Industry Insights

General Market and Manufacturing & Distribution (M&D) Trends

• U.S. Gross Domestic Product (GDP) increased 2.6 percent in the third quarter of 2010 after increasing 1.74 percent in the previous quarter. Increases in personal consumption, business investment and government spending were tempered by a slowdown in residential fixed investment.
• A two-year extension of the Bush tax laws through 2012 is expected to provide an economic boost, and we believe it will be a driving factor behind active mergers & acquisitions (M&A) and capital markets.
• The ISM Manufacturing Index has risen for the past 16 months through November 2010 (with 10 of 18 industry subsectors seeing continued strong demand), and the overall economy grew for the 19th consecutive month. November’s rate of growth was the second fastest in the last six months. New orders, production and employment all continue to expand while supplier deliveries slowed and inventories grew 2.8 percent.
• Continued uncertainty in theemployment and housing sectors, as well as investors’ concerns with the health of European nations and the European banking system, continue to bring uncertainty to the sustainability of the recovery.

Total U.S. Middle Market and Manufacturing & Distribution M&A Activity

• Total middle market (< $750 million) M&A transactions for the 12-month period ended September increased 41.8 percent from 4,088 in 2009 to 5,798 in 2010, with deal value up 50.4 percent from $218 billion to $327 billion. For the nine-month period ended September 2010, transactions and deal value were up 57.3 percent and 55 percent, respectively.
• U.S. enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA) middle-market valuation multiples for the 12-month period ended Septemberincreased from 7.0x to 8.3x. This increase reflects the improved economic and corporate profit outlook, as well as improving equity and credit markets. The activity upturn was extremely broad-based, with increases across most industry sectors. Transactions under $50 million continue to be the most active market, representing 77 percent, with an average multiple of 6.2x, up from 5.3x for the same period in 2009. Larger transactions continue to demand higher multiples ($250M to $750M – 8.1x, $50M to $250M – 9.9x). These multiples include both strategic and financial buyers.
• For the nine-month period ended September, total M&D* middle-market (< $750 million) M&A transactions more than doubled, from 219 in 2009 to 448 in 2010, with deal value up 52.9 percent from prior year levels. The average EV/EBITDA multiple for this period has increased as well, up from 7.8x to 8.4x.
• According to PitchBook, U.S. private equity deal flow continues to build momentum, with 1,027 completed U.S private equity deals for the first nine months of 2010 compared to 948 completed deals in the nine months ended September 2009. Capital invested for the same period more than doubled to $77 billion. The majority of deals continue to be completed in the middle market (under $500 million in transaction value). Through 3Q 2010 exits totaled 298—more than all of 2009 and on pace to top the 2008 total of 370. Positive trends that began to develop a year ago—increased availability in the debt markets, rising company valuations and recovery in the general economy and company performance—are expected to continue to drive private equity investment. According to GF Data Resources, the EV/EBITDA average multiple for manufacturing companies totaled 5.9x, with total EV/EBITDA multiples ranging from 5.4x (total enterprise value (TEV) from $10 to $25 million), 6.4x (TEV from $25M to $50M), 6.2x (TEV from $50M to $100M) and 6.2x (TEV from $100M to $250M) through Q3 of 2010.
• Credit markets saw a nice rebound in Q3 when compared to their 2008/2009 lows, as the average middle-market LBO total debt multiple (total debt/EBITDA) for transactions by companies with less than $50 million of EBITDA is currently 4.2x for Q3 compared to 3.4x for year-end 2009, with senior debt/EBITDA remaining relatively flat at approximately 3.3x. For companies with more than $50 million in EBITDA, total debt multiples increased slightly in Q3 but are still down slightly from 4.8x for the year ended 2009. Senior debt/EBITDA increased to 4.4x as of September 2010, up from 2.9x at the end of 2009. Due to a slow but improving syndication market, transactions of less than $50 million in debt continue to be more feasible as they continue to be financed with single lenders or “club” financing. Because of the tight credit markets, private equity contribution as of September 2010 continues to exceed 50 percent of total capital, up from levels below 40 percent in 2007.

Trends for 2011 M&A Activity

• Overall, we expect to see an active M&A market for Q4 2010 with momentum carried into 2011inthe general M&A marketas well as the M&D industry sector.
• With an estimated $400 billion overhang in the private equity market,there is a great deal of committed capital that needs to be deployed. Although focus will continue to be on the operations of existing portfolio companies, the recent pickup in private equity transactions has been driven by new platform-company investment along with strategic add-on acquisitions. Exit opportunities accelerated in Q3 and are expected to increase into 2011.
• S&P 500 companies have an estimated $428 billion in excess cash on corporate balance sheets. A result of business caution following the deep recession, we expect companies to cautiously invest in capital spending and M&A going forward in 2011, with a keen eye focused on the economic climate.
• Federal legislation will continue to be critical to economic and M&A activity with respect to health care and other proposed programs designed to stimulate the economy. We think the extension of the Bush tax laws will stimulate M&A activity, as many businesses owners have been given a two-year window on favorable tax rates and should accelerate those considering success-planning options.
• For M&D businesses that have survived the difficult economic environment of the past two years, we continue to see strategic options available, whether seeking growth capital, executing an acquisition strategy, recapitalizing your business or considering a sale of your company.

* Includes Food & Beverage, Industrials, Materials & Transportation.

For more information about the M&A market, please contact your BKD advisor.

About BKD Corporate Finance, LLC

BKD Corporate Finance, LLC, a wholly owned subsidiary of BKD, LLP, provides merger and acquisition, sales, management buyout, ESOP, recapitalization, financing and IPO advisory services. Our experience covers a variety of industries, including financial institutions, health care, communications, defense, food processing, manufacturing, retail, software, technology, transportation and distribution. Member FINRA and SIPC.