M & A 2015 I N D I A N A P O L I S ▼ J U N E 1 1 CONFERENCE

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Welcome!

Jim Birge Partner, Faegre Baker Daniels

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#MACon15 @FaegreBD

Twitter

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Questions

Please submit your questions in one of two ways:

►Question Card (on your table)

►Email: MAConference@FaegreBD.com

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M & A 2015 I N D I A N A P O L I S ▼ J U N E 1 1 CONFERENCE

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Marketing Update: Current Deal Activity, Valuations and Outlook

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Panelists

Moderator: Jim Birge, Partner, Faegre Baker Daniels

Devin Anderson, President / CEO, E&A Companies LLC

Brian Baker, Executive Vice President Corporate Finance, City Securities Corporation

Chris Caniff, Senior Managing Director, Periculum Capital Corporation

Steve Cobb, Managing Partner, CID Capital

Scott Lutzke, Founding Partner, Centerfield Capital Partners

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Middle-Market M&A Valuations

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Source: GF Data, M&A Report May 2015 *Note: middle market is $10 -$250mm

► The chart illustrates valuation multiples of private equity-sponsored, middle-market* M&A transactions by transaction size since 2011. ► Transaction multiples are at their highest levels since 2011, with the $100-250mm transaction size range leading the way at 8.3x.

5.3x

5.7x 5.9x

5.4x

5.9x

6.0x 6.1x

6.9x

6.3x

7.7x

7.2x

6.8x 6.7x

7.5x

7.9x 7.5x 7.4x

7.1x

7.6x

8.3x

5.0x

5.5x

6.0x

6.5x

7.0x

7.5x

8.0x

8.5x

2011 2012 2013 2014 1Q 2015

TEV/

EBIT

DA

Valuation Multiples by Transaction Size

$10-25mm $25-50mm $50-100mm $100-250mm

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Middle-Market M&A Valuations by Industry

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4.0x

6.0x

8.0x

10.0x

12.0x

2011 2012 2013 2014/1Q 2015

TEV/

EBIT

DA

Manufacturing

$10-25mm $25-50mm $50-100mm $100-250mm

4.0x

6.0x

8.0x

10.0x

12.0x

2011 2012 2013 2014/1Q 2015

TEV/

EBIT

DA

Business Services

$10-25mm $25-50mm $50-100mm $100-250mm

4.0

6.0

8.0

10.0

12.0

2011 2012 2013 2014/1Q 2015

TEV/

EBIT

DA

Healthcare Services

$10-25mm $25-50mm $50-100mm $100-250mm

4.0

6.0

8.0

10.0

12.0

2011 2012 2013 2014/1Q 2015

TEV/

EBIT

DA

Distribution

$10-25mm $25-50mm $50-100mm $100-250mm

► The charts below illustrate valuation multiples of private equity-sponsored, middle-market* M&A transactions by industry and transaction size since 2011.

Source: GF Data, M&A Report May 2015 *Note: middle market is $10 -$250mm

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M&A Drivers

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Source: Pitch Book & Renaissance Capital *YTD 2015

Private Equity U.S. Fundraising by Quarter

Private Equity U.S. Investments-to-Exits Ratio

$34

$32

$25

$21

$33

$37

$26

$32

$36

$78

$31 $7

8

$43

$52

$41

$61

$38

0

20

40

60

80

100

$0

$25

$50

$75

$100

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

2011 2012 2013 2014 2015Capital Raised ($B) # of Funds Closed

3.2x

3.1x

3.6x

3.7x

2.6x

2.3x

1.9x

2.1x

1.9x

1.6x

0.0x

1.0x

2.0x

3.0x

4.0x

0

500

1,000

1,500

2,000

2,500

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

Investments/Exits # of Investments (excl. add-ons) # of Exits

► Private equity capital raised has increased from a total of $112B in 2011 to $223B and $197B in 2013 and 2014, respectively.

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Current Trends in Senior Debt Structure

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Pre 2008 2008 - 2009 2015

Hold Levels $50 million $25 million max $50 million +

Stretch Pieces Aggressive Nonexistent Yes

Term Loan Amortization Little or none Nearly a prerequisite Little or back-end loaded

Covenants Limited to 1 or 2 and loose Full package, much tighter 1 to 2 covenants; looser

Advance Rates Aggressive (ABL-Lite) Conservative (ABL-Heavy) Aggressive (ABL-Lite)

Rate Floors Rare Standard Rare

Rate Protection Language Minimal Robust and complex Robust and complex

Prepayment Penalties Rare Standard Rare

Bank Commitment Fully underwritten Best efforts Best efforts

Market Flex Language Limited, if any Required Required

Bank Group Syndications Relationship driven "Club Deals" Syndications

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Senior and Subordinated Debt Leverage ► The chart below shows senior and subordinated debt multiples on private equity-sponsored, middle-market* M&A

transactions since 2011. ► Total average leverage has increased from 3.4x EBITDA in 2011 to 4.0x in 1Q 2015, with sub debt as a % of average capital

structure declining over that period.

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2.4x 2.4x 2.5x 2.6x

3.4x

1.0x 1.0x 0.9x 1.0x

0.6x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

2011 2012 2013 2014 1Q 2015

Debt

/EBI

TDA

Senior Debt/EBITDA Subordinated Debt/EBITDA

Source: GF Data, Leverage Report May 2015 *Note: middle market is $10 -$250mm

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Recent Loan Pricing

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Source: GF Data, Leverage Report May 2015

4.5% 4.6% 5.0% 4.8% 5.0%

12.1% 12.0% 11.6% 11.5% 11.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1Q 2014 2Q 2014 3Q 2014 4Q 2014 1Q 2015

Inte

rest

Rat

e

Senior Debt Pricing/EBITDA - Splits by Period Subordinated Debt - Average Coupon & Spreads

90-Day LIBOR 0.2% 0.2% 0.2% 0.3% 0.3%

Senior Spread vs. LIBOR 4.3% 4.4% 4.8% 4.5% 4.8%

Sub Debt Spread vs. LIBOR 11.8% 11.7% 11.4% 11.2% 11.0%

► Senior debt spreads increased about 50 basis points to L+4.8% over the past year, while subordinated debt spreads declined about 80 basis point to L+11%.

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S&P 500 Cash Balances ► The chart illustrates U.S. cash holdings for the non-financial members of the S&P 500. ► There is a significant amount of available capital to support strategic acquisitions, as the non-financial members of the S&P 500

had aggregate cash holdings of ~$1.4 trillion at year-end 2014.

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Source: Capital IQ Note: Cash includes short-term investments.

450

600

750

900

1,050

1,200

1,350

1,500

2009 2010 2011 2012 2013 2014

Cash

Hol

ding

s ($

in b

illio

ns)

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Predictions for 2015-2016

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What Makes Private Equity M&A Different?

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Panelists

Jeff Brown, Partner, Faegre Baker Daniels John Ackerman, Principal, Cardinal Equity Partners Gary Laitner, Partner, Faegre Baker Daniels Scot Swenberg, Managing Director, CID Capital Bob Welch, Managing Director, David A. Noyes & Company

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Topics to Cover

►Deal Metrics

►Primer – Buying with Leverage

►Valuation Drivers

►Owner/Management Perspective

►Deal Process

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Strategic v. Financial Buyers

Strategic Financial

Cost of Equity Lower Higher Cost of Debt Lower Higher Required IRR Lower Higher Tax Advantages More Less Time Horizon Longer Shorter Need for Accretion Higher Lower So: Who can justify a higher Enterprise Value?

But: Financial buyers are better at using leverage, which helps level the playing field.

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Primer - Buying with Leverage

►Buying with leverage magnifies both gains and losses.

Example: ►Buy Acme for $5 million, using 40% equity:

► Debt = $3 million; Equity = $2 million. ► Debt/Capital ratio = 60%. ► Debt/Equity ratio = 1.5x. ► Leverage ratio = 2.5x. ► Assume cost of debt is 6% per annum.

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Buying with Leverage

►Sell Acme at end of year 5 for $10 million, repay $3.9 million in debt (including accrued interest), and distribute remaining $6.1 million to equity holders: ► Cash on cash return = 6.1/2 = 3x return. ► IRR = 25%.

► In reality, the result would be better because the buyer would use the target's cash flow to pay down some debt over the 5 years.

►What if the deal is financed with 100% equity? ► Cash on cash return = 10/5 = 2x return. ► IRR = 14.9%.

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Deal Metrics

►Strategic M&A dwarfs PE acquisition activity:

►Both number of deals: 106 PE deals of 998 total deals announced in March 2015

►And dollar volume: $20.6 billion (PE equity base) of $194 billion total deal value announced in March 2015

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Valuation Drivers

►Strategic Buyers – Synergies ► Economies of scale, overhead consolidation, complementary business

lines, access to new markets, etc. ► Earnings accretion

►PE Buyers – Cash Flow

► Steady revenue and free cash flow, quality earnings, no substantial capex requirements, etc.

► Cost of debt ► Management equity rollover – approx. 20%

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Owner/Management Perspective

►Strategic sale is likely to be a complete exit: ► 100% sale ► Management may or may not stay on ► Business typically absorbed into buyer’s business

►PE sale is more like a partnership:

► 80% sale and 20% equity roll ► Management more likely to stay on ► Business remains more entrepreneurial ► PE firm supplies advice, board guidance, maybe growth capital ► The business will be sold again – the 2nd payday could be the larger

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Deal Process

►Hard to generalize: ► PE firms are in the M&A business ► Strategic buyer may or may not have a dedicated M&A team / experience

►Factors to consider that could be very different:

► Diligence process ► Legal risk allocation – indemnities and rep / warranty insurance ► Financing condition/lender meetings – closing risk ► Time to closing

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What Goes Wrong After the Deal: Post-Closing Claims

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Panelists

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David Becker President/CEO, First Internet Bank CEO, DyKnow, RICS

Scott Hebbeler Director Lincoln International

Karen DeHaan-Fullerton Assistant General Counsel Zimmer, Inc.

David Barrett Partner Faegre Baker Daniels

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Main Categories of Disputes

►Breaches of representations and warranties

►Purchase Price adjustment disputes (with primary one being working capital)

►Earn Out Disputes

►Breaches of Covenants (such as non-competes)

►Fraud

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Some Facts About Claims1

► Indemnity claims took an average of 8 months to resolve.

► 4% of deals with claims went to litigation or arbitration.

► 18% of deals in SRS study had at least one claim in final week of escrow period.

► Final escrow release delayed in 30% of deals. _________________________________ 1 Most of the information from this and slides 6 – 9 comes from Practical Law Company and the Shareholder Representative Services 2013 study about claims.

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Types of Claims

Undisclosed Liabilities 18%

Net Working Capital 17%

Appraisal Rights 5%

Breach of Fiduciary Duty 2% Fraud

1% Fees & Costs

3%

Capitalization 14%

Customer Contract 7%

Financial Statements 12%

Intellectual Property 6%

Other 1%

Regulatory 5%

Tax 9%

Cross-Section of All Claim Types

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Average Claim Size as Percentage of Escrow

7% 17%

9% 72%

30% 32%

20% 18%

3% 1%

100% 3%

Undisclosed LiabilitiesTax

RegulatoryOther

Intellectual PropertyFinancial Statements

EmployeeCustomer Contract

CapitalizationFees & Costs

FraudAppraisal Rights

Average Indemnification Claim Size as a Percentage of Escrow

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Types of Claims Against Escrow Accounts

16% 16%

12% 5%

9% 16%

12% 14%

9% 5% 5% 5%

Undisclosed LiabilitiesTax

RegulatoryOther

Intellectual PropertyFinancial Statements

EmployeeCustomer Contract

CapitalizationFees & Costs

FraudAppraisal Rights

Percentage of Deals with Expired Escrows Receiving Each Indemnification Claim Type

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Average Number of Claims per Basket Type

No Basket - 0 Combination - 1.33

Deductible - 0.57 First Dollar - 1.21

Average Number of Indemnification Claims Per Deal with Basket Type

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Combination - 50% Deductible - 22%

First Dollar - 14%

Average Size of Indemnification Claims as a Percentage of Escrow in Deals with Basket Type

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Additional Overview Topics

►Are claims generally avoidable? ►Importance of pre-closing due diligence ►Process for bringing claims

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Purchase Price Adjustments

►GAAP issues

►Drafting Tips

►Accounting Referee

►Other specific examples

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Earn Outs: Some Statistics

►Health care, technology most popular for earn outs ►Typical driver from buyer’s perspective is uncertainty around

future earnings (or disagreement with seller as to what earnings look like).

►20-25% of Scott's deals have earn outs. ► 10% in Industrials ► 30-40% in Health Care

►According to 2013 ABA study, earn out hurdles were split nearly evenly in being set to (1) revenue, (2) earnings / EBITDA, and (3) other milestones.

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Earn Outs: Specific Issues

► Earn outs sound great in theory.

► Often very difficult to administer

► Sellers who see their idea changed often have a very difficult time.

► Consulting agreements as alternatives

► “All or nothing” / Milestones

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Breaches of Covenants

► Non-competes most common

► There are others, such as assisting with vendors, customers, etc.

► Balancing Act ► Even for sellers who plan to walk away, not caring about non-compete

is bad idea. ► On buy side, you don’t want your seller using your capital to compete

with you (massive red flag). ► Let's talk about what you are working on.

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Breaches of Reps and Warranties

►Material adverse change

►Tax issues

►Financial statement claims

►Undisclosed liability claims

►Capitalization claims

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Fraud

►Definition of fraud

►Grant Hill Equity Partners v. SIG Growth Equity Fund

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Other Topics

► Public company deals

► Relationship between post-closing integration and post-closing claims

► Preference of litigation vs. arbitration options

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Acquiring a Public Company: What’s Different?

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Panelists

Christine Long, Partner, Faegre Baker Daniels Dan Corsaro, Partner, Transaction Advisory Services, Ernst & Young LLP Brian Edelman, CFO and Treasurer, Purdue Research Foundation Beau Garverick, Vice President of Corporate and Business Development, Anthem, Inc. Randy Paine, President, KeyBanc Capital Markets

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What is Public Company M&A?

►Acquisition of a company that is registered with the SEC ►Traded on an exchange or over-the-counter

►Requires compliance with disclosure obligations and

enhanced focus on director fiduciary duties

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Additional Concerns of a Public Company Target

►Knowing and approaching a public company target ► What are additional concerns of the target company’s Board?

►Activist Shareholders ►Fiduciary Duties – Heightened Scrutiny

► Best price rule once Board determines company is for sale (Revlon duties) ► Boards have burden of establishing they were adequately informed and acted

reasonably ► As a result, more likely to have pre-signing auctions designed to encourage

alternative proposals ► After signing, “fiduciary out” and / or “go-shop” provisions

►Litigation far more likely

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Negotiating with a Public Company

Confidentiality and Standstill Agreements ►Target company will demand confidentiality agreement with standstill as

condition to due diligence, access to confidential information. ►Even confidentiality agreement without standstill is restrictive.

► Will preclude disclosing discussions, proposals ► Can’t trade on inside information, including discussions.

►Standstill Agreements - Typical term of one to two years ► Limitations on trading, stock acquisitions and making and publicizing

acquisition proposals ► Prohibition on tender offers and proxy contests ► Will effectively preclude going hostile

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Negotiating with a Public Company (cont’d)

Due Diligence ►Significant information publicly available ►But increased importance of due diligence since no post-closing

recourse ► Need to educate those on buy-side of importance of diligence, in all areas

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Negotiating with a Public Company (cont’d)

Greater Risk of Premature Disclosure ► Ideal generally is not to disclose until definitive agreement is signed. ► Public disclosure is inevitable and likely sooner than might be desired.

► Consider developing plan for premature disclosure. ► Premature disclosure can adversely affect employees, customers, supplier

relationships; create yo-yo effect on stock price; and invite third-party suitors without deal protections.

Compressed Pre-signing Timeframe ► To reduce risk of premature disclosure and/or topping bids ► Want to know what other options seller has ► Puts pressure on getting sufficient diligence done in that timeframe

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Differences in Certain Agreement Terms

►Terms will be made public ► Indemnification virtually impossible ►Consideration almost always paid in its entirety at closing and escrows

very rare ►Conditions to closing may be more limited and are likely to be MAE

qualified ►“Fiduciary outs” - agreements usually permit termination for superior

proposal ►“Go-shop” provisions, which allow solicitation of alternative proposals

post-signing, are heavily negotiated

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Differences in Certain Agreement Terms (cont’d)

►Termination fees heavily negotiated ► Typically 2-4%; could include expense reimbursement

►Hart-Scott-Rodino (HSR) process ►Consideration may be partial or all stock of the Buyer

► Cash is king. ► Stock consideration leads to:

► Reverse diligence – on Buyer ► Need to value the stock ► Additional reps from Buyer and restrictions on its conduct before closing ► Possible Buyer shareholder vote ► Additional disclosure obligations for Buyer, including prospectus ► Complex tax considerations

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Less Deal Certainty

►Safer place is post-signing, but is by no means a guarantee of closing. ► Public disclosure of all agreement terms increases chance of competing offers ► Target company’s Board’s obligation to consider competing offers ► Increased time between public announcement and closing increases likelihood

that deal will not close

►Time between signing and closing likely to be substantially greater, depending on industry ► Regulatory approvals can be very time consuming ► HSR process and any required divestitures can extend time period ► Any required stockholder approval lengthens the time period ► Time to closing can be extended if SEC review occurs

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Role of Investment Bankers

►Engaging a financial advisor, typically an investment bank, has become standard practice in connection with public company acquisitions.

►The Board of Directors of target company obtains a fairness opinion from the financial advisor that concludes that the terms of the transition are fair to the target company’s shareholders from a financial standpoint. ► Provides the Board with information that may affect their evaluation of a

transaction – the fairness of the consideration to be paid ► Serves as evidence that the Board fulfilled its duty of care in approving a

transaction ►Buyer often also engages an investment banker. ►Will need to avoid (or disclose) any material relationships or potential

conflicts of the financial advisor

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Role of Accountants

►Conduct due diligence to help identify and understand the impact of accounting and tax issues in the transaction ► Accounting diligence (including internal controls) ► Tax diligence ► Business and operational diligence

►Provide advice regarding provisions in the acquisition agreement and/or financing agreements

►Assist with and review SEC disclosures, including pro forma financial statements

►Provide comfort letters

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Litigation Far More Likely

►Lawsuits routine ► 90-95% of public transactions have shareholder litigation, with average of

four to five lawsuits per transaction ► Can model in cost of litigation to the cost of the deal ► Need to prepare Boards of both companies that litigation is almost

inevitable ►Public announcement and filings give plaintiffs’ bar roadmap to possible

litigation. ► In particular, background of merger, reasons for the merger and fairness

opinion sections. ►Arbitrage “investors”

► Will do about anything to try to figure out when deal will close

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Integration Planning

►Planning is key.

►Antitrust considerations

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The Auction Process: Tips and Tactics

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Panelists

Trevor Belden, Partner, Faegre Baker Daniels Joe Lavely, Managing Director, Greene Holcomb Fisher Rich Mitchell, President, A&R Logistics, Inc. Patrick Jensen, Managing Director, Prairie Capital

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“Barbarians at the Gate”

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Auction Defined

A structured process in which a business owner seeking to sell a business works with investment banking advisors to market the business for sale, to solicit bids from multiple potential purchasers, to assess bids and to negotiate and complete the transaction.

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Why an Auction Process?

►Why would a seller want to conduct an auction to sell the business?

►Under what circumstances does an auction not make sense?

►How can a buyer avoid an auction process?

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Deal Timeline

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- Conduct due diligence - Finalize financial projections - Refine marketing strategy and buyer list - Prepare Confidential Memorandum

4 Weeks

SELECT BUYER

- Evaluate final offers - Further negotiate terms - Select preferred buyer(s)

NEGOTIATION & CLOSE

- Negotiate and execute definitive agreement - Buyer conducts final due diligence

6 Weeks

PHASE II - MARKETING

- Establish ground rules for Phase II - Develop management presentations - Conduct company visits - Support potential buyer due diligence - Distribute draft of purchase agreement (optional) - Solicit final offers

6 Weeks

PHASE I - MARKETING

- Contact full list of pre-approved potential buyers - Distribute Confidential Memorandum subject to signed CA - Solicit indications of interest - Select Phase II buyers

6 Weeks

0

Weeks 2 4 6 8 10 12 14 16 18 20 22 24

LENDER MEETINGS AND TERM SHEETS

- Prepare and finalize lender presentations - Finalize lender list prepared by GHF - Initiate contact with potential lenders - Schedule and host lender discussions - Request and review initial term sheets

4 Weeks

2 Weeks

DEVELOP MARKETING STRATEGY & MATERIALS

2 0 1 5 M & A C O N F E R E N C E

2 0 1 5 M & A C O N F E R E N C E

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Closing Remarks

Jim Birge Partner, Faegre Baker Daniels

M & A 2015 I N D I A N A P O L I S ▼ J U N E 1 1 CONFERENCE

65