market update: current deal activity, valuations and outlook
TRANSCRIPT
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
2 0 1 4 M & A C O N F E R E N C E
15
Market Update: Current Deal Activity, Valuations and Outlook
Robin Engelson, Sapphire Financial GroupSima Griffith, Aethlon Capital, LLCDan Gulbrandson, Piper Jaffray & Co.Glenn Gurtcheff, Harris Williams & Co.Lisa Kro, Mill City CapitalModerator: Morgan Burns, Faegre Baker Daniels
2 0 1 4 M & A C O N F E R E N C E
Recent History in the Middle Market
►2006-2008: Peak Activity► 2H 2008/2009: The Music Stops
► 2010: Thin but reasonably active market
► 2011: Momentum Builds
► Cyclical businesses continue recovery
► Lending market broadens
►Strategic buyers become active► 2012: A Rush for the Exit
► “If it’s not bolted down…”
► Record level of activity for virtually every middle market investment bank
► Lending markets continue to strengthen throughout the year
► Strategic buyers become aggressive
16
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Recent History in the Middle Market (cont.)
2013: Imbalance
►Demand remains strong:► PE overhang continues
► Strategic buyers remain aggressive
► Robust valuations
► Leveraged structures return to pre-recession levels and terms
►Supply missing:► 2012 Pull-forward effect
► Q1/Q2 2013 – Very few deals in market
► Dividend recaps viewed as interim alternative to sale
► Q3/Q4 – Deal activity and pitch activity builds
17
2 0 1 4 M & A C O N F E R E N C E
Recent History in the Middle Market (cont.)
2014: A Strong Year So Far… But What’s Ahead???►Deal volumes up year-over-year
►Valuations in middle market remain high
►CLO market robust and leverage levels continue to increase
►Equity markets open nearly the entire year, BUT
►Supply problem continues given extent of PE exits over last two years
►Lots of potential flash points globally
►Less stable equity markets of late
►Pitch activity seems to have cooled off somewhat in 2H
18
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Domestic Transactions – Annually
Annual Domestic Transactions
► After a significant lull in 2009, M&A activity rebounded in 2010-2013
► Activity in 2014 has increased, driven by balance sheet cash and favorable credit market dynamics
19
Annual Domestic M&A TransactionsFor the Years Ended December 31, 1990 – 2013 and YTD 2014 ($ in billions)
Source: Thomson Financial. Year-to-date figures as of September 30, 2014.Includes transactions with the target and the acquiror based in the United States.Excludes minority stake purchases, acquisitions of remaining interest, self-tenders, and repurchases.
$124 $104 $138
$219 $293
$465
$551
$827
$1,353
$1,237
$1,364
$619
$371
$496
$731
$1,031
$1,293
$1,136
$635 $651 $568
$872
$576
$888
$394
$309
4,069 3,8914,307
4,944
5,917
6,959
7,988
8,870
9,656
8,4788,431
5,943
5,687
6,313
7,226
7,8088,561
8,802
7,205
5,715 6,073
6,3066,616
7,583
4,5354,628
0
2,000
4,000
6,000
8,000
10,000
12,000
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q-3Q2013
1Q-3Q2014
Num
ber of Deals
Aggr
egat
e D
eal V
alue
($ B
illion
s)
Aggregate Deal Value ($ Billions) Number of Deals
2 0 1 4 M & A C O N F E R E N C E
Middle Market M&A Observations
► Middle market M&A transaction volume still well below 2005 - 2007 peak
► Significant activity in 2012 driven by capital gains increase
► 2012 “pullforward” constrained dealflow in 1H 2013
► Pitch activity accelerated in 2H 2013, driving the notable increase in 2014 YTD deal volume
20
Source: Thomson Financial. Year-to-date figures as of September 30, 2014.Includes transactions with the target and the acquiror based in the United States.Excludes minority stake purchases, acquisitions of remaining interest, self-tenders, and repurchases.
$34
$43
$35 $39
$35
$43
$49
$43 $46
$51 $49 $48
$42
$51
$41 $46
$33 $33 $32
$17 $14
$19 $21
$29 $24
$31
$36 $37 $32
$40 $38
$32 $33 $37
$33
$42
$29 $30
$39 $44
$33
$42 $47
293313
288 292281
331
372355
328
398
351 343
298
334323 314
257238
251
152
119
159 149
220
167
207
256 251227
261245
221 212
252
220
323
225 226
279
308
245
282 291
0
50
100
150
200
250
300
350
400
450
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
Q1
2004
Q2
2004
Q3
2004
Q4
2004
Q1
2005
Q2
2005
Q3
2005
Q4
2005
Q1
2006
Q2
2006
Q3
2006
Q4
2006
Q1
2007
Q2
2007
Q3
2007
Q4
2007
Q1
2008
Q2
2008
Q3
2008
Q4
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Q3
2014
Num
ber of Deals
Aggr
egat
e D
eal V
alue
($ B
illion
s)
Aggregate Deal Value ($ Billions) Number of Deals
Quarterly Announced Domestic Middle Market M&A TransactionsFor the Periods Ended 1Q04 through 3Q14 (Transactions valued between $25 - $500 million)
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Historical Breakdown by Transaction Value
► Deals less than $500 million historically represent over 90% of all transactions
21
Source: Thomson Financial. Year-to-date figures as of September 30, 2014.Includes transactions with the target and the acquiror based in the United States.Excludes minority stake purchases, acquisitions of remaining interest, self-tenders, and repurchases; based on number of deals.
93.2% 92.2% 88.9% 88.8% 85.5% 84.9%88.7% 88.9% 88.4% 85.6% 83.4% 81.2% 79.9%
87.2% 88.8%80.7% 80.4% 79.1% 78.2% 76.5%
3.0% 3.5%4.9% 5.0%
6.0% 6.4%4.8% 5.7% 5.8%
6.0%6.8% 8.2% 7.7%
5.5% 4.7%
7.3% 8.9% 8.9% 8.6% 9.9%
3.8% 4.3% 6.1% 6.2% 8.5% 8.7% 6.4% 5.4% 5.8% 8.4% 9.7% 10.6% 12.4%7.3% 6.5%
12.0% 10.7% 11.9% 13.2% 13.6%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD2014
$0 - $249 Million $250 - $499 Million $500 Million +
2 0 1 4 M & A C O N F E R E N C E
M&A Seller Trends
►M&A activity has been fairly consistent across industries
22
Source: Thomson Financial. Based on number of deals as of September 30, 2014.
M&A Transaction Breakdown by IndustryFor the Years Ending December 31, 2010 – 2013 and the Year-to-Date Period Ended September 2014
16.6%
23.0%
25.4%
4.9%
7.4%
8.2%
14.4%0.2%
2010
Consumer FinancialsTMT Real EstateEnergy & Power HealthcareIndustrials Other
16.8%
21.6%
24.2%
6.0%
7.3%
9.2%
14.8%0.2%
2011
Consumer FinancialsTMT Real EstateEnergy & Power HealthcareIndustrials Other
17.4%
22.1%
23.2%
6.9%
6.0%
8.4%
15.9%0.1%
2012
Consumer FinancialsTMT Real EstateEnergy & Power HealthcareIndustrials Other
19.4%
20.0%
24.2%
8.8%
5.6%
7.9%
13.9%0.3%
2013
Consumer FinancialsTMT Real EstateEnergy & Power HealthcareIndustrials Other
19.1%
11.5%
27.4%7.4%
8.3%
9.1%
17.1%0.1%
YTD 2014
Consumer FinancialsTMT Real EstateEnergy & Power HealthcareIndustrials Other
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Middle Market M&A Pricing Trends
► Valuation multiples have rebounded significantly from 2009 levels.► 2011/2012: Significant spread in valuations between “A” companies and “Less than A”
companies
► 2013: “Less than A” companies receiving relatively strong valuations given scarcity of opportunities
► YTD 2014: average Enterprise Value / EBITDA multiple for all middle market transactions was 13.6x
23
Average U.S. Middle Market Purchase Price / EBITDA Valuation Multiples
Source: Thomson Financial; Year-to-date figures as of September 30, 2014.
11.3x
9.2x10.3x 10.2x
9.2x
13.7x
11.9x13.1x
8.7x
10.1x 9.8x10.4x
14.6x 15.1x
10.5x9.6x
11.8x 11.7x
10.4x
13.4x 13.1x
11.7x
9.1x
10.5x 10.3x 9.9x
14.1x13.6x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
2008 2009 2010 2011 2012 2013 YTD 2014
Less than $100 million $100 - $499 million $500 million - $1 billion Greater than $1 billion
2 0 1 4 M & A C O N F E R E N C E
93.7
144.0 143.8
67.5
164.0
287.0
218.3
344.8 321.2
253.1265.8
$0B
$100B
$200B
$300B
$400B
Secured Unsecured Subordinated
24
Leveraged Finance Market Highlights
Commentary
• Improved investor sentiment due to relativecalm on the macro front with regard to theEuropean sovereign debt crises and hopes forfurther quantitative easing in the U.S., pushedthe demand for loans, bonds and equitieshigher as investors searched for yield.
• 2014 YTD Total volume reached ~$475billion, a ~5% decrease from 2013 YTD
• Liquidity in financing market drove significantrefinancing activity in 2014
• Refinancing activity is further constrainingM&A volume as refi dividend is seen asinterim liquidity alternative for PE sponsors
Total New Issue Loan Volume and Use of Proceeds
High Yield Bond VolumeUse of Proceeds – High-Yield Bonds (YTD 2014)
Source: S&P LCD and Bloomberg
Source: S&P LCD
Source: S&P LCD
220.2255.9
243.4184.7
138.7139.4
165.6
265.2295.4
480.1
535.2
156.9
76.6
235.9
376.9
465.5
606.9
501.9474.8
$0B
$100B
$200B
$300B
$400B
$500B
$600B
$700B
Institutional Pro Rata
Refinancing28%
LBO19%
Acquisition21%
Recap / Dividend
12%
Recap / Stock
Repurchase1%
Corp Purpose
1%
Recap / General Recap
2%
Other16%
Total ($474.40B)
17%10% 8% 13%
21% 22% 23% 23% 22% 22%
14%17%
12%
26%
44%30%
19% 19% 21%17%
15%
8%9%
3%
11%
10%
12% 16% 11%10%
40%
50% 55%
51%
6%
19%24%
22%20% 28%
8%5% 4%
2%
5% 7% 11% 8%11%
9%
6%11% 11%
5%14% 12% 10% 12% 15% 14%
0%
20%
40%
60%
80%
100%
Refinancing / Bonds Refinancing / Bank Debt Refinancing / General M&A Recap Other
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Average Credit Statistics for Middle-Market LBO Transactions (Debt/EBITDA)
Leverage Capacity for LBOs
► Leverage levels on middle market M&A transactions continues to increase through YTD 2014
25
4.8x 4.7x
4.1x 4.0x
3.4x
3.9x 3.8x
4.2x
4.7x 4.7x
5.6x
4.5x
3.3x
4.2x 4.3x4.5x
4.8x
5.4x5.6x
0.0x
2.0x
4.0x
6.0x
8.0x
FLD/EBITDA SLD/EBITDA Other Sr Debt/EBITDA Sub Debt/EBITDA
Source: S&P LCD and Capital IQ, FLD is First Lean Debt
2 0 1 4 M & A C O N F E R E N C E
Current Indicative Terms for Middle Market Senior Debt and Mezzanine Financing
► Ranges vary by size of EBITDA, credit profile of borrower and risk profile of lender
26
1
SENIOR DEBT INDICATIVE TERMS MEZZANINE DEBT INDICATIVE TERMS
ORIGINATION FEESStructuring: 1.00% – 2.00%Arrangement: 1.00% – 2.00%
CASH FLOW SENIOR PRICING
L+350-450% + 1% Libor floor (bank)L+ 4.50-6.0% + 1% Libor floor (non-bank)
CASH FLOW SENIOR LEVERAGE MULTIPLE
<$7.5MM EBITDA 1.5-2.0x>$10MM EBITDA 2.0-3.5x>$25MM EBITDA 3.0-4.0x
TOTAL LEVERAGE MULTIPLE
<$7.5MM EBITDA 3.0-4.0x>$10MM EBITDA 3.75-5.0x>$25MM EBITDA 4.0-5.5x
UNITRANCHEPRICING
<$7.5MM EBIDTA 8.0-11.0%, (1% LIBOR FLOOR)>$10MM EBITDA L+6.0-8.0% (1% LIBOR FLOOR)>$25MM EBITDA L+5.50-7.50% (1% LIBOR FLOOR)
AMORTIZATION
SENIOR CASH FLOW TERM- 10-15% (bank)SENIOR CASH FLOW TERM- 5-10% (non bank)UNITRANCHE 1-5%
EQUITYCONTRIBUTION
30% – 40%
ORIGINATION FEE 1.50% – 2.00%
COUPONCash Coupon 10.00% – 12.00%PIK Coupon 1.00% – 3.00%Total Coupon 11.00% – 15.00%
TOTAL LEVERAGE MULTIPLE
4.00x – 6.00x
WARRANTS Selectively
EQUITY-CO-INVESTMENT
Generally at Lender’s Option
COVENANTS 85% – 90% of Senior Debt covenant levels
PREPAYMENTRESTRICTIONS
Varies but almost always; contrast with prepayment penalties in unitranche
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Middle Market Coverage Fact Sheet
► Coverages by size and leverage demonstrate a much stronger fundamental market than in the 2007 pre-crunch, pre-Lehman peak market
27
2Source: S&P Capital IQ LCD 3Q 2014 High-End Middle Market Lending Review
All Loans - Cash Interest Coverage 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q-3Q14$200M or Less 3.27x 4.14x 4.75x 4.03x 4.39x 4.02x 3.31x 3.43x 4.22x 4.40x 4.13x 3.79x 4.16x 4.04x 4.37x$201M - $350M 3.41x 3.84x 4.10x 4.15x 4.05x 3.86x 3.27x 2.99x 3.97x 3.51x 4.23x 3.52x 3.81x 4.40x 5.16x$351M - $500M 3.60x 3.74x 3.68x 4.28x 4.49x 3.31x 3.36x 2.62x 4.18x 4.10x 3.93x 3.71x 3.58x 4.19x 4.88x$501M+ 2.94x 3.49x 3.78x 4.24x 3.89x 3.71x 3.13x 2.77x 3.87x 4.06x 3.87x 4.18x 3.76x 4.62x 4.18x
LBO - Total Debt/EBITDA 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q-3Q14$200M or Less 3.95x 3.40x 3.74x 3.72x 4.49x 4.74x 4.79x 5.57x 4.26x 3.39x 4.09x 4.05x 4.44x 4.47x 4.40x$201M - $350M 3.90x 3.58x 3.90x 4.38x 4.53x 5.28x 5.26x 5.49x 4.64x 3.93x 4.54x 4.66x 4.58x 5.66x 5.18x$351M - $500M 3.93x 4.21x 4.37x 3.79x 4.50x 5.42x 5.12x 6.04x 4.87x 2.40x 4.49x 4.78x 5.24x 4.85x 5.46x$501M+ 4.33x 5.04x 5.08x 4.82x 5.28x 5.71x 5.73x 6.89x 6.60x 4.89x 4.92x 5.83x 5.56x 5.61x 6.27x
LBO - Sr Debt/EBITDA 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q-3Q14$200M or Less 3.23x 2.72x 3.08x 2.77x 3.55x 4.19x 4.15x 4.98x 3.31x 2.61x 3.26x 3.49x 3.68x 4.23x 4.40x$201M - $350M 3.16x 2.59x 3.04x 2.96x 3.66x 4.31x 4.60x 5.07x 3.93x 3.93x 3.91x 4.51x 4.30x 5.50x 5.12x$351M - $500M 2.94x 2.63x 2.35x 1.96x 2.99x 4.66x 4.24x 5.48x 3.97x 2.40x 3.96x 4.58x 5.16x 4.73x 5.46x$501M+ 3.31x 3.43x 3.81x 3.58x 3.62x 4.58x 4.93x 6.26x 5.96x 3.53x 4.86x 5.67x 5.39x 5.56x 6.27x
LBO - Cash Interest Coverage 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q-3Q14$200M or Less 2.69x 3.80x 4.23x 3.69x 3.63x 2.81x 2.65x 2.04x 2.76x NA 3.40x 3.49x 2.97x 3.97x 3.74x$201M - $350M 2.44x 3.18x 3.65x 3.62x 3.44x 2.50x 2.28x 2.30x 3.05x NA 3.05x 3.12x 3.37x 2.99x 5.51x$351M - $500M 2.72x 2.35x 2.98x 3.46x 3.29x 2.52x 2.35x 2.30x 2.24x NA 3.24x 3.18x 2.94x 3.35x 3.67x$501M+ 2.75x 2.73x 2.61x 3.05x 3.03x 2.49x 2.14x 1.93x 2.50x NA 2.95x 2.59x 2.93x 3.17x 3.30x
LBO - Purchase Price Multiple 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q-3Q14$200M or Less 6.61x 6.24x 6.77x 6.72x 7.46x 8.09x 8.00x 9.09x 7.86x 7.49x 7.94x 7.88x 8.17x 8.17x NA$201M - $350M 6.34x 6.00x 7.01x 7.15x 7.25x 8.44x 9.03x 9.31x 9.06x NA 9.56x 8.60x 8.02x 8.63x 8.52x$351M - $500M 5.84x NA 6.79x 7.91x 7.41x 8.40x 8.59x 9.27x 9.59x NA 8.08x 8.66x 8.49x 7.89x 9.26x$501M+ 6.59x 6.94x 7.13x 7.18x 7.72x 8.88x 8.99x 10.63x 10.32x NA 8.72x 9.88x 9.29x 8.60x 9.55x
LBO - Equity Contribution 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q-3Q14$200M or Less 37.83% 41.42% 43.51% 42.24% 38.18% 38.94% 39.28% 36.02% 44.78% 50.86% 48.17% 44.45% 41.65% 45.95% NA$201M - $350M 32.87% 36.49% 34.03% 39.80% 32.99% 33.56% 37.16% 37.02% 45.18% NA 45.46% 43.26% 41.84% 39.68% 41.03%$351M - $500M 30.85% NA 35.48% 37.05% 32.34% 28.12% 28.71% 32.89% 42.80% NA 41.36% 39.16% 38.75% 42.34% 42.03%$501M+ 31.83% 37.56% 29.28% 29.28% 27.67% 30.10% 30.54% 31.81% 34.47% NA 39.26% 35.55% 38.77% 34.24% 37.97%
*Please note LCD requires a minimum of 3 observations (after excluding for outliers) in order to publish a statistic. Cells that are blank or NA reflects that we did meet that requirement for that time period.
Middle Market Coverage Fact Sheet
2 0 1 4 M & A C O N F E R E N C E Email Questions to [email protected]
Equity Contribution – Middle Market LBOs
► Equity contributions for middle market LBOs have remained relatively consistent in 2014 from 2013
► However, in the lower middle market, equity contributions have decreased to 43% from 50% last year
28
Source: Standard & Poor Leveraged Commentary & Data and Thomson Financial
Average Equity Contribution for Middle Market LBOs(Defined as issuers with EBITDA of $50 million or less as a % of purchase price)
0%
10%
20%
30%
40%
50%
60%
2007 2008 2009 2010 2011 2012 2013 YTD 9/14 3Q14
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Current Equity Market Environment
Dow Jones Industrial Average S&P 500
Source: Bloomberg and FactSet, Research Systems as of September 2014.
29
Volatility Index
10,000
12,500
15,000
17,500
20,000
1,000
1,250
1,500
1,750
2,000
0
5
10
15
20
25
30
DJ Industrial Average S&P 500 Nasdaq Composite Russell 200052 Week High 17279.7 2011.4 4598.2 1208.752 Week Average 15680.6 1754.9 3919.4 1102.6Current 17042.9 1972.3 4493.4 1101.7% of Average 108.7% 112.4% 114.6% 99.9%% of High 98.6% 98.1% 97.7% 91.1%
2 0 1 4 M & A C O N F E R E N C E Email Questions to [email protected]
Abundance of Available Investable Capital
► The market is flush with capital that needs to be deployed. Financial investors have nearly $400 billion in dry powder
► Strategic acquirers (made up of the S&P 500) are holding an additional $1.7 trillion in investable cash
► Fierce competition to invest the approximately $2.1 trillion of “dry powder” is one of the factors that has driven valuations
30
Source: Pitchbook, Prequin and Capital IQ
$0
$100
$200
$300
$400
$500
2007 2008 2009 2010 2011 2012 2013
$ in
billi
ons
Private Equity “Dry Powder” S&P 500 Companies Cash Balance
$0
$400
$800
$1,200
$1,600
$2,000
2007 2008 2009 2010 2011 2012 2013 Q22014
$ in
billi
ons
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Buyer Trends –Private Equity Capital Invested Already Beyond 2012 Level
31
Source: PitchBook; as of September 30, 2014
$79
$148
$222
$307
$483
$846
$357
$158
$362 $374 $376
$489
$328
$393
912
1,291
1,764
2,149
2,692
3,193
2,382
1,520
2,114
2,273 2,272
2,791
2,036 2,097
0
500
1000
1500
2000
2500
3000
3500
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q-3Q2013
1Q-3Q2014
Num
ber of Deals
Aggr
egat
e D
eal V
alue
($ B
illion
s)
Capital Invested ($ billions) Number of Deals
Annual U.S. Private Equity Deal Activity and Capital Invested ($ in billions)
2 0 1 4 M & A C O N F E R E N C E
Quarterly Private Equity Exits By Type
Breakdown by type shows recovery in equity markets from 2008-2009 lows
32
Quarterly Private Equity Exits by Corporate Acquisition, IPO and Secondary SaleFor the Periods Ended 1Q06 through 3Q13
67 62 56 70
93 65
81 91 88 61
80
40 43 38 32 56
72 78 78 96
72 86 93 100
127
96 82
132
73 101 93
125
91 93 83
19 12
8
24
8
17 10
14 4
5
2
3 5 4
17 7
14 9
17
9 9
8 9
16
11 11
5
11
208
22
12 1714
36 34 61
59 61
71 55 43
47
33
43
29 19 16 13
20
41 34 34
85
38
62 64
81
65
82 83
134
59
6390
98
80
99 96
-
50
100
150
200
250
300
Corporate Acquisitions IPO Secondary Buyout
Source: PitchBook, as of September 30, 2014.
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Private Equity Portfolio Company Inventory
33
Inventory of U.S.-based, private equity-backed companies continued to grow in 2013, reaching a new high of 7,413
3,102
3,702
4,438
5,291
5,928 6,241
6,630 6,970
7,272 7,413
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*
2009 - 2013*
2005 - 2008
2000 - 2004
Pre 2000
Year of Investment
Source: PitchBook, as of September 30, 2014.
Current Inventory of Private Equity-Backed Companies
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
2 0 1 4 M & A C O N F E R E N C E
35
From Fishing Lures to Medical Guidewire Leader: The Sale of Lake Region Medical
Bruce Engler, Faegre Baker DanielsJoseph Fleischhacker, Lake Region MedicalAmy Roberts, Grant Thornton LLPModerator: Kate Sherburne, Faegre Baker Daniels
2 0 1 4 M & A C O N F E R E N C E
Lake Region Medical: 65 Years of History
36
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
1960s• Lake Region developed
a method to manufacture small diameter pacing lead coils for Medtronic
1947• Lake Region founded by
Joseph Fleischhacker Sr.
2011• SMART Wire
Technologies R&D initiative implemented
1994• Opened manufacturing
facility in New Ross, Ireland
2009• Acquired Brivant Medical in
Galway, Ireland - expanding interventional device development capabilities
1970 - 1989• Standard and
custom guidewireproduction, specialty wire forming, and precision machining became the primary product lines
Lake Region Medical: 67 Years of History
37
2009• Opened sales office in
Shanghai, China
2 0 1 4 M & A C O N F E R E N C E
Lake Region Medical: 65 Years of History
38
• Global company with over 1,700 employees• Locations in Minnesota, Ireland (2), and China• Proprietary products & technology platforms• Supplying key global players in the medical
industry
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Accellent
►Outsourced precision manufacturing and engineering services
►Target markets: cardiology, orthopedics, and endoscopy
►Private equity portfolio company with a history of growing through acquisitions
39
2 0 1 4 M & A C O N F E R E N C E
The Decision to Sell
►Second generation family business with no clear third generation successor
►Pressure in marketplace as customers try to narrow their vendor ranks and reduce costs
►Extremely favorable debt markets improve pricing and accelerate timing
40
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Synergies with Accellent
►Complementary businesses – IP Rights (Lake Region) and Contract Manufacturing Expertise (Accellent)
►Accellent had technologies that Lake Region Medical otherwise would have needed to acquire to stay competitive
►Strong brand in Lake Region
►Customer overlap and favorable market perception
►Credible and collaborative leaders, good chemistry
►Financial strength of private equity backers (KKR and Bain Capital)
41
2 0 1 4 M & A C O N F E R E N C E
Overview of Deal Terms
42
►Accellent acquired Lake Region Medical in a $420M merger► $345M in cash
► $75M (~ 20% of siblings’ holdings) in rollover investment
►Accellent refinanced its existing debt, allowing it to fund the acquisition, reduce interest expense, and terminate its voluntary filer status with the SEC.
First meetings in January
2014
Signed February 2,
2014
Closed
March 12, 2014
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Deal Issues: Reverse Due Diligence for Rollover
►Significant rollover for sibling shareholders
►Deal economics
►Potential synergies
►Reverse due diligence into Accellent operations and financial condition
►Expansive reps and warranties from Accellent
43
2 0 1 4 M & A C O N F E R E N C E
Deal Issues: Antitrust Clearance
►“Give it to them, we don’t care, we’re not competitive …”
►Broad NAICS medical device codes = significant legal, but not practical, overlap
►Telephone interview between FTC, counsel, CEO, marketing and sales representatives
►Requested customer names for additional follow-up
►Ran the full waiting period
►Ireland filing required due to operations of other KKR portfolio companies
44
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Deal Issues: Repatriation Dividend
Accellent had Irish operations, but did not need
cash
Accellent had Irish operations, but did not need
cash
Lake Region had a significant
amount of cash in Ireland
Lake Region had a significant
amount of cash in Ireland
Forced to repatriate and take tax hit
45
2 0 1 4 M & A C O N F E R E N C E
Deal Process: Eight Cold Days in January
►Two days of all-hands in-person due diligence and synergy sessions to kick-off transaction
►Eight days of in-person negotiations with key decision-makers present
►The final emotional moments before the dealwas signed
46
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Integration: What Accellent Did to Make the Integration Successful
►Collaboration!►Two in the Box – reps from historical Lake Region and
Accellent staff on all initiatives
►Relying on experience
►Selling systems, not components
►Commitment to best practices
►Delivered on promises
47
2 0 1 4 M & A C O N F E R E N C E
Integration: Customer Reactions
Satisfied customer desire to reduce vendor counts
“Don’t screw this up.”
“We have a great relationship with both companies. We see two great suppliers coming together. Some issues to deal with, but nothing we see as a problem.”
“Can you share your integration strategy with us?”
“Will you be closing any sites?”
“How will we be affected and, if so, how many products will move? By when?”And, of course, last but not least …
“How will this affect price reductions?”
48
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
2 0 1 4 M & A C O N F E R E N C E
53
Shareholder Activism:An Emerging Asset Class
Mark Gentile, Richards, Layton & Finger, PAEileen Nugent, Skadden, Arps, Slate, Meagher & Flom LLPJon Nygren, Faegre Baker DanielsMatt Sherman, Joele Frank, Wilkinson Brimmer KatcherModerator: Mike Stanchfield, Faegre Baker Daniels
2 0 1 4 M & A C O N F E R E N C E
Shareholder Activism: Growing Resources
►Heightened levels of activist activity set to continue.
►More capital, more campaigns.
$19
$29
$48$55
$32$36
$47$51
$66
$93$100
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1 2014
+
Estimated Activist Fund Assets Under Management ($ billions)
54
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
The number of activist campaigns has increased
►Activist campaigns (2000 – 2013)
27
65 6878
49
95
138
203 202216
178189
197214
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: FactSet SharkRepellent data as of December 31, 2013
55
2 0 1 4 M & A C O N F E R E N C E
Activist 13Ds over time
►13Ds filed by known activists with specific demands (2007 – 2013)
160
113
46
78 8271 74
2007 2008 2009 2010 2011 2012 2013
Source: 13D Monitor as of December 31, 2013.
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Schedule 13D Requirements
►Schedule 13D► Greater than 5% stake
► Possible intent to change or influence control or 20% stake
► Filings must be amended promptly for any material change (including 1% ownership change)
► Initial filing due 10 days after hitting 5% threshold► Subject to insider-trading and antitrust rules, shareholder may continue
to acquire ownership interests before filing
► Beneficial ownership may not capture all economic interests
57
2 0 1 4 M & A C O N F E R E N C E
Proxy fight statistics post-2008
Proxy fight outcomes
Source: FactSet SharkRepellent data as of November 3, 2014.Includes completed proxy fights for meeting dates from January 1, 2009 to December 31, 2014
Dissident election
Dissidents won at least one seat in ~46% of all proxy fights by either settlement or shareholder vote
Withdrawn 25%
Went to Vote 35%
Settled for board seats
28%
Settled without board seats
13%
At least one activist
candidate elected 52%
No activist candidate
elected 48%
58
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
The number of proxy fights rose in 2013, following a decline after the financial crisis
33 37 37 3417
36 38 31
68
83 88
61
6640
5154
2007 2008 2009 2010 2011 2012 2013 YTD 2014Seeking majority Seeking minority
101
120125
95
7683 8589
Source: FactSet SharkRepellent data as of November 3, 2014(1) Campaigns where formal notice of dissident proxy is publicly disclosed.(2) Seeking more than half of the Board seats.
(39%)
17%
(2)
Proxy contests (1)
59
2 0 1 4 M & A C O N F E R E N C E
Shareholder support for dissident nominees has increased in recent years
14 1621 13 8
9
23
74
11
22
6
1
2637
24
2512 17
18
2007 2008 2009 2010 2011 2012 2013Dissident win majority of seats sought Dissidents win minority seats sought Incumbent wins
47 57 56 40 3222 42(4)
Source: FactSet SharkRepellent data as of December 31, 2013(1) Includes winning half of the seats sought and campaigns which were settled prior to a vote and after an ISS recommendation was issued.(2) Includes campaigns that were settled prior to a vote and after an ISS recommendation was issued.(3) Includes campaigns that were withdrawn prior to a vote and after an ISS recommendation was issued.(4) Includes 4 campaigns settled post ISS recommendation. Sandridge Energy, Ferro Corp., Hess Corp., Tessera Technologies.
(2)
Vote results
(3)(1)
Average ~46% of
fights won at least 1
seat 45%
35%
57%
38%45% 47%
57%
60
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
ISS has recommended in favor of dissidents approximately 50% of the time
1514
22 16 10
9
21
28 39
30 22 1021
18
4 4 4 2 2 2 3
2007 2008 2009 2010 2011 2012 2013For Majority Dissident Slate For Minority Dissident Slate or Incumbent No ISS Recommendation
47 57 56 40 3222 42
Source: FactSet SharkRepellent and ISS data as of December 31, 2013Note: Percentages based on the total number of proxy fights where FactSet captures the ISS recommendation.(1) Includes supporting half the dissident slate.(2) Proxy fights that went to a vote with no ISS recommendation. ISS does not cover targets that are LLPs, LLCs, privately held, or have no ISS client investors.
(2)
ISS vote recommendations
(1)
35%26%
42% 42%50%
30%
54%
61
2 0 1 4 M & A C O N F E R E N C E
Given the relative dissident success in contests, it’s not surprising that many targets have decided to settle
47 41 42 4427
36 43
27 4121 24
22
24 12
5251
37 25
28
3029
2008 2009 2010 2011 2012 2013 2014Settlements Withdrawn Went to Vote Pending
126
10093
77
9097
13
Source: FactSet SharkRepellent data as of November 3, 2014
37% 31% 42% 47%
35%40%
44%
133
62
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Timken Company (November 1, 2012 to June 30, 2014)
CalSTRSproposal and
Relational ownership stake are publicly
disclosed on Schedule
13D
13D amended to
reflect increased Relational ownership
Relational and CalSTRS
send joint letter to Board
members
Graph Source: Yahoo! Finance
Shareholder vote to
recommend spinoff
Board appoints strategy
committee and retains Goldman
Sachs
Board approval of
spinoff
Initial Form 10 is filed
Spinoff is effective
63
2 0 1 4 M & A C O N F E R E N C E
Combination of Strategic Acquirer and Activist –Allergan
April 21 - Activist investor Pershing Square acquired almost 10% stake in drug-maker Allergan, and plans joint bid with healthcare company Valeant
April 22 - Valeant and Pershing Square jointly make unsolicited cash and stock takeover offers for Allergan; Allergan rejects offer and adopts poison pill
May 7 – Allergan reports better than expected Q1 earnings, states considering offer
May 12 – Allergan rejects offer
May 13 – Pershing Square files documents to call non-binding shareholder vote on proposal
May 28 – Valeant increased bid by $10, to around $163 per share plus contingent right to receive additional $25 per share
May 30 – Valeant raises bid again, to around $177 per share
June 2 – Pershing Square files documents to begin proxy fight to oust directors
June 10 – Allergan rejects raised Valeant offer
June 12 – Pershing Square seeks clarity from Chancery Court as to whether efforts to hold special shareholders’ meeting will trigger poison pill
June 18 – Valeant launches exchange offer for Allergan shares
May 2014 June 2014April 2014
64
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E
Combination of Strategic Acquirer and Activist –Allergan (continued)
July 7 – Pershing Square announces dissident slate, for 6 director positions
July 11 – Pershing Square files definitive solicitation statement
August 1 – Allergan sues Pershing Square and Valeant in California, accusing Pershing Square and Valeant of violating tender offer rules regarding insider trading
August 22 – Pershing Square submits request for shareholder meeting
September 4 – Allergan schedules special shareholder meeting for December 18
September 15 – Parties settle Delaware litigation, and allow special shareholder meeting to proceed
August 2014 September 2014July 2014
65
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
2 0 1 4 M & A C O N F E R E N C E [email protected]
2 0 1 4 M & A C O N F E R E N C E
75
International M&A Trends, Strategies & Deal Points
Gary Laitner, Partner, Faegre Baker Daniels (London)Euan Rellie, Sr. Managing Director, Business Development Asia John Potter, Partner, PricewaterhouseCoopers LLPNii Quaye, VP of M&A, PentairModerator: George Martin, Partner, Faegre Baker Daniels
BDA Trends in Emerging Markets M&A November 2014
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
Global Cross Border M&A H1 2014 vs H1 2011 140 14060
2002011 2014Outbound Inbound
US$bn 60 125160 1502011 2014Outbound Inbound
US$bn 75 6344 54
2011 2014
US$bn
Outbound Inbound27 2215 112011 2014
US$bn
Outbound Inbound
Asia (excluding Japan)
78
45.8 65.5 89.8 82 74.7 113.376.8 71.8 79.4 81.1 108.2 173.5050100150200250300350
H1'2009 H1'2010 H1'2011 H1'2012 H1'2013 H1'2014
Q2 M&A Value Q1 M&A ValueHistorical H’1 M&A Total Deal Values Deal value US$bn
40 5520
5030 40 5342
6540 45 50 40 30
010203040506070
H1'2011 H2'2011 H1'2012 H2'2012 H1'2013 H2'2013 H1'2014Inbound Outbound
Deal value US$bnCross Border Breakdown
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
China
79
Deal value US$bn
24 25 26 40 37 6347 26 31 38 5293
050
100150200
H1'2009 H1'2010 H1'2011 H1'2012 H1'2013 H1'2014
Q2 M&A Value Q1 M&A Value
920
519 9 8 1819
46
1736 39 30 34
05101520253035404550
H1'2011 H2'2011 H1'2012 H2'2012 H1'2013 H2'2013 H1'2014Inbound Outbound
Deal value US$bn
Historical H’1 M&A Total Deal Values
Cross Border Breakdown
Japan
80
Deal value US$bn
Deal value US$bn
10.6 13.9 12.3 14.1 8.1 5.514 7.3 17.2 26.3 15.3 6.205
1015202530354045
H1'2009 H1'2010 H1'2011 H1'2012 H1'2013 H1'2014
Q2 M&A Value Q1 M&A Value
4 5 4 5 1 10 133 33 38
76
1135 33
01020304050607080
H1'2011 H2'2011 H1'2012 H2'2012 H1'2013 H2'2013 H1'2014Inbound Outbound
Historical H’1 M&A Total Deal Values
Cross Border Breakdown
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
Emerging Markets
81
57.1 129.5 142.4 103.3 93.5 107.386129.5 108.4 138.2 133.2 172.6
050100150200250300
H1'2009 H1'2010 H1'2011 H1'2012 H1'2013 H1'2014
Q2 M&A Value Q1 M&A Value
58 60 59 50 4059 59
3250
31 40 30 2145
010203040506070
H1'2011 H2'2011 H1'2012 H2'2012 H1'2013 H2'2013 H1'2014Inbound Outbound
Deal value US$bn
Deal value US$bn
Historical H’1 M&A Total Deal Values
Cross Border Breakdown
Africa & the Middle East
82
Deal value US$bn
Deal value US$bn
5.3 25.4 19.8 8.8 12.7 6.748 6.5 13.5 21.6 14.5
0510152025303540
H1'2009 H1'2010 H1'2011 H1'2012 H1'2013 H1'2014
Q2 M&A Value Q1 M&A ValueHistorical H’1 M&A Total Deal Values
Cross Border Breakdown
12 13 13 1220 19
8
23
6 8 10 8 716
0510152025
H1' 2011 H2' 2011 H1' 2012 H2' 2012 H1' 2013 H2' 2013 H1' 2014Inbound Outbound
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
Europe
83
Deal value US$bn
Deal value US$bn
Historical H’1 M&A Total Deal Values
Cross Border Breakdown
162100 130
65119
70110
50100 75 89
4080
130
020406080100120140160180
H1'2011 H2'2011 H1'2012 H2'2012 H1'2013 H2'2013 H1'2014Inbound Outbound
121 127 183 171 135 17178 114241 186 199 282
0100200300400500
H1' 2009 H1'2010 H1'2011 H1'2012 H1'2013 H1'2014
Q1 M&A Value Q2 M&A Value
37.4%
11.8%11.1%8.4%
5.6%4.9%4.5%3.7%2.9%2.7% 7.0% ChinaAustraliaJapanSouth KoreaHong KongIndiaThailandSingaporeKazakhstanIndonesiaOther
Value Volume
Asia-Pacific M&A Geographic Breakdown
31.0%
14.0%14.6%9.4%
4.0%8.8%1.4%3.5%0.5%2.5% 10.3%
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
Asia-Pacific M&A Sector Breakdown14.6%
12.4%3.2%
21.9%10.8%11.5%
4.0%2.2%5.5%4.4%4.5%
Industrials & Chemicals Consumer Business ServicesEnergy, Mining & Utilities Technology Financial ServicesPharma, Medical & Biotech Leisure Real EstateConstruction Transportation Media
Value
European M&A Sector BreakdownValue
12.3% 8.3%9.5%
19.1%2.2%1.8%15.0%
31.8%
Industrials & Chemicals ConsumerEnergy, Mining & Utilities Pharma, Medical & BiotechLeisure MediaTelecomunications Other
Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014
Africa & the Middle East M&A Sector BreakdownValue
3.3% 13.1%
26.2%3.3%19.7%
9.8%24.6%
Industrials & Chemicals ConsumerEnergy, Mining & Utilities Pharma, Medical & BiotechTechnology TelecomunicationsOther
2 0 1 4 M & A C O N F E R E N C E [email protected]
Focus on Compliance!
88