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                                      Kansas City

            KC Private Equity Forum:
            Survival, Success & Succession
Dealmaking in Today’s Turbulent Markets:
          Where Do We Go?
                      Presented by:
                      Jack Helms
                       Chairman
                 Lazard Middle Market
              jack.helms@lazardmm.com
                      612.339.0500
                          JUNE 2009




STATE OF THE M&A MARKET

            ®

            Kansas City
    Table of Contents


      I.       STATE OF THE ECONOMY

      II.      CREDIT MARKET

      III.     PRIVATE EQUITY

      IV.      KANSAS AND MISSOURI ACTIVITY

      V.       M&A MARKET




                                              ®
2                                             Kansas
I.   STATE OF THE ECONOMY
    Cyclicality in the M&A Market




          # of Deals                                                                                  LTM EPS          Index
            14,000                                                                                           $90       $1,600
                                                                                                             $80       $1,400
            12,000
                                                                                                             $70       $1,200
            10,000
                                                                                                             $60
                                                                                                                       $1,000
             8,000                                                                                           $50
                                                                                                                       $800
             6,000                                                                                           $40
                                                                                                                       $600
                                                                                                             $30
             4,000                                                                                                     $400
                                                                                                             $20
             2,000                                                                                                     $200
                                                                                                             $10
                 0                                                                                           $0        $0
                       1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

                                 Deal Volume      S&P 500 LTM EPS (Proxy for U.S. Economy)   S&P 500 Index

                 Source: Mergerstat and S&P




                             M&A volume is clearly linked to the state of the economy and is highly
                                        correlated with equity market performance.
                                                                                                                   ®
4                                                                                                                  Kansas
             Public Market Indexes Over Time




                                                                                                                                                         (55.6%)
% of Index




                                                                                                                                               (53.8%)



                                                                                                                                     (56.8%)




                                                             S&P 500 Index   Dow Jones Industrial Average   NASDAQ Composite Index
                 Source: CapitalIQ, updated through 6/2/09
                 Note: Indexed off of September 1989




                                        From peak to trough the DJIA, S&P and NASDAQ were down 53.8%, 56.9%
                                                                 and 54.8%, respectively.

                                                                                                                                           ®
     5                                                                                                                                     Kansas
    Public Market Indexes Over Time


                                                                 $100 invested equally in 3 indexes on 9/1/89
                 875.0
                                                                                                $400                                      $430


                                                                                                                                                  $255

                                                                             $200                              $200                              $190
    % of Index




                               $100




                                                                                             ~7 yrs                             ~7 yrs




                                                             S&P 500 Index      Dow Jones Industrial Average     NASDAQ Composite Index
                 Source: CapitalIQ, updated through 6/2/09
                 Note: Indexed off of September 1989




                               A long term view of public equity market valuations reflect: (i) the bizarre behavior
                         of the NASDAQ in 1999 (tech bubble) and (ii) the recent loss of 13 years of value appreciation.

                                                                                                                                                  ®
6                                                                                                                                                 Kansas
    Comparison to 1929 Stock Market Crash




       Source: Capital IQ updated through 6/2/09


                                  Is the bear dead, or is this just a “bull-bounce” in a continuing bear?
                                                                                                            ®
7                                                                                                           Kansas
    Bull or Bear?




                    ®
8                   Kansas
    Bear Case




                ®
9               Kansas
     Debt Outstanding by Sector Over the Past 15 Years
                                                                                                                                           Debt/GDP

            $65                                                                                                                                     4.5x
                                                                                                                                  $60
              60
                                                                                                                                  4.2x              4.0x
              55                                                                                         $51
              50                                                                                                                                    3.5x
                                                                                                         3.6x
              45
                                                                                                                                                    3.0x
                                                                                2.7x
              40                 2.6x
                                                              2.4x                                                                                  2.5x
              35
              30                                                                $26                                                                 2.0x
              25
                                                                                                                                                    1.5x
              20                                              $16
              15                                                                                                                                    1.0x
                                                                                                         $14.3                   $14.3
              10
                                                                                $9.8                                                                0.5x
               5               $150mm                         $6.7
               0                                                                                                                                    0.0x
                         Great Depression                     1993              2000                     2008                    2009E*

                             GDP                 Households          Business      State & Local Gov't           Federal Gov't           Debt/GDP


         Source: Federal Reserve, Department of Commerce
         Note: $’s in trillions
         *2009 is Lazard estimate for illustrative purposes




                                 There has been a dramatic increase in leverage since the Depression years.

                                                                                                                                               ®
10                                                                                                                                             Kansas
     Federal Government Deficit Analysis




          Source: Congressional Budget Office data and estimates as of 5/6/09; www.cbo.gov




                                                                                             ®
11                                                                                           Kansas
     Treasure Quarterly Net Marketable Borrowing


                                                     “Net Cash”
                                                     Fiscal Quarter


                                                                                                   B
                                                                                                   o
                                                                                                   r
                                                                                                   r
                                                                                                   o
                                                                                                   w
                                                                                                   i
                                                                                                   n
                                                                                                   g
                                                                                                   s




                                                                                                   P
                                                                                                   a
                                                                                                   y
                                                                                                   d
                                                                                                   o
                                                                                                   w
                                                                                                   n




                              Net marketable borrowing through the second quarter of FY 2009
                                   has eclipsed total FY 2008 net marketable borrowing.

                                                                                               ®
12                                                                                             Kansas
     Non-Investment Grade Debt Maturities Over the Next 5 Years




                                                                                                         $3,594



                                                                                         $2,977



                                                                          $2,364




                                                              $1,695




                                                     $1,017



                             $459




         Source: Bloomberg and S&P as of 3/31/2009
         Note: $’s in billions




                         Over $1.5 trillion in non-investment grade debt is coming due over the next 5 years.

                                                                                                                  ®
13                                                                                                                Kansas
     Credit Providers



      $ in tn




                     Shadow Banking System

                                 Others
                                 GSE and ABS
                                 Funds
                                 Insurance
                                                                                                              Traditional Banking




          Source: “Downunder Daily”. Morgan Stanley Research. 1/28/09. Asset Backed Alert. www.abalert.com.




                                    Traditional banking lacks the capacity to service current debt levels.
                                   Equalization and government intervention will be the primary solutions.

                                                                                                                            ®
14                                                                                                                          Kansas
     Death of the Securitization Market



                                                                      US SECURITIZATION ISSUANCE




         Source: “Downunder Daily”. Morgan Stanley Research. 1/28/09. Asset Backed Alert. www.abalert.com.




                                                                                                             ®
15                                                                                                           Kansas
     Percent of Leveraged Loans in Payment Default or Bankruptcy




              Source: Standard and Poor’s LCD and S&P/LSTA Leveraged Loan Index
              Note: Comprises all loans, including those not tracked in the LSTA/LPC mark-to-market service
              Note: Vast majority are institutional tranches
              Note: 2009 Projection from Edward Altman, Stern School of Business, NYU



                                                    2009 default rate expected to end higher than 2002.
                                                          Current shadow default rate is 11.3%.
                                                                                                              ®
16                                                                                                            Kansas
     U.S. Housing Still A Problem
                                          Housing Inventory                                    Monthly Housing Starts




     Source: U.S. Census Bureau                                 Source: U.S. Census Bureau
                             Average Sales Price of New Homes                          Commercial Real Estate Vacancies




     Source: U.S. Census Bureau
     Note: Sales price include the land                         Source: CB Richard Ellis (historical), National Association of Realtors (projections)
                                                                Note: Retail vacancy data only available back to 2005.
                                                                                                                                                        ®
17                                                                                                                                                      Kansas
     Bull Case




                 SHORT TRADERS
                                 ®
18                               Kansas
     Dow Jones Industrials Performance Post Bottom (3/9/2009)




                                                                    +46%

                                                                    +38%
                                                                    +34%




        Source: Yahoo Finance as of 6/9/09



                                                                ®
19                                                              Kansas
     Equity Mutual Fund Inflow vs. DJIA

                                                                                                                            Δ in DJIA
     $20,000                                                                                                                    10%


     $10,000                                                                                                                    5%


          $0                                                                                                                    0%


     -$10,000                                                                                                                   (5%)


     -$20,000                                                                                                                   (10%)


     -$30,000                                                                                                                   (15%)


     -$40,000                                                                                                                   (20%)


     -$50,000                                                                                                                   (25%)
                Jul-08        Jul-08           Aug-08    Sep-08    Oct-08   Nov-08    Dec-08   Jan-09   Feb-09   Mar-09   Apr-09

                                                        Equity Mutual Funds Inflows (mm)       DJIA
        Source: TrimTabs Investment Research
        Note: $’s in millions



                                                                                                                            ®
20                                                                                                                          Kansas
     Cash Held on the “Sidelines” Currently at Historical Highs




         Source: Bloomberg and Factset



                       Cash “on the sideline” is at an all-time high compared to the value of equity markets.
                                            When will “in-flow” to equity funds begin?

                                                                                                                ®
21                                                                                                              Kansas
     U.S. Manufacturing and Services
                                               Inventories and Orders



                                                                                                                                         Inventory lags new orders and is shrinking.
                                                                                                                                         New orders are rising, causing an increase
                                                                                                                                         in new production due to low inventory.
                                                                                                                                         Possible increased demand for labor?




     Source: Institute for Supply Management

                                                  ISM Services Index


                                                                                                                                         ISM Services Index has turned. Services
                                                                                                                                         drives economy much more than
                                                                                                                                         manufacturing.




                                  As of 5/09. Blue-shaded areas indicate periods of recession. See last slide for definition of recession. Source: Bureau of
                                  Economic Analysis, FactSet, Institute of Supply Management (ISM), National Bureau of Economic Analysis (NBER).                         ®
22                                                                                                                                                                       Kansas
     Housing Inventories Moving Down



                                                           New



                                                                                                                      New home inventories fully
                                                                                                                      reversed bubble




                                                        Existing


                                                                                                                       Foreclosures still feeding
                                                                                                                       into existing home
                                                                                                                       inventories




                       As of 4/09. Blue-shaded areas indicate periods of recession. See last slide for definition of recession. Source:   ®
23                     Department of Commerce, FactSet, National Association of Realtors, National Bureau of Economic Research (NBER).
                                                                                                                                          Kansas
     Home Prices Appear to be Stabilizing




                Note: As of 3/09. Based on S&P/Case-Shiller composite 20 Home Price Index. Source: FactSet, Standard & Poor’s .




                                                                                                                                  ®
24                                                                                                                                Kansas
     Consumer Confidence – Jobless Claims




         Source: Bloomberg and Factset



                                         Have the bad things stabilized, and is confidence returning?
                                              Or, are they just taking a rest before continuing?

                                                                                                        ®
25                                                                                                      Kansas
     Layoff Announcements Down Noticeably




                                                                                         Layoffs




                Layoff announcements as of 5/09. Unemployment claims as of 5/29/09. Blue-shaded areas indicate periods of recession. See last slide for definition
                of recession. Source: Challenger Gray & Christmas Inc., Department of Labor, FactSet, National Bureau of Economic Research (NBER).




                                              Layoff announcements are a true forward indicator.

                                                                                                                                                                     ®
26                                                                                                                                                                   Kansas
     No Signs of Inflation


     Traditional definition of Inflation




                                   Too many dollars
                                   chasing
                                   too few goods




                                                      ®
27                                                    Kansas
     Money Supply and Velocity




                                                          Fed flooding system:
                                                          could reach $3.5T by
                                                          year-end




                                                          But “velocity” of money
                                                          remains depressed (money
                                                          not getting into economy)




                      As of 6/09.
                      Source: FactSet, Federal Reserve.


                                                                                 ®
28                                                                               Kansas
     Too Few Goods?



                      The Output Gap Drives Inflation




                                                                                  The chart to the left from Goldman
                                                                                   Sachs studies the Output Gap since
                                                                                   1960 as a measure of how the actual
                                                                                   GDP can rise above or below its
                                                                                   potential long-term average and its
                                                                                   relationship with inflation.
                                                                                  Some     economists believe that
                                                                                   deflation is a near-term threat due to
                                                                                   the recent shock to the global
                                                                                   financial system.




          Note: Dotted lines denote GS forecasts.
          Source: Department of Commerce, CBO & Goldman Sachs Estimates (4/09)



                                                                                                                ®
29                                                                                                              Kansas
     Consumer Debt and Personal Savings


                                              Change in Liabilities




                                                                                                       Consumer debt is contracting
                                                                                                       massively




           Consumer net increase in liabilities as of 4Q08. Personal savings rate as of 4/09.
           Source: Bureau of Economic Analysis, FactSet, Federal Reserve.



                   Personal Savings as a Percentage of After-Tax Income




                                                                                                       Americans are saving more of their paychecks
                                                                                                5.7%   than at any time since February 1995. Could
                                                                                                       prolong the recession, but will strengthen the
                                                                                                       financial health of U.S. households and overall
                                                                                                       economy for the long term.



           Source: Department of Commerce
                                                                                                                                          ®
30                                                                                                                                        Kansas
     Bull or Bear?




                     ®
31                   Kansas
     Anemic Bull




                   Headwinds for the Emerging Bull
                    Rising Energy Costs
                    Rising Interest Rates
                    Continued Consumer Delevering
                    Increasing Taxes
                          Increase in top rate, cap gains rate, dividend rate
                          Offshore income
                          Healthcare plans
                          Social Security

                    National Health
                    Radical Increases in Regulation




                                                                         ®
32                                                                       Kansas
II.   CREDIT MARKET
     Leveraged Loan Volume Trends


                        $600.0
                                                                                                        $535
                                                  U.S. Dollar Denominated New-Issue Leveraged Loan Volume
                        $500.0                                                                   $480


                        $400.0
                                                                                                                                                  (71%)
          In Billions




                                                                                                               $295
                        $300.0
                                 $256                                                                   $265
                                            $243

                        $200.0                          $185
                                                                                             $166                                   $153
                                                                    $139         $139
                        $100.0
                                                                                                                                           $46
                                                                                                                                                  $11       (76%)
                          $0.0
                                 1998      1999        2000         2001        2002        2003        2004   2005   2006   2007   2008   1Q08   1Q09

        Source: Standard & Poor’s, LCD Leveraged Lending Review 1Q09
        Note: Excludes existing tranches of add-ons and amendments and restatements with no new money




                            Leveraged loan volume was down 75% year-over-year, but up 30% compared to 4Q’08.

                                                                                              34                                                   ®
34                                                                                                                                                 Kansas
     Middle Market Loan Volume Trends – Pro Rata and Institutional Middle Market Volume By Year




      Source: Standard & Poor’s, LCD Leveraged Lending Review 1Q09
      Note: Middle Market defined up to $50 million of EBITDA
      Note: $’s in billions



                                                Institutional investors have all but left the middle market.

                                                                                                               ®
35                                                                                                             Kansas
     Credit Providers



      $ in tn




                     Shadow Banking System

                                 Others
                                 GSE and ABS
                                 Funds
                                 Insurance
                                                                                                              Traditional Banking




          Source: “Downunder Daily”. Morgan Stanley Research. 1/28/09. Asset Backed Alert. www.abalert.com.




                                    Traditional banking lacks the capacity to service current debt levels.
                                   Equalization and government intervention will be the primary solutions.

                                                                                                                            ®
36                                                                                                                          Kansas
     Fund Managers That Issued Arbitrage CLOs by Year




          Source: Standard & Poor’s LCD, Leveraged Lending Review 4Q08




                                                   2008 CLO volume down 85%.
                       2007 volume: $87 billion – 2008 volume: $13 billion – 2009 YTD volume: $300 million.

                                                                                                              ®
37                                                                                                            Kansas
     U.S. Bond Markets

                                 24-Month U.S. Investment Grade Issuance


                                                                           The market for investment grade issues
                                                                           appears to have reestablished itself.




            Source: Advantage Data and Bloomberg as of 06/10/09



                                     24-Month U.S. High-Yield Issuance




                                                                           The high yield markets show signs of spring
                                                                           and recovery.




            Source: Advantage Data and Bloomberg as of 06/10/09
                                                                                                              ®
38                                                                                                            Kansas
     Credit Crisis Resulting in Unprecedented Price Declines



                            Average Discounted Spread                                                Average Bid of Leveraged
                               of Leveraged Loans                                                        Loans (% of Par)


                                                                                   Last Date:
                                                                                    5/1/09
                                                                              Ending Value:
                                                                                L+1479




                                                                                                                                 Last Date:
                                                                                                                                  5/1/09
                                                                                                                                Ending Value:
                                                                                                                                   75.1%




      Source: Standard & Poor’s, LCD LoanStats Weekly as of 5/7/09
      Note: Assumes discount from par is amortized evenly over a three-year life




                             Primary and secondary trading levels depressed by a liquidity vacuum.
                     Cause: CLO liquidations, portfolio fire-sales, record hedge/mutual fund redemptions.
                  Result: Limited number of active buyers reaping the benefit of forced-selling by many sellers.

                                                                                                39                              ®
39                                                                                                                              Kansas
     Average Debt Multiples of Highly Leveraged Loans




          8.8


                  7.1
                          6.7




                                                                                                                  (36%)




          Source: Standard & Poor’s LCD, Leveraged Lending Review 4Q08




                                                             Transaction leverage is at a 22-year low.

                                                                                                         ®
40                                                                                                       Kansas
     Middle Market Total Leverage Multiples




         Source: Standard & Poor’s, LCD Middle Market Lending Review 1Q09
         Note: Defined as issuers with EBITDA of $50 million or less
         Note: For Q1’09, average leverage level is the Firm’s internal estimate


               Starting and ending attachment points for mezzanine debt continue to decline, reducing risk for
                                                          lenders.
                Middle Market leverage was lower than overall market (see previous slide) prior to 2000, higher
                                         from 2001 through 2008, and is now lower.
                                                                                   41                        ®
41                                                                                                           Kansas
     Average Cash Flow Multiples of Highly Leveraged Loans (Cash Flow Coverage)




                                                                                                                   +55%




            Source: Standard & Poor’s LCD, Leveraged Lending Review 4Q08




                                           Cash flow coverage of new issue loans strongest in 22 years.

                                                                                                          ®
42                                                                                                        Kansas
     Capital Structures are More Conservative



                                    AVERAGE SOURCES OF PROCEEDS FOR MIDDLE MARKET LBO LOANS


                            2007                                                     2008                      2009E




                                                                     Equity   Rollover Equity   Sub   Senior


       Source: Standard & Poor’s, LCD Leveraged Buyout Review 1Q09
       Note: Defined as issuers with EBITDA of $50 million or less




                                               Capital structures continue their trend toward more equity.

                                                                                      43                               ®
43                                                                                                                     Kansas
     Pricing of Credit

                                                                                                         Pre-Lehman        Post-Lehman


                                                               Rate                         5%                        5-8%
                              ABL                              Libor Floor                  No Libor floor            W/& w/o Libor floors
                                                               Fees                         1%                        1%
                    SENIOR DEBT
                    (B Rated Credit)
                                                               Rate                         7-9%                      10-12%
                                                               Libor Floor                  No Libor floor            Libor floor of 3-4% plus
                         Cash Flow
                                                               Spread                       L+450                     L+600-700
                                                               Fees                         1-2%                      2-4%



                                                               Rate                         15-18%                    18-20%
                                                               Cash Pay                     10-12% plus               12% plus
                        SUB DEBT
                                                               PIK                          3-5%                      6-8% and/or
                                                               Warrants                     No warrants               Warrants


       Source: Lazard Middle Market Credit Overview and Standard & Poor’s, LCD ABL Lending Review Q109
       Note: ABL includes DIP financing




                                                                                                                                           ®
44                                                                                                                                         Kansas
     Pricing of Risk




                                            Yields on 5-year U.S. Treasuries drop while
                                            yields on AAA/AA-rated bonds and BB+ and
                                            below rated bonds jump dramatically.




                                            Spreads over 5-year U.S. Treasuries jump
                                            substantially more for BB+ and below rated
                                            bonds when compared to AAA/AA-rated
                                            bonds.




                       Source: LehmanLive                                    ®
45                                                                           Kansas
III.   PRIVATE EQUITY
     2003-2007: M&A Market


                             BILL THOMAS




                                           ®
47                                         Kansas
     2003-2007: M&A Market


                             ANALYSTS’ RESEARCH LAB




                                                      ®
48                                                    Kansas
     2003-2007: M&A Market


                             PAT HEALY (C3 CAPITAL)




                                                      ®
49                                                    Kansas
     Halloween 2008


                      “WHICH IS MORE SCARY?”




                                               ®
50                                             Kansas
     Lender Relationships




                            ®
51                          Kansas
     Portfolio Companies




                           ®
52                         Kansas
     Secretary Geithner




                          ®
53                        Kansas
     MBA Graduates




                     ®
54                   Kansas
     Private Equity Total Deal Flow




                                      ®
55                                    Kansas
     Private Equity Total Deal Flow




                                      ®
56                                    Kansas
     Private Equity Total Deal Flow




 $200                                                                                                                                                                    800

 $180
                                                                                                                                                                         700

 $160
                                                                                                                                                                         600
 $140

                                                                                                                                                                         500
 $120

 $100                                                                                                                                                                    400

     $80
                                                                                                                                                                         300

     $60
                                                                                                                                                                         200
     $40

                                                                                                                                                                         100
     $20

 $-                                                                                                                                                                      -
           Q1 '04 Q2 '04 Q3 '04 Q4 '04   Q1 '05 Q2 '05 Q3 '05 Q4 '05 Q1 '06 Q2 '06 Q3 '06 Q4 ' 06 Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08       Q1 '09

                                                                                            Number of Deals




                                                                                                                                                            ®
57                                                                                                                                                          Kansas
     Private Equity Total Deal Flow




 $200                                                                                                                                                                    800

 $180
                                                                                                                                                                         700

 $160
                                                                                                                                                                         600
 $140

                                                                                                                                                                         500
 $120

 $100                                                                                                                                                                    400

     $80
                                                                                                                                                                         300

     $60
                                                                                                                                                                         200
     $40

                                                                                                                                                                         100
     $20

 $-                                                                                                                                                                      -
           Q1 '04 Q2 '04 Q3 '04 Q4 '04   Q1 '05 Q2 '05 Q3 '05 Q4 '05 Q1 '06 Q2 '06 Q3 '06 Q4 ' 06 Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08       Q1 '09

                                                                                            Number of Deals




                                                                                                                                                            ®
58                                                                                                                                                          Kansas
     Private Equity Total Deal Flow




 $200                                                                                                                                                                      800

                                                                                                                            $177
 $180
                                                                                                                                                                           700

 $160
                                                                                                                     $143                                                  600
 $140
                                                                                                $128
                                                                                                              $118                                                         500
 $120

 $100                                                                                                  $96                                                                 400

     $80                                                                                                                                        $71
                                                                                          $67                                                                              300
                                                                 $60
     $60                                                                                                                           $53
                                                                                 $48
                                                   $40                   $41                                                                                               200
                      $35      $35                                                                                                       $37
     $40
                                     $28    $27           $29
             $18                                                                                                                                       $19                 100
     $20                                                                                                                                                           $13


 $-                                                                                                                                                                        -
           Q1 '04 Q2 '04 Q3 '04 Q4 '04     Q1 '05 Q2 '05 Q3 '05 Q4 '05 Q1 '06 Q2 '06 Q3 '06 Q4 ' 06 Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08       Q1 '09

                                                                        Capital Invested ($B)   Number of Deals


           Source: PitchBook




                         Capital invested by PEGs has fallen dramatically, indicating substantial equity capacity


                                                                                                                                                              ®
59                                                                                                                                                            Kansas
     M&A Deals – Strategic vs. Financial


         $ in billions                                                                                                                             Deal Volume
             $450                                                                                                                                       3,500

             $400
                                                                                                                                                        3,000

             $350
                                                                                                                                                        2,500
             $300

             $250                                                                                                                                       2,000


             $200                                                                                                                                       1,500

             $150
                                                                                                                                                        1,000
             $100

                                                                                                                                                        500
              $50

             $-                                                                                                                                         -
                         Q1 ' 06      Q2 '06      Q3 '06   Q4 '06   Q1 '07   Q2 '07   Q3 '07   Q4 ' 07   Q1 '08   Q2 '08   Q3 '08   Q4 '08   Q1 '09
         PEG $             $32             $69    $139     $133     $141     $305      $46      $38       $15      $36      $19       $7      $4
         PEG #             517             543     592      552      658      702      665      619       590      412      440      279      188
         Strategic $      $331             $329   $212     $326     $308     $388     $240      $211     $135     $265     $308      $92     $253
         Strategic #      2,406        2,708      2,612    2,561    2,825    2,898    2,618    2,631     2,436    2,449    2,481    1,954    1,517


                       Source: CapitalIQ



                                In number of deals, PEG’s market share stays consistently small.
                  In value of deals, PEGs win large deals when credit markets reach their most aggressive level.
                                                                                                                                                   ®
60                                                                                                                                                 Kansas
     Percent of Private Equity Transactions by Deal Size




                       Source: Pitchbook




             The percentage of capital invested in larger deals expanded rapidly from 2002 to 2007, and then
                 declined since 2007 as investors have recently focused their resources on smaller, more
                                                     accessible deals.
                                                                                                           ®
61                                                                                                         Kansas
     Deal Structure – Average Equity Contributions to LBOs




         Source: Standard & Poor’s LCD, Leveraged Lending Review 4Q08




                                                        YTD 2009 deals involve more than 50% equity.

                                                                                                       ®
62                                                                                                     Kansas
     Private Equity Divestitures




                       Source: Pitchbook




               Divestitures in the up-cycle (’04 through ’07) increased to record levels, driving distributions,
                                                   feeding new fund raises.
                   As no surprise, divestitures now are limited to distressed or very special situations.
                                                                                                                   ®
63                                                                                                                 Kansas
     Private Equity Fund Raising

                         Capital Raised by Fund Size                            Fund Count by Fund Size




     Source: Pitchbook




       Large funds continue to raise a disproportionately large   Funds bellow $1 billion accounted for the majority of
       portion of capital and in Q1 2009, funds between $500      funds, but larger middle market funds ($500 million to
       million and $1 billion received a slightly larger than     $1 billion) are proliferating since 2007.
       normal percentage of funds raised.

                                                                                                              ®
64                                                                                                            Kansas
     Capital Overhang




        $500

                                                                                                                     $400
        $400                                                                                                 $378

                                                                                             $292
        $300                                                                         $263
                                                             $230     $222   $232
                                                     $198                                            $237
        $200
                                            $150

        $100                   $77
                  $43

           $0
                 1998         1999          2000     2001    2002     2003   2004    2005    2006    2007    2008     2009
       -$100

            Equity Invested                 Capital Raised by Funds     Overhang (By Year)      Overhang (Cumulative Total)


                        Source: Pitchbook




                                                                                                                      ®
65                                                                                                                    Kansas
IV.   KANSAS AND MISSOURI ACTIVITY
     Private Equity and Mezzanine Investors Universe




     Office Location                                        Office Location
     Kansas                                            5    Kansas                                      2
     Missouri                                          26   Missouri                                    5
     Portfolio Company Industry                             Portfolio Company Industry
     Industrial Products and Manufacturing             92   Industrial Products and Manufacturing       33
     Consumer                                          68   Consumer                                    23
     Technology                                        26   Technology                                   6
     Healthcare                                        15   Healthcare                                   4
     Business Services                                 13   Business Services                           5
     Media and Communications                          11   Media and Communications                     4
     Food and Agriculture                               4   Food and Agriculture                         2
     Fund Size (mm)                                         Fund Size (mm)
     $100 and under                                    5    $100 and under                              1
     $100 - $300                                       3    $100 - $300                                 1
     $300 and above                                    5    $300 and above                              2
     N/A                                               18   N/A                                         3

            Source: Capital IQ




                                                                                                    ®
67                                                                                                  Kansas
     Kansas and Missouri Headquartered Sponsor-Backed Companies



                                     Portco Office Location
                                     Kansas                                  158
                                     Missouri                                266
                                     Industry
                                     Industrial Products and Manufacturing   131
                                     Consumer                                 88
                                     Technology                               67
                                     Healthcare                               41
                                     Business Services                        56
                                     Media and Communications                 22
                                     Food and Agriculture                     19
                                     Revenues (mm)
                                     $50 and under                           109
                                     $50 - $500                               55
                                     $500 and above                           25
                                     N/A                                     235

                Source: Capital IQ




                                                                                   ®
68                                                                                 Kansas
V.   M&A MARKET
      M&A Activity – Volume by Year




15,000                                                                                             $1,500
                                                                      (68%)
13,500                        Recession
                                                                                                   $1,350
                                                                          (34%)
12,000                                                                                             $1,200        (42%)
                                                                                                                 (34%)
10,500                                                                                             $1,050
 9,000                                                                                             $900
 7,500                                                                                             $750
 6,000                                                                                             $600
 4,500                                                                                             $450
 3,000                                                                                             $300          (37%
                                                                                                                 )
 1,500                                                                                             $150
       0                                                                                           $0
           1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007



                     Source: Mergerstat




              Deal Volume: 2000-2002 – 34% decrease; 2006-2008 – 34% decrease; 1Q08-1Q09 – 37% decrease
              Deal Value: 2000-2002 – 68% decrease; 2006-2008 – 42% decrease
                                                                                                        ®
 70                                                                                                     Kansas
     The Lower and Middle Market Thesis


     Middle Market vs. Large Cap Market
      Higher deal volume
      Less cyclical
      Less competitive and less efficient market
      More value-add opportunities with less mature companies
      Higher equity returns




                                                                 ®
71                                                               Kansas
     M&A Activity – Volume by Deal Size


     # of Deals       2004                2005            2006             2007              2008     2009




                                                                                                             (70%)




                                                                                                                     (73%)

                                                                                                             (86%)




                    Source: Mergerstat




                         Deal volume in the “lower middle market” has declined steadily since 2005.

                                                                                                      ®
72                                                                                                    Kansas
     Number of Deals by Industry




      Source: Factset Mergerstat




                            Only 3 of 49 industries have seen an increase in deal volume activity since Q1 2008.

                                                                                                                   ®
73                                                                                                                 Kansas
     Top 20 Transactions Announced or Closed Since September 2008




                                                            Three industries account for 82% of all deal value since
                                                                               September 2008



       Source: Capital IQ


                                                                                                              ®
74                                                                                                            Kansas
     Deals by Industry


      Business Products & Services (B2B)             Consumer Products & Services (B2B)       Financial Services




                   2008               2009                       2008                2009         2008                 2009




                     Energy                                      Healthcare                 Information Technology




                   2008               2009                       2008                2009         2008                 2009




                  Source: PitchBook      Capital Invested ($B)     Number of Deals
                                                                                                                   ®
75                                                                                                                 Kansas
     Deals Getting Done


                             DEALS ON EITHER END OF THE SPECTRUM




          High-Performance
                                                               Distressed Companies
             Companies




                                                                               ®
76                                                                             Kansas
     Deals Getting Done


     High Performance Companies
      Midwest software business serving insurance brokerage
      $30 million revenue, $8 million EBITDA (21% CAGR)
      Management remaining, reinvesting
      Significant new products in pipeline
      Exclusive Private Equity marketing process
      SELLER ROAD SHOW
      Valuation: $125 million
      Funding
         $25 million senior debt
         $80 million new equity
         $20 million management rolled equity




                                                               ®
77                                                             Kansas
     Deals Getting Done


     High Performance Companies
      Midwest test & measurement business
      $50 million revenue, $15 million EBITDA (12% CAGR)
      Management remaining, reinvesting
      Strong quality of earnings, solid growth prospects
      Marketed to Strategics and Private Equity (targeted)
      Non-competitive strategics: $110 million in cash (7.3x)
         Dilutive math in year 1
         Highly accretive in year 2
         Accretive on historic valuation
      PEG won deal at $100 million
         Cash reduced to $85 million
         Replaced with:
            – $10 million Seller Note (10% PIK)
            – Warrants with “kick” at 2.0x and 2.5x return to buyer, $15 million valuation
      Funding = 40% senior debt; 60% equity

                                                                                             ®
78                                                                                           Kansas
     Number of Bankruptcy Related M&A Transactions vs. U.S. GDP




            Source: Thomson Financial




             The number of bankruptcy transactions is surprisingly low when viewed in the context of the
                                                 economic cycle.
               The lack of DIP and takeout financing is acting as a dam, with fast-rising water levels.
                                                                                                           ®
79                                                                                                         Kansas
     Correlation Between Default and Bankruptcy sales




                                          Default Rate   Assets in Bankruptcy   Bankruptcy Sales

           Source: Capital IQ



                 In 2002, bankruptcy sales expanded dramatically, following increases in default rates and
                                                      bankruptcies.
                 Currently, bankruptcy sales could “explode” in volume when financing becomes available.
                                                                                                             ®
80                                                                                                           Kansas
     Distressed M&A Observations


      Distressed M&A, both in-court and out of court, is just now beginning to increase for several reasons
           Relatively early in the cycle
           As to 363 sales, lack of DIP financing has been a deterrent to filing under Chapter 11
           First-lien creditors impaired in this cycle  therefore, can credit bid
           Lack of take-out financing, whether in-court or out-of-court
           Incumbent lenders often rolling-over/restructuring debt, hoping to maximize outcome when
              company performance and the markets improve




                                                                                                     ®
81                                                                                                   Kansas
     Deals Getting Done


                                 DEALS ON EITHER END OF THE SPECTRUM




          High-Performance
                                                                                             Distressed Companies
             Companies


                                           SOME DEALS IN THE MIDDLE
                                Private (Non-PEG)
                                      Facilitate management or family succession
                                      Sell before capital gain rate increases
                                PEG
                                      Replace tired capital; focus resources ($ and time)
                                      Meet shareholder liquidity needs
                                Strategics
                                      Merger of equals
                                      Meet shareholder liquidity needs
                                Delever Through Sale of Non-Control Equity Position
                                      Filing the GAP
                                      PIPEs and RDs form public companies

                                                                                                             ®
82                                                                                                           Kansas
     Deals Getting Done


     Merger of Equals
      Two national commodity chemical manufactures
           Subsidiary of European conglomerate
           Subsidiary of PEG-held portfolio company
      Each with $300 million in Revenue and $5 million in EBITDA
      Highly cyclical end markets, overcapacity
      Both are sellers, but not for less than cost (book) of $100 million +/-
      Merger integration allows closing 3 of 7 plants; purchasing, R&D, and G&A savings
      EBITDA: 5 + 5 = 10 + 45 = 55
      Asset based lending allows for $80 million in new funding
      Neither would allow other to have control
      New PEG invests with management to own 15%




                                                                                           ®
83                                                                                         Kansas
     Capital Gap




       Source: Factset and Bloomberg



                                       ®
84                                     Kansas
     Purchase Price Multiples Decrease



     10.0x                                                                                                     9.4x
                                                                                                                                                         $100
                            8.8x                                                                                      8.9x          8.7x   8.8x          $90
      9.0x                                                                                                                   8.4x
                                        8.2x                                                                                                             $80
               7.9x                                 7.8x
      8.0x                                                                                              7.5x                                             $70
                                                                 7.1x                                                                                    $60
                                                                             6.9x        6.8x
      7.0x                                                                                                                                        6.3x   $50
                                                                                                                                                         $40
      6.0x                                                                                                                                               $30
      5.0x                                                                                                                                               $20
                                                                                                                                                         $10
      4.0x                                                                                                                                               $0



                                                                                        EBITDA Multiple

                Source: Mergerstat
                Note: Deal Size $10 million to $500 million, excluding negative and multiples over 25




                                  Reported EBITDA multiples are down from record levels.
                         Why do multiples peak in higher earnings years and fall in lower earnings years?
                                                                                                                                                         ®
85                                                                                                                                                       Kansas
     Lower Valuations


      Reduced Expectations
      Increased discount rates against future cash flows
         “Time value costs” very low now, will increase
         Price of risk – very high
         Increased cost of capital
              – Less leverage
              – More expensive leverage
              – More equity




                                                            ®
86                                                          Kansas
     Time and Performance


             Performance




                            Time




                                   ®
87                                 Kansas
     S&P EPS vs. Median Purchase Price as Multiple of EBITDA



     10.0x                                                                                                    9.4x
                                                                                                                                                         $100
                          8.8x                                                                                        8.9x          8.7x   8.8x          $90
      9.0x                                                                                                                   8.4x
                                      8.2x                                                                                                               $80
               7.9x                                7.8x
      8.0x                                                                                             7.5x                                              $70
                                                                7.1x                                                                                     $60
                                                                            6.9x        6.8x
      7.0x                                                                                                                                        6.3x   $50
                                                                                                                                                         $40
      6.0x                                                                                                                                               $30
      5.0x                                                                                                                                               $20
                                                                                                                                                         $10
      4.0x                                                                                                                                               $0



                                                 EBITDA Multiple                                                     S&P 500 LTM EPS

               Source: Mergerstat
               Note: Deal Size $10 million to $500 million, excluding negative and multiples over 25




                                 Reported EBITDA multiples are down from record levels.
                        Why do multiples peak in higher earnings years and fall in lower earnings years?
                                                                                                                                                         ®
88                                                                                                                                                       Kansas
     Value of a Business Through Economic Cycles




                                                   ®
89                                                 Kansas
     Recession Investing Makes Great Vintages




            Source: Preqin; the Economist Intelligence Unit.
            Note: IRR = internal rate of return
            1 Buyout funds with a focus on the U.S. market.




                                                               ®
90                                                             Kansas
     Structuring Deals in the New World


      Senior debt:
         Funding at closing = 2.0x
         Availability = 2.5x
      Mezzanine:
         Funding and closing = 1.0x
         Emphasis on PIK and warrant coverage
      50% equity
      Seller financing (PIK, subordinated, senior-like-pricing)
      Earnouts




                                                                   ®
91                                                                 Kansas
     Earnouts


      Performance Based Payouts
         Revenues
             – Favored by Sellers (simplicity, control)
             – Buyers concerned with conflicts (margin dilution, pipe stuffing, etc.)
         Operating Profit
             – Favored by Buyers
             – Resistance from Sellers (accounting issues, investment spending, control, allocations)
         Gross Margin
             – Reasonable compromise
             – Issues include COGS allocations, CAPEX implications, variable costs arguments, etc.)
         New Rules (FASB 141(R) and 160)
             – Fair value inclusion for Buyers
             – Counter intuitive result for Buyers
             – New cottage industry for “fair value”
             – Significant complexity for strategic buyers in calculating IRR’s and accretion/dilution models for
                  preparing bids and negotiating/structuring deals
                                                                                                           ®
92                                                                                                         Kansas
     Earnouts


      Performance Based Payouts (cont.)
         Disconnect in Risk/Reward Equation
          Illustration:




                – Solution: Performance-Based Earnout
           Theoretical structure (Seller’s view)
             – Issue $14.0 million note at close, due in 16 months
             – Principal adjusted pro rata based on achieving $2.0 million in earnings growth
           Practical Issue
             – Strategic buyer can (but doesn’t like to) fund, with stock and/or cash
             – Private Equity rarely is able to structure second stage funding from lenders, and rarely consents to
                  equity funding for earnout
           Conventional Solution
             – Note is paid over time, or
             – Buyer pays seller X% of (revenues, gross profit, or EBITDA) in excess of ($12.0 million for Y years)
                                                                                                           ®
93                                                                                                         Kansas
     Earnouts


      Performance Based Payouts (cont.)
         Valuation Disconnect
             – For Seller to receive $14.0 million, the company will need to grow substantially beyond the original
                  payout target (loss of residual value)
           Funding Issues Remain
             – For Buyers, paying the earnout may create cash flow bind when company performance is strong
             – Often, buyers also face unexpected covenant barriers to payment




                                                                                                           ®
94                                                                                                         Kansas
     Earnouts


      Retained Equity/Warrants
         Win/Win Solutions
          Illustration:




           Solution:
             – Cash price at closing of $70.0 million (assume $35.0 million in debt and $35.0 million in equity)
             – Capitalize company with $35.0 million preferred stock, with PIK dividend, convertible into common
                   at deal valuation
                – Issue 29% of common (full conversion of preferred as of closing) to sellers
                                          14 / (35+14) = 29%
                – PIK on preferred is negotiated and set so that seller’s percentage of common stock is diluted as
                   company performance falls below hurdles, and visa versa for greater performance


                                                                                                             ®
95                                                                                                           Kansas
     Earnouts


      Benefits
         No accounting issues
         Complete alignment on all strategy matters (investment spending, CAPEX, pricing, hiring,
                compensation, etc.)
           No funding issues
           Seller receives full residual value
      Drawbacks
         Seller is not in control
         Seller’s timing is deferred
         Buyer pays more (for performing companies)
         Buyer has a partner, with full transparency




                                                                                              ®
96                                                                                            Kansas
     Structuring Convertible Preferred


      Heighted arm wrestling over use of traditional convertible preferred vs. non-convertible preferred with
         detached common
           Illustration:
            Situation:
              – Portco is acquired for $100.0 million – $50.0 million debt, $50.0 million equity
              – Gap between bid and ask is approximately $12.5 million
              – Portco’s EBITDA grows from $15.0 million to $25.0 million in 4 years, and is sold
              – If conventional earnout was used, with Seller getting 50% of EBITDA in excess of $15.0 million for 4 years,
                    Seller would receive approximately $11.0 million over 4 years which is likely to be taxed as ordinary income
                – Instead Seller receives “20% retained interest”
            Convertible Structure:
              – Sale at $175.0 million after year 4
              – After debt proceeds of $125.0 million
              – If preferred had no PIK, and conversion was straight up:
                      Buyer – 80% – $100.0 million
                      Seller – 20% – $25.0 million
              – If preferred has PIK @ 10%
                      Buyer – 85% – $106.0 million
                      Seller – 15% – $19.0 million
                                                                                                                     ®
97                                                                                                                   Kansas
     Structuring Convertible Preferred


            Detached Common
              – Preferred paid as if debt
              – If no PIK, proceeds to common are reduced from $125.0 million to $75.0 million
                     Buyer – 80% – $60.0 million (plus $50.0 million)
                     Seller – 20% – $15.0 million




                                                                                                 ®
98                                                                                               Kansas
     PEG Strategy for Tomorrow


      Many firms are out of the new platform market
         Difficult portco performance
         Diminishing and critical investor base
         Estimates range from 20% to 50% of current firms will disappear
      Economic Headwinds Create Change
         Dynamic markets and industries
         Increasing premium on efficiency
         Increasing need to “catch a wave”; a few examples:
           – New healthcare paradigm
           – Emerging technologies
           – Exploit regulated markets
           – Be right on timing in energy related/influenced businesses
           – Select infrastructure opportunities (those that generate (not require) government funding)
      Rewards for strategy/more than structure


                                                                                                          ®
99                                                                                                        Kansas
      Don’t Miss The Big Picture




                                     School for
                                   Private Equity



                                                    ®
100                                                 Kansas
                                      ®


                                      Kansas City

            KC Private Equity Forum:
            Survival, Success & Succession
Dealmaking in Today’s Turbulent Markets:
          Where Do We Go?
                      Presented by:
                      Jack Helms
                       Chairman
                 Lazard Middle Market
              jack.helms@lazardmm.com
                      612.339.0500

				
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