the return to normalcy post 2008 was not destined to be a 5 year rehab program. The damage done was simply too great, and financial and geopolitical tides and storms still roar in Europe, the US and emerging markets. In this context, M&A is different. It requires greater clarity and conviction than the business world has today. The world is slowly but surely healing. As it does, M&A will return; however, being the most truthful market about real business fundamentals, M&A has not returned quickly. It takes its time.

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About the AuthorMr. Sonenshine is Chairman of Sonenshine Partners, an international boutique investment advisory firm headquartered in New York and also Professor of Finance and Economics at Columbia University. A frequent global finance commentator on CNBC and Bloomberg Television and author of numerous publications on financial, legal and public affairs, he is a contributor to The New York Times, Financial Times, CNN, Columbia University Business School, Harvard Law Review, Harvard Law and Institutional Investor.

Mr. Sonenshine began his banking career at Salomon Brothers as Partner to Paul Volcker and Jim Wolfensohn in the M&A and Restructuring bank Wolfensohn & Company. Following the merger of Wolfensohn into Bankers Trust, he headed Media and Aerospace /Transportation M & A, and later into Deutsche Bank, serving as Co-Head of M&A.

Mr. Sonenshine has counseled numerous major corporations worldwide including AIG, Alcoa, American Express, Ansett, Bell + Howell, Blue Cross Blue Shield, Carlyle, Comcast, Conrail, Clear Channel Communications, Daimler Benz, Dassault Systèmes, Disney, Dun & Bradstreet, Essilor, GE, ING Group, Invesco, KKR, Lavazza, LensCrafters, Madison Dearborn, Marubeni, New York Times, Nippon Sanso, NTT, 1-800 Contacts, Prisa, Proquest, RH Macy, Ricoh, Sears, Societe Generale, Sony, Simulia, Tata Sons, TNT Limited, Union Pacific, and Viacom.

Mr. Sonenshine holds a BA, magna cum laude, from Brown University where he was elected to Phi Beta Kappa, and a JD from Harvard Law School, where he served as an Editor of the Harvard Law Review. He studied at L’Institut d’Etudes Politiques and The Sorbonne in Paris. He served as Teaching Fellow in International Relations at Harvard University’s Government Department, Instructor in Legal Writing and in the International Tax Program at Harvard Law School. He is amember of the New York bar.

Mr. Sonenshine is Chairman of Rosetta Books and the Harvard Law School Fund, a Trustee of Jazz at Lincoln Center, the International Center of Photography and Mass General’s Center for Law, Brain and Behavior. He is past Vice Chairman of Arts Connection and member of the Brown University Annual Fund Executive Committee, has served on the New York Finance Committee for the Democratic Party and is a lifelong member of the Council on Foreign Relations. He is also an Emmy award winning Executive Producer of The Loving Story, the HBO civil rights film. Mr. Sonenshine, and his wife Dr.Therese Rosenblatt, have three sons and live in New York.

MarshallSonenshineChairmanSonenshire Partners

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PublisherThe M&A AdvisorThe M&A Advisor was founded in 1998 to offer insights and intelligence on mergers and acquisitions through the industry’s leading publication. Over the past fifteen years, we have established the world’s premier leadership organization of M&A, Turnaround and Financing professionals. Today, we have the privilege of presenting, publishing, recognizing the achievements of, and facilitating connections among the industry’s top performers throughout the world with a comprehensive range of services including:

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MARKE OR E MS RL MARET DECEMBER 2013 THE M&A …...Source: Thomson Reuters Mergers & Acquisitions Review, First Nine Months 2013. Page 18. 4. Source: Thomson Reuters Mergers & Acquisitions

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