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2011 M&A Update for Growth Companies
October 20, 2011
MARKET UPDATE
2
Emerging Growth & Middle Market
3
Revenues($millions)
5 150 500 1,000
Source: Middle Market M&A (2012)
Small Companies Middle Market Large
Companies
5.4MM 300,000 2,000P O P U L A T I O N
15% 40% 45%G D P
2‐3x 4‐11x 12x +V A L U A T I O N
A Macro View
4
Public Markets Flat for the Last 10 Years
S&P 500
PEGs Are Flush
5
$490.26
$2.62 $7.73 $17.87
$36.10
$130.05
$155.53
$96.18
$44.19
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$0
$20
$40
$60
$80
$100
$120
$140
$160
2003 2004 2005 2006 2007 2008 2009 2010Vintage Year
Cumulative Overhang Under $100M $100M‐$250M $250M‐$500M$ in Billion
Source: Pitchbook.com $490 + Billion of Dry Powder
PEG Deal Flow
6
$42$58
$76
$129$124$119
$144
$207
$71
$38
$76
$19 $15 $8 $11$26 $18
$40$26
$65
$32 $28
648609
650613
751798
742725
719
526
593
403352 326 321
394429
393 388
521438
373
0
100
200
300
400
500
600
700
800
900
$‐
$50
$100
$150
$200
$250
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2006 2007 2008 2009 2010 2011
Capital Invested ($B) # of Deals ClosedSource: PitchBook
PEG Industry Focus
7
Source: Robert W. Baird & Co., M&A Market Analysis 2011
Corporate Cash to Invest
8
$1.8+ Trillion in Cash on the S&P 500 Balance Sheets
Corporate Development
9
Source: Deloitte Survey 2010
General Factors Affecting the Market
10
Source: Robert W. Baird & Co., M&A Market Analysis 2011
?
?
?
Global Market Activity
11
Cross Border Deals
12
Add‐on’s Increase
13
181 185 298 399560
722934
648383 508
129
313408
620
874
1020
1229
1401
957
520
669
140
37%
42%43%
48%
30%
32%
34%
36%
38%
40%
42%
44%
46%
48%
50%
0
500
1,000
1,500
2,000
2,500
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
Add‐on Non Add‐on Add‐On % of BuyoutSource: PitchBook
PEG Multiples
14
Source: GF Data Resources
TEV / EBITDATEVs of $10‐250 million
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
2003 ‐ 2006 2007 2008 2009 2010 H1 2011
Total Enterprise Va
lue (TEV
) / EBITD
A
Year of Transaction Closing
$10mm to $25mm
$25mm to $50mm
$50mm to $100mm
$100mm to $250mm
Total Enterprise Value*
Broad Valuations
15
TEV / EBITDA
0
1
8
73
4.5
5.5
6.5
7.5
8.5
9.5
10.5
11.5
12.5
2006 2007 2008 2009 2010 H1 2011
EBITDA
Total Enterprise Va
lue (TEV
) / EBITD
A
Year of Transaction Closing
$1mm to $10mm
$10mm to $25mm
$25mm to $50mm
$50mm to $100mm
$100mm to $250mm
$250mm to $1B
*North American M&A targets of strategics and private equity investors
Other Factors / Drivers of M&A Activity for 2012
• Likely change in effective taxes• Outlook for individual segments and markets• Need for PEGs to sell older vintage companies
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The Drag on Growth and the Ability to Get Deals Done
• The bar is set high for target company performance• Relatively few high performers vs. available capital• Little cash flow financing for lower middle market deals
• Time to close• Lots of attention to emerging growth & middle market companies
• Widening Size Premium
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Positive Deal Drivers• Strategics actively seeking growth w/o betting the farm• Target company performance improvements creating more
viable candidates• PEGs have time pressure to invest funds• Modest economic growth generally supports buy vs. build • Credit markets relatively open for larger middle market deals• Valuations are rebounding• Cross border interest• Lots of attention to the emerging growth & middle market
companies
18
VALUE GAP?
19
Value Gap Survey
21
Value Gap Survey
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The Value Gap
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“Most owners do not have a value creation framework”
Rob Slee
24
$$
Focus on Real Value Creation …not just growth
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Strategic Health(products, services, market position, etc…)
Strategic Health(products, services, market position, etc…)
Management Team Strength(without the owner / operator)
Management Team Strength(without the owner / operator)
Dependence on the Owner Dependence on the Owner
Scalable InfrastructureScalable Infrastructure
Capital FormationCapital Formation
1
2
3
4
5
Some Changes that Take Time
• Develop and articulate a clear growth strategy• Measure your company’s performance as the buyer/investors will ….GAAP
• Assemble the right deal team• Organize and document your intellectual capital and get ready for due diligence
• Develop a strategy to maximize after‐tax proceeds
26