effect of u.s. credit downgrade and stock market ... · financing and capital shares strategic...

Effect of U.S. Credit Downgrade and Stock Market

Fluctuations on Deal-Making

October 3, 2011

2 © 2011 Crowe Horwath LLP

Executive Summary

M&A Overview

Market Reactions to U.S. Credit Downgrade

Positive Factors Affecting M&A Opportunities

Negative Factors Affecting M&A Opportunities

What Next?


M&A Overview

M&A Transactions

Transactions are with various forms of currency, including

financing and capital shares

Strategic acquisitions drove deal volume up from lows in 2009

Corporations have cash and are utilizing it for growth despite

credit concerns

Strategic buyers outbidding financial buyers

Lenders requiring 40% equity for LBOs (“leveraged buyouts”)

which is lowering purchasing power

Increased use of alternative financing – earn-outs, seller

paper, etc.


M&A Overview (continued)

The following chart summarizes quarterly deal values and

volumes in North America since September 2007:

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

Strategic vs. Financial Buyer M&A (North American Targets)

LBO $ Strategic $ LBO # Strategic #

million

Source: Capital IQ



The following chart summarizes quarterly deal values and

volumes globally since Q4 2007:

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

$550,000

$600,000

$650,000

Strategic vs. Financial Buyer M&A (Global Targets)

LBO $ Strategic $ LBO # Strategic #

million

Source: Capital IQ



M&A Transactions (continued)

EBITDA multiples have increased in North America since 2009

The following chart summarizes deal multiples by deal type in North

America since September 2007:

6.0x

7.0x

8.0x

9.0x

10.0x

11.0x

12.0x

Median Enterprise Value / EBITDA

LBO StrategicSource: Capital IQ



M&A Transactions (continued)

The following schedule summarizes deal multiples by sector in North

America since 2008:

(As of 8/31/11)

Less Than Greater Less Than Greater Less Than Greater Less Than Greater

Target's Sector $500M Than $500M $500M Than $500M $500M Than $500M $500M Than $500M

Consumer Discretionary 11.0x 9.1x 6.7x 10.8x 10.4x 10.4x 11.2x 8.5x

Consumer Staples 7.3x 10.3x 7.7x 9.0x 12.6x 9.3x 8.0x 9.0x

Energy 6.8x 10.4x 5.3x 10.0x 8.7x 10.2x 9.5x 14.2x

Financials 10.9x 13.2x 15.6x 10.6x 10.9x 14.1x 13.1x 14.7x

Healthcare 14.6x 17.5x 6.7x 11.5x 11.3x 10.3x 12.3x 11.0x

Industrials 9.1x 11.8x 6.5x 9.1x 6.7x 9.0x 8.6x 9.9x

Information Technology 14.7x 16.3x 8.4x 12.7x 11.9x 13.6x 12.0x 16.4x

Materials 8.9x 10.0x 8.6x 9.4x 7.9x 11.9x 6.5x 10.7x

Telecommunications Services 8.2x 11.1x 5.3x 5.4x 6.5x 7.6x 5.7x 7.4x

Utilities 8.0x 9.1x 6.9x 30.3x 9.5x 7.1x 11.9x 9.4x

Source: Capital IQ

Median Implied Enterprise Value / EBITDA (North American Targets)

2008 2009 2010 2011

Last Twelve Months Ending August 31st of:



M&A Markets are Very Fragile

Fluctuations in borrowing costs and stock markets cause

stagnation

Sellers and buyers like stable environments for negotiating

prices

Instability can be offset by opportunistic buying

Q1 2009 Stock Market Crash

Capital markets froze

Limited opportunity without cash or functioning capital

markets



August 5, 2011 S&P Downgrade of U.S. Credit

Capital markets are functioning and corporations have cash

Financing is available for M&As

M&A activity has remained relatively stable post-downgrade

Historically, minimal fluctuation in lending rates for countries

downgraded from AAA ratings during subsequent years

S&P only agency to downgrade and its credibility has been

questioned for several years

Subprime debt – all 3 major agencies failed to identify early

Long-term effects are more difficult to predict


8/5/11 - U.S. Downgrade

2.5%

2.7%

2.9%

3.1%

3.3%

3.5%

3.7%

3.9%

4.1%

4.3% Market Yield on 20-Year U.S. Treasuries


The following chart summarizes 20-year U.S. Treasury yields before

and after the downgrade on August 5, 2011:

Yields have decreased to 2.92% as of September 14, 2011 since

the downgrade.

European sovereign debt issues

U.S. Federal Reserve announced policies to buy treasuries

and hold rates low



The borrowing costs to certain strategic acquirers is best represented by

Baa seasoned corporate bond yields

The following chart summarizes the historical yields on Moody’s Baa bonds

before and after the downgrade on August 5, 2011:

All cash deals will likely increase with corporate bond rates

Strategic deals should continue, despite higher rates, as cash available

Impact on LBOs will be greater with higher financing costs


5.0%

5.1%

5.2%

5.3%

5.4%

5.5%

5.6%

5.7%

5.8%

5.9%

6.0%Yield on Moody's Baa Seasoned Corporate Bonds



1,100

1,150

1,200

1,250

1,300

1,350

1,400S&P 500


The following chart summarizes the S&P 500 Index before and after the downgrade

on August 5, 2011:

Speculation of U.S. default or credit downgrade was a primary driver for the decrease

in the S&P 500 during late July 2011 and early August 2011

M&A tends to move with equity markets; although, M&A activity stable since last slide

Lower stock prices increase investor anxiety which causes fluctuations in M&A

Lower buyer stock prices decrease ability to fund deals with stock

Volatile markets tend to increase cash deals as sellers less likely to accept stock



The following chart summarizes the total number of daily 4% fluctuations in

the S&P 500 Index for each respective period:

Each 4% swing in 2011 occurred in August

Speculation of U.S. default or credit downgrade increased volatility in 2011

Increased volatility has increased uncertainty; however, M&A activity has

remained stable

05

101520253035404550

S&P500 Daily Swings Greater than 4%



The following schedule summarizes the decrease in S&P equities by sector since

April 29, 2011 and consensus analyst investment opinions:

As of September 9, 2011, the S&P 500 was at a 27% discount to its median trailing

operating P/E since 1988

Most equity analysts believe market uncertainties have fostered positive acquisition

opportunities

% Change

S&P 1500 Sector Since 4/29 EPS Growth P/E Ratio Favorable Neutral Unfavorable

Energy (18.4) 41.3 10.1 85% 15% 0%

Industrials (20.8) 16.5 12.7 82% 18% 0%

Info Technology (13.4) 21.2 12.1 79% 21% 0%

Healthcare (9.4) 13.9 12.0 78% 22% 1%

Consumer Discretionary (11.8) 14.2 14.1 77% 22% 1%

Materials (17.1) 37.3 11.7 74% 26% 0%

S&P 1500 (14.4) 18.3 12.3 73% 27% 0%

Telecom Services (9.9) (0.1) 16.4 69% 31% 0%

Consumer Staples (3.1) 10.4 14.7 68% 32% 2%

Financials (22.7) 13.0 11.1 56% 43% 0%

Utilities (1.1) 2.5 13.6 48% 49% 3%

Source: S&P MarketScope Advisor, Capital IQ

2011E Valuations "Street" Investment Opinions

S&P 1500 Price Changes, Valuations and Consensus Investment Opinions



The following chart summarizes the NYSE Financial Sector Index before

and after the downgrade on August 5, 2011:

Components of this index include many of the largest commercial lenders in

the NYSE

Although commercial lender valuations have diminished, these entities

continue to provide credit for M&A


3,500

3,700

3,900

4,100

4,300

4,500

4,700

4,900

5,100

NYSE Financial Sector Index (NYK)


Positive Factors Affecting M&A Opportunities

Equity valuations are at historic lows

U.S. Federal Reserve announced policies to buy treasuries and hold

rates low

U.S. Treasury Secretary Tim Geithner says “no chance” of a

Lehman-like event in Europe

Chinese indicate interest in purchasing significant quantities of

European bonds

France and Germany signal commitment towards Greece


Negative Factors Affecting M&A Opportunities

Stock market volatility

Devaluation of U.S. bank stocks may reduce credit availability

Global economic slowdown

U.S. GDP and employment stagnation

U.S. Federal deficits continue to expand

Congressional deadlock and uncertainty over current political

agenda


What Next?

Yields on U.S. treasuries will remain low in short-term and increase

in long-term

Stock market volatility should settle when European debt issues

resolved

Political campaigns and elections upcoming

Opportunities exist with low valuations

Next several months are critical as M&A world back from vacations

Several large LBOs schedule to close in September 2011 may tell

the story

M&A momentum is contagious, decision-maker confidence is critical

19 © 2011 Crowe Horwath LLP © 2011 Crowe Horwath LLP

For more information, contact:

Marc Shaffer

Direct 312.857.7512

Mobile 630.215.3098

[email protected]

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of Crowe Horwath International. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance

specific to your organization from qualified advisers in your jurisdiction. © 2011 Crowe Horwath LLP

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