Readying For

8/14/2019 Readying For

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The Annual M&A Outlook Survey

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1KPMG & The Deal The Annual M&A Outlook Survey

Readying for Resurgence ..............................................................2

M&A Outlook 2010 Survey Results............................................ 6

Expert Voices

Ray Liguori, Vice President, Mergers and Acquisitions,

Walmart International .................................................................8

Ted Virtue, CEO, MidOcean Partners ...................................... 9

Mark Copman, Vice President, Corporate Developmentand Mergers and Acquisitions, 3M .............................................10

Scott Glassberg, Managing Director & Carey Do,

Director, Wells Fargo Capital Finance ...................................... 11

Co

ntents


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The M&A market continued to face numerous challenges in 2009.

Global mergers and acquisitions activity for 2009 was $2.3 trillion,

down 22% from $2.94 trillion in 2008. Although the GDP appeared

to be improving, unemployment reached a multi-decade high of 10%,making consumer demand and revenue projections less predictable.

However, there have been some recent positive signs for dealmakers. Globally, deal volume jumped 15% in the fourth

quarter of 2009 from a year earlier. Deal activity was particularly strong in the U.S., where deal volume more than doubledfrom the fourth quarter of 2008 to the fourth quarter of 2009. Several large deals dominated the headlines in the fall andindicate that M&A activity may become more robust in 2010. In December, Exxon Mobil Corp. announced plans to buyXTO Energy Inc. in a deal valued at $31 billion. A month earlier, Warren Buffetts Berkshire Hathaway Inc. agreed to buyBurlington Northern Santa Fe Corp. in a $34 billion deal. According to the Berkshire Hathaway press release, the dealwas motivated in part by Buffetts general optimism concerning the U.S. economy. Another recent noteworthy deal isComcast Corp.s acquisition of NBC Universal from General Electric Co., which values the media company at $30 billion.The takeover battle for Cadbury plc indicates that the nancing atmosphere may also be improving. If Kraft Foods Inc.sbid succeeds, nine banks have agreed to provide $9.3 billion in nancing.

It appears that 2010 may be a transition year in which deal volumes increase, with certain sectors and certain dealstructures dominating the landscape. In order to gain a timely perspective on the M&A market, KPMG LLP and TheDeal LLC conducted a recent survey of 360 M&A professionals, including public companies, private companies and

private equity funds. The ndings of this sur vey are summarized herein.

Readyingfor

ResuRgenceM&A Prospects for the Next 12 MonthsBy Sherrie Nachman


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Deal Volume May Rebound

Many deal professionals are hoping that 2009 marksthe bottom of the deal cycle, and the respondents inour survey seem to believe that it will. In 2009, 35%of all respondents did not engage in any M&A activity.However, 31% completed between one and two deals;

17% completed between three and four deals; and 11%completed ve to 10 deals. Six percent of respondents

were extremely active and completed more than 10 deals.Compared with 2008, 40% of those who participated inthe survey stated that their companies did fewer acquisi-tions in 2009 than in 2008.

Companies and PE funds intend to complete moredeals in 2010 than in 2009. Only 26% of the respondentsin our sur vey stated that they would not be involved in anyacquisitions in 2010. A respectable 33% stated that theyplanned to buy between one and two companies, and 19%stated that they planned between three and four acqui-

sitions. In the coming year, 15% said that they plannedto complete between ve and 10 acquisitions, and 6%planned on completing more than 10 acquisitions. All in all,74% of respondents said that they planned on completingan acquisition in 2010, compared with 65% who actuallycompleted an acquisition in 2009. Dan Tiemann, Amer-icas Transactions & Restructuring Leader, says that thoseresults are consistent with what he is seeing in the market-place. There is a sense among dealmakers that 2010 will bea better year for M&A. The improvement in both the debtand equity markets has made buyers slightly more con-dent about pursuing deals, Tiemann says. Cherie Homa,

Managing Director and Co-Head of KPMG CorporateFinance LLC, adds that due to the challenging economicenvironment, companies have been hoarding cash for thepast year. This has resulted in a number of companies withstrong balance sheets that are in an excellent position touse cash to fund acquisitions in 2010.

In general, respondents believe that the M&A tideis turning. A robust 74% said that they were more opti-mistic about the economic environment today than they

were a year ago, and 70% said that they were more opti-mistic about the deal environment today than they werea year ago. When asked where we are in the economiccycle, 6% said that they saw a sustainable recovery takingplace at the end of 2009, and 48% said that they thoughtthe economy was leveling and would begin to improve in2010. However, 32% said that they expected the economyto continue to decline until 2011, and 14% did not expectthe economy to recover until 2012 or beyond.

Deal Size May Also Increase

Deal size continued to be relatively small in 2009. In oursurvey, an overwhelming 83% said that the average enter-

prise value of each of their companys acquisitions was

less than $250 million. Just 9% said the average enterprisevalue of their acquisitions was between $250 million and$500 million; 4% valued their average deal at between$500 million and $1 billion; and only 3% stated that theiraverage acquisition was between $1 billion and $5 billion.

However, survey respondents anticipate that deal

size will increase in 2010. The vast majority of respon-dents still plan to focus on relatively small deals in 2010;76% said that they expected the average enterprise valueof their acquisitions would be less than $250 million in2010. However, 15% said that they expected their averageacquisitions to be valued at between $250 million and$500 million; 5% expected their average acquisition tobe valued at between $500 million and $1 billion; and4% believed their average deal size would be between $1billion and $5 billion.

Change in Strategic Focus Fuels

Divestitures

The prevalence of smaller deals may also be a result ofcompanies needing or choosing to divest divisions orsubsidiaries. In the survey, 25% of respondents said theirorganization completed between one and two divesti-tures in 2009. A total of 9% said they completed betweenthree and four divestitures, and 5% said they completedbetween ve and 10 divestitures. A substantial 42% saidthey increased the number of divestitures in 2009 fromthe previous year. Companies said that they expect tocomplete about the same number of divestitures in 2010.

For the coming year, 27% said that they planned betweenone and two divestitures, and 7% said they plannedbetween three and four divestitures.

What is motivating these divestitures? When asked fortheir top two reasons for conducting a divestiture, 44%said it was because of a change in their strategic focus;32% said the divestiture was opportunistic; and 23% saidthey were motivated by a desire to raise cash or improveliquidity. Other sellers were interested in deleveragingtheir balance sheets (18%), downsizing their business tomeet current demand (10%) or in response to regulatoryrequirements (7%).

Sector Turmoil Creates M&A

Opportunities

It is not surprising that the industries that have been expe-riencing the most turmoil are those where respondentsexpect to see the most deal activity. Respondents statedthey expected the most active industries to be banking(41%), healthcare (32%) and nancial services (30%). Otherindustries that were expected to be active include: infor-mation technology (22%), energy (19%), real estate (15%)

and retail (12%). Banking and nancial services are indus-


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tries that have been subject to a large amount of govern-ment investment, regulation and scrutiny. Over 130 banksfailed in 2009, creating numerous investment opportuni-ties for PE funds and other investment institutions. Whilemany of these industries may seem troubled, they alsopresent huge restructuring and investment opportunities

for the right buyers, particularly private equity investors,says Shawn Hessing, National Managing Partner, PrivateEquity. I do expect some of the industries that are in tran-sition to be more active in terms of M&A.

Healthcare has been placed at the top of the federalgovernments legislative agenda. Any change to the currenthealthcare industry will likely also create a number ofM&A opportunities. Certain sectors will have a degree ofuncertainty lifted in 2010, says Jonathan Lynch, ManagingDirector & Head of Investor Relations for CCMP CapitalAdvisors LLC. For example, healthcare has been shroudedby impending reform. As the healthcare picture gains

clarity in the coming months, that should benet transac-tion decision making Lynch says.

In terms of which countries will have the most activeM&A markets in 2010, 65% of respondents ranked NorthAmerica as most active. Those who participated in the

survey also believe that China (49%), Western Europe(28%) and India (23%) would be among the more activemarkets.

Challenges Still Exist

Despite some relative optimism in the industry, thereare still numerous obstacles that are hindering a robustdeal environment. When asked which single factor willmake it hardest for deals to be completed in 2010, respon-dents said the availability of debt nancing was the No.1 obstacle (37%). Dealmakers also believe that the deal

environment is being negatively affected by unpredict-

able revenue projections (20%), disputes concerning valu-ations (17%) and generally negative market conditions(16%). In addition, many businesses are trying to antici-pate how any new tax legislation or regulatory require-ments will affect their valuations, says Lisa Madden,National Leader, M&A Tax.

In the current environment, it has become more dif-cult to make accurate revenue and prot projections.When asked which factors acquirers considered whenevaluating earnings potential, 62% of respondents cited a

slowing growth environment. Other concerns includedearnings dilution (33%), commodity price volatility andexposure (28%) and the relative strength or weakness ofthe dollar (19%). Some of those issues undoubtedly causedsome buyers to walk away from deals in 2009. Last year,32% said they aborted between one and two deals.

When asked how the current economic conditions willaffect their M&A plans in 2010, 39% said that the condi-

tions would cause a reduction in the number of deals, and32% said that they would be using a higher ratio of equity when nancing deals. However, a portion of the groupsaw opportunities in the current environment: Twenty-nine percent said that economic conditions would cause

them to increase the number of deals they would pursue.A percentage of the group (27%) would use more cash tonance deals and another percentage (21%) would relymore heavily on deferred or contingent payout structures.

In addition to the general recessionary pressures, 32%said that they thought the primary cause of distressedbusinesses was the fact that companies were still burdenedby too much debt. An additional 20% blamed misman-agement, 18% believed it was the inability to maintain orrenegotiate credit lines, and 12% said it was the inability toissue new credit at reasonable terms. A total of 11% citedexcess xed capacity, and 8% thought commodity expo-

sure was the main cause.

A

robust 74% said that they were more

optimistic about the economic environment

today than they were a year ago, and 70% said

that they were more optimistic about the deal

environment today than they were a year ago.


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Distressed Assets May Create

Opportunities

While the recent recession has affected almost all busi-nesses, it has also created buying opportunities for those

who have access to funding. Companies with solid balancesheets who can borrow or use stock and those with cash

on hand will have the chance to acquire distressed assets,frequently at a discount.

In fact, 42% of the respondents in the survey said thattheir companies will be opportunistic buyers of distressedassets in 2010, and 7% said that their companies would befocused, repeat buyers. Investing in or acquiring distressedbusinesses and assets presents numerous nancial, tax andoperational complications for buyers, says Drew Koecher,KPMGs U.S. Restructuring Leader. He says acquirers ofdistressed targets need to understand the opportunitiesand risks in out-of-court transactions and carefully assessthe motivations and positions of the players in the capital

structure. Sometimes it will be benecial to pre-empta process while the target is in distress. At other times,bringing fresh capital into a prearranged or prepackagedbankruptcy process may be more compelling and offerbetter risk protection, Koecher says. When asked at whatpoint they typically look at distressed assets, 41% said thatthey do so in an out-of-court, private basis. Only 4% soughtout deals in a post-conrmation bankruptcy setting andonly 3% did so in a bankruptcy court context.

For those who were buyers of distressed assets, 29% were attracted to the turnaround opportunity; 27% weremotivated by a reduced purchase price; and 10% liked the

ability to cherry-pick attractive components of a businessin a bankruptcy court-approved sale. Last year may havebeen a record year for distressed M&A. Peter Gilhuly, apartner with law rm Latham & Watkins LLP who special-izes in the sale of distressed assets, says that several factorscontributed to the large number of asset sales. Manycompanies that could not obtain debtor-in-possessionnancing and those that could not renance their debtswere not able to reorganize and wound up being acquired,in whole or in part, he says. Buying and selling businessesin Chapter 11 has become almost a routine process. Sales

were also prompted by companies that needed to quickly

convert assets into cash or satisfy debts. Gilhuly expects

distressed M&A to continue to be extremely active in 2010.Strategic buyers, distressed bond funds and hedge funds

with expertise in this area will likely make up the bulk ofthe buyers.

Private Equity Deals Should

Increase

With the credit markets under siege, private equity activitydecreased substantially in the last two years. Uncertaintybreeds inaction, says Lynch. However, with greater visi-bility in earnings and improving stability in nancing, someof that uncertainty is dissipating. Deal ow wil l follow.

Respondents are optimistic that PE dealmaking is aboutto make a comeback. A signicant 61% of respondents saidthey believed that nancial-sponsored M&A activity wouldincrease in 2010; 30% said they expected it to stay the same;and only 9% expected it to decrease. In fact, several largeprivate equity deals were announced in the second half of

the year, including TPG Capital and the Canada PensionPlan Investment Boards $4 billion deal to buy IMS HealthInc. and General Atlantic LLC and Kohlberg KravisRoberts & Co.s acquisition of defense contractor NorthropGrumman Corp.s TASC consulting unit for $1.65 billion.

Last year, several PE portfolio companies led for bank-ruptcy, including Chrysler LLC, Fortunoff and ReadersDigest Association Inc. When asked how the bankrupt-cies of portfolio companies might affect future PE deals,51% said that they expected leverage ratios to decrease,while 25% expected an increase in government regulation,and 17% did not believe the bankruptcies would have any

signicant long-term effect.

Conclusion

Last year was another challenging year for those involvedin M&A. Strained credit markets and slowing consumerand business demand made acquirers cautious. However,numerous large deals were recently announced, and animproving GDP and a stock market rally have helped toimprove morale in the M&A community. The vast majorityof respondents are optimistic that 2010 will be better bothfor the general economy and for those looking to make

deals. We hope they are right.

I

t is not surprising that the industries that have

been experiencing the most turmoil are those where

respondents expect to see the most deal activity.


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Other

Government State & Local

Government Federal

Higher Ed./Not-for-profit

Investment Mgmt. & Funds

Transportation

Chemicals

Electronics

Media

Food & Beverage

Insurance

Professional Services

Consumer ProductsSoftware

Telecommunications

Industrial Products

Automotive

Retail

Pharmaceuticals

Real Estate

Energy

Information Technology

Financial Services

Healthcare

Banking

26%

33

19

15

6

76%

15

54

0

31%

6

2

61

6

Approximately how many acquisitions do you antici-pate your own organization will complete during 2010?By % of respondents

What do you anticipate the average enterprise valueper acquisition will be in 2010?By % of respondents, among those who anticipate completing at least one acquisition during 2010

How does your firm anticipate financing futureacquisitions?By % of respondents, among those who anticipate completing at least one acquisition during 2010

Morethan 10

5-103-41-20

Average No. of acquisitions: 2.8> $5B

$1B$5B

$500M$1B

$250M$500M

Less than$250M

Combination ofall threeAll stockAll debtAll cash

In 2010, what top three industries do you think will bemost active in mergers and acquisitions?(Choose up to three) By % of respondents

41%

32

30

22

19

15

13

12

12

10

9

99

8

8

8

7

7

4

4

4

3

2

1

3

M&A OUTLOOK 2010 SURVEY RESULTS


Source: KPMG LLP and The Deal LLCAnnual M&A Survey 2010


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M&A OU TLOOK 2010 SURVEY RESULTS

61%

9

30

In 2010, do you expect the amount of financial-sponsored M&A activity to ...By % of respondents

37%

20

17

16

5

3

1

1

Other

Large declines instock prices (to be

used as currency)

Burdensome debtterms

High borrowing costs

General negative

market conditions

Dispute concerningvaluations

Unpredictablerevenue projections

Availability ofdebt financing

Stay the sameDecreaseIncrease

74%

26

Are you more optimistic about the economicenvironment today than you were a year ago?By % of respondents

NoYes

70%

30

Are you more optimistic about the deal environmenttoday than you were a year ago?

By % of respondents

NoYes

What single factor do you believe will make ithardest for deals to be completed in 2010?

By % of respondents


Source: KPMG LLP and The Deal LLC Annual M&A Survey 2010


10/16


Where do you think the retail M&A marketwill be focused in 2010?Ray Liguori: It is important to remem-

ber that from an M&A perspective Wal-

Mart Stores Inc. has an international

focus. We were one of a few global retail-

ers looking for opportunities in 2009,

but there werent many sellers of qualityassets. Things have settled down and val-

uations are rebounding, so we anticipate

that there will be more willing sellers.However, I still think that there will

be few willing cash buyers. Geographi-

cally, we see good opportunities in the

developing markets of Asia and Latin

America, and I think we will see the big

retailers consolidate their positions in

large high-growth markets such as Bra-

zil and China. These same players will

rationalize their portfolios in underper-

forming markets.

Has Walmarts strategy changed in responseto the slowing economy?Our M&A strategy hasnt changed. We

are strategically focused. We look to buy

retailers that are focused on the SaveMoney. Live Better value proposition.

We have clear priorities on where wed

like to expand. We dont wait to see if a

company is for sale. We identify targets

that will be a good strategic t for Wal-

mart, then develop the opportunity.

In retail its different because most of

the targets are local family-owned com-panies. This means that we establish

relationships over time and ultimately

convince them to join the Walmart

family. Its a long process but a success-

ful way to move forward. Last year, we

closed one deal early in the year and

then worked on relationship building.

In 2010 we will continue to build the

pipeline.

When evaluating a potential transac-

tion or investment, will you be looking at

anything differently than you would havetwo years ago?One of the things that the economic

crisis has taught us is the importance of

focusing on quality companies. During a

recession, everyone struggles. We have

more condence with solid brand names

and quality management teams. Also,

when buying a group of existing stores,

there is no substitute for location. We

can x a bad store, but cant x a badlocation. It is difcult to improve a bad

brand name as well.

Its important to note that only 30%

of our international revenue comes from

the Walmart or Sams Club-branded

stores. In other countries, we own localbrands, and not all of them are big-

box stores. But all of them consistently

embody the Walmart concept of Save

Money. Live Better.

What are the new deal breakers, domestic orinternational?The biggest change for dealmaking over

the past few years has been the increased

importance of Foreign Corrupt Practices

Act (FCPA) diligence. One of the nice

things about working in the developed

world is that most places do business the

way we do in the United States. However,

there are many places where the customs

and norms are very different. We need

to know that a potential targets business

practices are consistent with Walmartshigh ethical standards. We conduct a fairbit of forensic diligence to conrm that

the business conducts its affairs legiti-

mately. We must ensure that we dont

subject our company to criminal and

reputation risk.

Name the international markets that arebeginning to heat up, and why?The regions that come to mind are

Latin America and Asia. For a company

our size, were looking for opportunities

that can really have a prot impact.

The large developing markets are very

attractive to us.

We have a strong presence in Bra-

zil and China and have partnered with

Bharti to build a retail presence in India.

We also have a team on the ground inRussia, and we continue to evaluate that

countrys opportunities. In the Ameri-

cas, we are the No. 1 retailer in Mexico,

Central America and Chile. We havestrong businesses in Brazil and Argen-

tina, where we need to build scale.

In Asia, its mostly about China and

Japan. We have a business in Japan thats

recently turned the corner. We see a tre-

mendous opportunity to consolidate and

improve the market dynamics because

its very fragmented in Japan. China

is simple because there is tremendous

growth potential. A very small portion of

China is served by formal retail. We are

improving customers lives by providingbasic necessities in a clean environment

at affordable prices.

Overall, where do you see the M&A marketheaded in the next year?Financing is slowly becoming available.

The investment banking community has

recoveredfaster than the U.S. economy.

Access to credit will increase, but lend-

ers will be more cautious. Lenders will

be more focused on core-value proposi-

tions. Future growth projections shouldbe fairly conservative.

The worst scenario in the M&A mar-

ketplace is when there is too much credit

available and acquirers are out there

just looking to do deals, regardless of

whether the deals make economic sense.

We are fairly conservative. Coming out

of the nancial contraction, people

will be more sensible and realistic in how

they invest. Id be very surprised to seecrazy premiums being paid like a couple

of years ago.

Ray Liguori, Vice President, Mergers and Acquisitions,Walmart International

A Long-Term Approach to Growing

the Walmart Family


11/16


Over 70% of those who participated in oursurvey were optimistic about both the economy and M&A for 2010. Is that consistent withyour rms views?Ted Virtue: Were a little more cautious

than the public markets. There is a con-

sensus that the rebound in S&P earnings

growth will be about 30%. That may be a

bit high. The public markets and PE rms

will probably see a more choppy recovery,as theres still a lot of debt deleveraging

to be done and unemployment will weigh

heavily on consumer spending for sometime. However, there will be a signicant

uptick in M&A activity.

I think that there will be strategic

activity in the marketplace that will ben-

et the PE world. Currently, there are

many companies that need PE capital

because there are not a lot of banks and

creditors to offer nancing. This will

shift a number of companies into the

hands of private equity as we come out of

the downturn.

What lessons can the PE community take fromthe economic turbulence of 2009?It seems that the 100-year ood hap-

pens every ve years now. We live in amore volatile time. Most of the major

markets are heavily correlated with each

other, such as debt, xed income and

private equityon a global basis. That

correlation creates the potential for an

increase in volatility. Going forward, we

will have to incorporate that type of vola-

tility into our valuation models and it wil laffect nancing.

There is a belief that the PE com-

munity welcomes chaos because chaos

may create added opportunity. Thats

not necessarily the case. There is a

point where too much chaos brings

paralysis to deal ow. It is tough to

execute change-of-control transac-

tions during chaotic periods. And its

certainly been proven prudent for pri-vate equity rms to remain patient and

disciplined and stay focused on long-

term goals during periods of turbu-lence and not let this quarters disaster

drive long-range plans.

How do you think nancing or deal struc-tures will change for PE rms in the near

future?This relates to the credit markets. Bond

markets have come back to high-yield

spreads and are close to historic norms.

Credit markets are open to high-yield

and dividend recap deals. The appetite

for traditional credit, buyouts and tra-ditional nancings has begun to return.

There is a growing demand for equity,

both primary and secondary, in larger

companies.However, this is not true in the smaller

and midcap spaces. We dont see a lot of

banks ooding back into those markets,

and those that have returned are mov-

ing slowly and cautiously before approv-

ing any nancing. There could be some

inefciency in this space, so PE rms can

bring liquidity into these markets. Theremay be more structured deals instead of

change-of-control deals. This will be a

great opportunity for us over the course

of the next 12-to-18 months. And in the

absence of this nancing, we may see an

emphasis on companies with the ability

to grow organically, or a focus on acquisi-

tions that may provide a company with a

growth catalyst.

Are there any particular deals MidOcean

closed in 2009 that serve as an illustration ofthings to come?We acquired the Allant Group in Octo-

ber 2009, which may be indicative of

future deals. Allant is a leading provider

of marketing optimization solutions that

combines database management, ana-

lytics and predictive intelligence that

we were able to acquire at a relatively

low valuation from its founder. With

a capital infusion and several improve-

ments, we believe that we can grow the

business substantially, as we feel it is well

positioned in an industry sector undergo-ing rapid and signicant transformation.

Structuring-wise, this is a traditional

deal and does not involve any unex-

pected leverage ratios. We were familiar

with the marketing space and the man-agement team as well; MidOcean puts

a premium on superior management as

a primary growth driver in all our busi-

nesses. I think there is a lot more caution

out there on the PE side, and extra effort

is being made to really diligence-out sta-

bility and growth. There is bifurcation ofthinking regarding where the public mar-

kets and PE view growth. I think there

will be over-leveraged companies coming

out of the extend-amend-and-pretend

game with banks. Solid companies will

need capital to survive and will turn to

PE to solve some capital issues.

Two target sectors for MidOcean are listed asConsumer & Leisure and Media & Enter-tainment. With consumer condence creeping

back up and media in transition, how are youapproaching these industries?In general, a lot of companies are in need

of capital. Our review process hasnt

changed. We look for great brands so

we can bring transformative growth and

high-quality management. There will be

strong opportunities to purchase compa-

nies that normally wouldnt be for sale in

normal times, and stronger companies in

the consumer sector recognize that it is a

good time to acquire market share at the

expense of weaker competitors. The sameis true in the media sector. There are a

ton of distressed traditional media com-

panies, no matter how theyre backed.

Old media must transform to new

media by bringing in the right strategies

and the right people. There is an oppor-

tunity to capture value in those markets.We think thats going to be a big oppor-

tunity for private equity, particularly

those private equity teams experienced

in working with industry knowledge and

management rather than with leverage.

Ted Virtue, CEO, MidOcean Partners LP

Seeking Opportunities with

Cautious Optimism


12/16


How do you determine if a deal makes sensefor 3M?Mark Copman: 3M has a very well

established due diligence process that

begins by asking the same six questions,

regardless of the type of deal.We ask: 1. Is there a strategic t?

2. Is there a nancial t? 3. What are

the primary r isk factors associated withthe deal? 4. How will we integrate the

company? 5. Why is this company being

sold? and 6. Whats the process to get

to a successful conclusion? As we pro-

ceed in the due diligence process, we get

more granular in addressing these six

questions.

When 3M completes an acquisition, you focuson the rst 100 days. Why?From the time we have a nonbinding

letter of intent, we dedicate a teamto create a complete integration plan.

The team reports to a business person

who has strong integration experience,

rather than asking the leader to learnon the job.

We believe it is extremely important

to be able to hit the ground running day

one after close. We strive to ensure that

the plan is communicated to everyone

in the company being acquired right

away. We may not have every answer,

but we want the organization to know

who they can go to with their questions.

Its people that drive the business.

You have customers and suppliers rely-

ing on you to maintain a smooth tran-

sition. When we make an acquisition,

we do so because the business has real

value; our goal is to enhance that value.

You only made four acquisitions in 2009, asopposed to 17 in 2007. Was that a functionof the economy or was it because of other

strategic reasons?You are right: 2009 was a slower year. In

part, thats because the opportunities

we saw werent appealing, and partly

because we were especially cautious

with how we spent shareholder dollars

given all of the market uncertainty thatprevailed for much of the year.

Sometimes the most appealing

opportunities you see are those wherethe operating performance of the busi-

ness is sound but the balance sheet has

some troubling issues. We looked for

those opportunities but didnt see as

many as wed hoped to nd. Another

reason is probably the fact that in many

cases sellers didnt want to sell into a

market trough and where it was very

hard to make accurate prot predic-

tions that both sides could agree on.

The environment was challenging for

both buyers and sellers.

However, we are pleased with the

quality of the businesses we acquired

in 2009. Our acquisition of Ace Ban-

dage is one good example. Aces product

line and brand strength dovetails nicely

with our growing consumer healthcare

portfolio.

How do you feel about the prospects for2010?There was a lot of uncertainty and a lotof concern in 2009. This year, theres

still uncertainty. But it certainly seems

that the market has a more positive

outlook. There is a general sense in the

business community that we have seen

the bottom.

At 3M, we feel that the current envi-

ronment offers signicant opportuni-

ties for value creation both organically

and through acquisition. We are look-ing forward to 2010.

How has your naval training and service as an ofcer inuenced your approach tobusiness?One common theme in both the mili-

tary and in business is the emphasis on

the power of the team. At 3M, we have a

strong collegial environment, much like what I experienced in the Navy. Any

success you have, theres a lot of people

that deserve credit.

Mark Copman, Vice President, Corporate Developmentand Mergers and Acquisitions, 3M Co.

Strict Due Diligence Leads to a

Disciplined Approach


13/16


What are your thoughts on M&A as weenter 2010?Do: Due to the tough lending environ-

ment and the overall softness in the

economy last year, M&A activity was

slow, particularly in the rst half of2009. Sponsors were mostly focused

on managing their portfolio compa-

nies rather than putting new money towork.

However, though were off to a slow

start, we believe M&A activity will

gain traction this year as liquidity con-

tinues to come back into the market

and buyer/seller expectations become

more aligned.

Glassberg: The PE re went out for

a time in 2009 and we saw a lot of PE

rms focus on operational and debt

restructurings of their portfolio com-panies and, add to that, there was not a

lot of credit available for M&A activity

in general.

We clearly saw that start to changetoward the end of the second half of

2009. In 2010, PE is ready to refocus

and put some money back into the

marketplace and were looking to help.

By the middle of the second quarter,

we expect to see more activity within

the middle-market leveraged buyouts

area.At the end of 2009, we started to see

purchase multiples on deals increase.

Its still early in the cycle, but there have

been some specic deals that we have

been involved in where private equity

rms were willing to pay a higher multi-

ple than we would have expected, given

market conditions. I think this has

been, thus far, limited to certain situa-

tions, but I expect the trend to continue

in 2010.

Where do you see activity taking place inthe M&A market in 2010 that was lackingin 2009?Do: Tough to specically pinpoint a

sector but from what weve seen, rela-

tive to other industries, technology as a

sector has performed fairly well in 2009,

as these companies were able to more

quickly reduce capital spending and cutcosts. We believe tech will continue to

be strong in 2010.

We spend a lot of time in this space,

especially on the software side, and

saw activity really pick up starting

the second half of 2009. Healthcareis another area, and has remained one

of the more recession-resistant spaces

that did not seem as impacted during

the downturn.

Impending healthcare reform should

also create additional M&A opportu-nities. In general, improving liquidity

in the debt markets will bode well for

overall M&A activity in 2010.

Glassberg: Overall, there will be more

activity in the M&A marketplace,

largely because PE money that has been

sitting on the sidelines is probably going

to get deployed.

I think that private equity players

will be trying to gauge which indus-

tries, such as homebuilding supplies, forexample, or industrial and commodity-linked businesses, are at the bottom of

the cycle and represent good value. This

may trigger more activity.

What are the factors in determining if a dealmakes sense for Wells Fargo and how havethose factors changed over the past 12-to-18

months?Do: Our approach has remained rela-

tively consistent, even throughout the

booming M&A days of 2005-2007. Our

analysis is substantial and examines the

underlying fundamentals of a company,

the strength of the management team,

the trends of the industry and the track

record of the sponsor (if there is one)when we do our evaluation.

One area where we probably focus a

bit more time on these days is assessinga borrowers downside case.

Glassberg: Liquidity is paramount. We

look at whether or not the transaction

is properly capitalized, we make sure

projected cash ows leave a margin for

error, and we pay attention to the fore-

casts we are working off of and that they

are in line with what we expect, given

where things are in the economy and

the industries our borrowers are in. We

are not alone.I think there are a lot more conserva-

tive approaches in the marketplace than

there were 18 months ago. However, I dobelieve, now that weve gotten through

the rougher part of this economic cycle

and it looks like we are headed in the

right direction, there may be some loos-

ening up as investors and their lenders

look at things from every possible angle

and see more opportunity and are less

fearful of the future.

What are the new deal breakers, domestic and international?Do: I think that aggressive multiples

and covenant-lite structures are things

of the past, at least for 2010. The spon-

sor now must have meaningful skin in

the game. In some cases, there was very

little equity on the line 18 months ago

because leverage multiples got so out of

whack. That has currently changed.

Scott Glassberg, Managing Director,Wells Fargo Capital Finance

Carey Do, Director, Wells FargoCapital Finance

A Continued Focus

on the Fundamentals

continues


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Glassberg: In general, the bar is higher

than it was 18 months ago on most deal

terms and on company performance.

Specically for us, we are more

focused on where the PE rm is in

terms of its investment level and com-mitment to the companies we nance,

and on having good capital structures,

which we may not have focused on quite

as much two years ago.

Thinly capitalized transactions and

divided recaps are still deal breakers for

most lenders involved in M&A right now.

What lessons have the banking community learned with regard to M&A activity as

a result of the challenging global economicclimate?Do: Dont just chase deals, make sure

the fundamentals are there and each

deal makes sense. Oftentimes, we are

will ing to trade pricing for better struc-tures and credit quality. Also, there will

be a refocus on due diligence and qual-

ity of earnings. Pro forma EBITDA

addbacks and adjustments that were

glossed over in the past are now moreheavily scrutinized.

Glassberg: From a lending perspective,

dont get caught up in the latest trends.

Stick to the fundamentalsthats a lot

of what we did. We stuck to our knitting,

so to speak. A lot of people didnt do that

and got caught up in what was going on

and forgot that things can go wrong on

you very quickly.

Its a simple lesson: know what you doand try to stick to it and be disciplined.

I think the industry will remember thisperiod for a long time, and the practice

of doing thorough, quality diligence

and structuring deals for the downside

potentialwith good capital structures

and liquiditywill be on the forefront

of M&A for a while.

The information obtained in this article was the result of an annual outlook M&A survey conducted jointly by KPMGLLP and The Deal LLC in the fall of 2009. The survey was sent to contacts at KPMG and to subscribers of The Dealmagazine. More than 300 M&A and corporate development executives from Fortune 1000 and middle-market compa-nies and private equity rms participated in the survey.

Due to rounding/the exclusion of dont know responses, graph totals may not equal 100 percent.


15/16

Shawn Hessing

National Managing Partner, Private [email protected]

Cherie Homa

Managing Director and Co-Head,KPMG Corporate Finance LLC

[email protected]

Drew Koecher

U.S. Leader, [email protected]

Lisa Madden

National Leader, M&A [email protected]

Dan Tiemann

Americas Transactions & Restructuring [email protected]

Contacts


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