Market Update: Current Deal Activity, Valuations and Outlook

Prepared in connection with the Faegre Baker Daniels 2014 M&A Conference. November 19, 2014

2 0 1 4 M & A C O N F E R E N C E

2 0 1 4 M & A C O N F E R E N C E

15

Market Update: Current Deal Activity, Valuations and Outlook

Robin Engelson, Sapphire Financial GroupSima Griffith, Aethlon Capital, LLCDan Gulbrandson, Piper Jaffray & Co.Glenn Gurtcheff, Harris Williams & Co.Lisa Kro, Mill City CapitalModerator: Morgan Burns, Faegre Baker Daniels

2 0 1 4 M & A C O N F E R E N C E

Recent History in the Middle Market

►2006-2008: Peak Activity► 2H 2008/2009: The Music Stops

► 2010: Thin but reasonably active market

► 2011: Momentum Builds

► Cyclical businesses continue recovery

► Lending market broadens

►Strategic buyers become active► 2012: A Rush for the Exit

► “If it’s not bolted down…”

► Record level of activity for virtually every middle market investment bank

► Lending markets continue to strengthen throughout the year

► Strategic buyers become aggressive

16


2 0 1 4 M & A C O N F E R E N C E

Recent History in the Middle Market (cont.)

2013: Imbalance

►Demand remains strong:► PE overhang continues

► Strategic buyers remain aggressive

► Robust valuations

► Leveraged structures return to pre-recession levels and terms

►Supply missing:► 2012 Pull-forward effect

► Q1/Q2 2013 – Very few deals in market

► Dividend recaps viewed as interim alternative to sale

► Q3/Q4 – Deal activity and pitch activity builds

17

2 0 1 4 M & A C O N F E R E N C E

Recent History in the Middle Market (cont.)

2014: A Strong Year So Far… But What’s Ahead???►Deal volumes up year-over-year

►Valuations in middle market remain high

►CLO market robust and leverage levels continue to increase

►Equity markets open nearly the entire year, BUT

►Supply problem continues given extent of PE exits over last two years

►Lots of potential flash points globally

►Less stable equity markets of late

►Pitch activity seems to have cooled off somewhat in 2H

18


2 0 1 4 M & A C O N F E R E N C E

Domestic Transactions – Annually

Annual Domestic Transactions

► After a significant lull in 2009, M&A activity rebounded in 2010-2013

► Activity in 2014 has increased, driven by balance sheet cash and favorable credit market dynamics

19

Annual Domestic M&A TransactionsFor the Years Ended December 31, 1990 – 2013 and YTD 2014 ($ in billions)

Source: Thomson Financial. Year-to-date figures as of September 30, 2014.Includes transactions with the target and the acquiror based in the United States.Excludes minority stake purchases, acquisitions of remaining interest, self-tenders, and repurchases.

$124 $104 $138

$219 $293

$465

$551

$827

$1,353

$1,237

$1,364

$619

$371

$496

$731

$1,031

$1,293

$1,136

$635 $651 $568

$872

$576

$888

$394

$309

4,069 3,8914,307

4,944

5,917

6,959

7,988

8,870

9,656

8,4788,431

5,943

5,687

6,313

7,226

7,8088,561

8,802

7,205

5,715 6,073

6,3066,616

7,583

4,5354,628

0

2,000

4,000

6,000

8,000

10,000

12,000

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q-3Q2013

1Q-3Q2014

Num

ber of Deals

Aggr

egat

e D

eal V

alue

($ B

illion

s)

Aggregate Deal Value ($ Billions) Number of Deals

2 0 1 4 M & A C O N F E R E N C E

Middle Market M&A Observations

► Middle market M&A transaction volume still well below 2005 - 2007 peak

► Significant activity in 2012 driven by capital gains increase

► 2012 “pullforward” constrained dealflow in 1H 2013

► Pitch activity accelerated in 2H 2013, driving the notable increase in 2014 YTD deal volume

20

Source: Thomson Financial. Year-to-date figures as of September 30, 2014.Includes transactions with the target and the acquiror based in the United States.Excludes minority stake purchases, acquisitions of remaining interest, self-tenders, and repurchases.

$34

$43

$35 $39

$35

$43

$49

$43 $46

$51 $49 $48

$42

$51

$41 $46

$33 $33 $32

$17 $14

$19 $21

$29 $24

$31

$36 $37 $32

$40 $38

$32 $33 $37

$33

$42

$29 $30

$39 $44

$33

$42 $47

293313

288 292281

331

372355

328

398

351 343

298

334323 314

257238

251

152

119

159 149

220

167

207

256 251227

261245

221 212

252

220

323

225 226

279

308

245

282 291

0

50

100

150

200

250

300

350

400

450

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

Q1

2004

Q2

2004

Q3

2004

Q4

2004

Q1

2005

Q2

2005

Q3

2005

Q4

2005

Q1

2006

Q2

2006

Q3

2006

Q4

2006

Q1

2007

Q2

2007

Q3

2007

Q4

2007

Q1

2008

Q2

2008

Q3

2008

Q4

2008

Q1

2009

Q2

2009

Q3

2009

Q4

2009

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Q2

2012

Q3

2012

Q4

2012

Q1

2013

Q2

2013

Q3

2013

Q4

2013

Q1

2014

Q2

2014

Q3

2014

Num

ber of Deals

Aggr

egat

e D

eal V

alue

($ B

illion

s)

Aggregate Deal Value ($ Billions) Number of Deals

Quarterly Announced Domestic Middle Market M&A TransactionsFor the Periods Ended 1Q04 through 3Q14 (Transactions valued between $25 - $500 million)


2 0 1 4 M & A C O N F E R E N C E

Historical Breakdown by Transaction Value

► Deals less than $500 million historically represent over 90% of all transactions

21

Source: Thomson Financial. Year-to-date figures as of September 30, 2014.Includes transactions with the target and the acquiror based in the United States.Excludes minority stake purchases, acquisitions of remaining interest, self-tenders, and repurchases; based on number of deals.

93.2% 92.2% 88.9% 88.8% 85.5% 84.9%88.7% 88.9% 88.4% 85.6% 83.4% 81.2% 79.9%

87.2% 88.8%80.7% 80.4% 79.1% 78.2% 76.5%

3.0% 3.5%4.9% 5.0%

6.0% 6.4%4.8% 5.7% 5.8%

6.0%6.8% 8.2% 7.7%

5.5% 4.7%

7.3% 8.9% 8.9% 8.6% 9.9%

3.8% 4.3% 6.1% 6.2% 8.5% 8.7% 6.4% 5.4% 5.8% 8.4% 9.7% 10.6% 12.4%7.3% 6.5%

12.0% 10.7% 11.9% 13.2% 13.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD2014

$0 - $249 Million $250 - $499 Million $500 Million +

2 0 1 4 M & A C O N F E R E N C E

M&A Seller Trends

►M&A activity has been fairly consistent across industries

22

Source: Thomson Financial. Based on number of deals as of September 30, 2014.

M&A Transaction Breakdown by IndustryFor the Years Ending December 31, 2010 – 2013 and the Year-to-Date Period Ended September 2014

16.6%

23.0%

25.4%

4.9%

7.4%

8.2%

14.4%0.2%

2010

Consumer FinancialsTMT Real EstateEnergy & Power HealthcareIndustrials Other

16.8%

21.6%

24.2%

6.0%

7.3%

9.2%

14.8%0.2%

2011


17.4%

22.1%

23.2%

6.9%

6.0%

8.4%

15.9%0.1%

2012


19.4%

20.0%

24.2%

8.8%

5.6%

7.9%

13.9%0.3%

2013


19.1%

11.5%

27.4%7.4%

8.3%

9.1%

17.1%0.1%

YTD 2014



2 0 1 4 M & A C O N F E R E N C E

Middle Market M&A Pricing Trends

► Valuation multiples have rebounded significantly from 2009 levels.► 2011/2012: Significant spread in valuations between “A” companies and “Less than A”

companies

► 2013: “Less than A” companies receiving relatively strong valuations given scarcity of opportunities

► YTD 2014: average Enterprise Value / EBITDA multiple for all middle market transactions was 13.6x

23

Average U.S. Middle Market Purchase Price / EBITDA Valuation Multiples

Source: Thomson Financial; Year-to-date figures as of September 30, 2014.

11.3x

9.2x10.3x 10.2x

9.2x

13.7x

11.9x13.1x

8.7x

10.1x 9.8x10.4x

14.6x 15.1x

10.5x9.6x

11.8x 11.7x

10.4x

13.4x 13.1x

11.7x

9.1x

10.5x 10.3x 9.9x

14.1x13.6x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

2008 2009 2010 2011 2012 2013 YTD 2014

Less than $100 million $100 - $499 million $500 million - $1 billion Greater than $1 billion

2 0 1 4 M & A C O N F E R E N C E

93.7

144.0 143.8

67.5

164.0

287.0

218.3

344.8 321.2

253.1265.8

$0B

$100B

$200B

$300B

$400B

Secured Unsecured Subordinated

24

Leveraged Finance Market Highlights

Commentary

• Improved investor sentiment due to relativecalm on the macro front with regard to theEuropean sovereign debt crises and hopes forfurther quantitative easing in the U.S., pushedthe demand for loans, bonds and equitieshigher as investors searched for yield.

• 2014 YTD Total volume reached ~$475billion, a ~5% decrease from 2013 YTD

• Liquidity in financing market drove significantrefinancing activity in 2014

• Refinancing activity is further constrainingM&A volume as refi dividend is seen asinterim liquidity alternative for PE sponsors

Total New Issue Loan Volume and Use of Proceeds

High Yield Bond VolumeUse of Proceeds – High-Yield Bonds (YTD 2014)

Source: S&P LCD and Bloomberg

Source: S&P LCD

Source: S&P LCD

220.2255.9

243.4184.7

138.7139.4

165.6

265.2295.4

480.1

535.2

156.9

76.6

235.9

376.9

465.5

606.9

501.9474.8

$0B

$100B

$200B

$300B

$400B

$500B

$600B

$700B

Institutional Pro Rata

Refinancing28%

LBO19%

Acquisition21%

Recap / Dividend

12%

Recap / Stock

Repurchase1%

Corp Purpose

1%

Recap / General Recap

2%

Other16%

Total ($474.40B)

17%10% 8% 13%

21% 22% 23% 23% 22% 22%

14%17%

12%

26%

44%30%

19% 19% 21%17%

15%

8%9%

3%

11%

10%

12% 16% 11%10%

40%

50% 55%

51%

6%

19%24%

22%20% 28%

8%5% 4%

2%

5% 7% 11% 8%11%

9%

6%11% 11%

5%14% 12% 10% 12% 15% 14%

0%

20%

40%

60%

80%

100%

Refinancing / Bonds Refinancing / Bank Debt Refinancing / General M&A Recap Other


2 0 1 4 M & A C O N F E R E N C E

Average Credit Statistics for Middle-Market LBO Transactions (Debt/EBITDA)

Leverage Capacity for LBOs

► Leverage levels on middle market M&A transactions continues to increase through YTD 2014

25

4.8x 4.7x

4.1x 4.0x

3.4x

3.9x 3.8x

4.2x

4.7x 4.7x

5.6x

4.5x

3.3x

4.2x 4.3x4.5x

4.8x

5.4x5.6x

0.0x

2.0x

4.0x

6.0x

8.0x

FLD/EBITDA SLD/EBITDA Other Sr Debt/EBITDA Sub Debt/EBITDA

Source: S&P LCD and Capital IQ, FLD is First Lean Debt

2 0 1 4 M & A C O N F E R E N C E

Current Indicative Terms for Middle Market Senior Debt and Mezzanine Financing

► Ranges vary by size of EBITDA, credit profile of borrower and risk profile of lender

26

1

SENIOR DEBT INDICATIVE TERMS MEZZANINE DEBT INDICATIVE TERMS

ORIGINATION FEESStructuring: 1.00% – 2.00%Arrangement: 1.00% – 2.00%

CASH FLOW SENIOR PRICING

L+350-450% + 1% Libor floor (bank)L+ 4.50-6.0% + 1% Libor floor (non-bank)

CASH FLOW SENIOR LEVERAGE MULTIPLE

<$7.5MM EBITDA 1.5-2.0x>$10MM EBITDA 2.0-3.5x>$25MM EBITDA 3.0-4.0x

TOTAL LEVERAGE MULTIPLE

<$7.5MM EBITDA 3.0-4.0x>$10MM EBITDA 3.75-5.0x>$25MM EBITDA 4.0-5.5x

UNITRANCHEPRICING

<$7.5MM EBIDTA 8.0-11.0%, (1% LIBOR FLOOR)>$10MM EBITDA L+6.0-8.0% (1% LIBOR FLOOR)>$25MM EBITDA L+5.50-7.50% (1% LIBOR FLOOR)

AMORTIZATION

SENIOR CASH FLOW TERM- 10-15% (bank)SENIOR CASH FLOW TERM- 5-10% (non bank)UNITRANCHE 1-5%

EQUITYCONTRIBUTION

30% – 40%

ORIGINATION FEE 1.50% – 2.00%

COUPONCash Coupon 10.00% – 12.00%PIK Coupon 1.00% – 3.00%Total Coupon 11.00% – 15.00%

TOTAL LEVERAGE MULTIPLE

4.00x – 6.00x

WARRANTS Selectively

EQUITY-CO-INVESTMENT

Generally at Lender’s Option

COVENANTS 85% – 90% of Senior Debt covenant levels

PREPAYMENTRESTRICTIONS

Varies but almost always; contrast with prepayment penalties in unitranche


2 0 1 4 M & A C O N F E R E N C E

Middle Market Coverage Fact Sheet

► Coverages by size and leverage demonstrate a much stronger fundamental market than in the 2007 pre-crunch, pre-Lehman peak market

27

2Source: S&P Capital IQ LCD 3Q 2014 High-End Middle Market Lending Review

All Loans - Cash Interest Coverage 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q-3Q14$200M or Less 3.27x 4.14x 4.75x 4.03x 4.39x 4.02x 3.31x 3.43x 4.22x 4.40x 4.13x 3.79x 4.16x 4.04x 4.37x$201M - $350M 3.41x 3.84x 4.10x 4.15x 4.05x 3.86x 3.27x 2.99x 3.97x 3.51x 4.23x 3.52x 3.81x 4.40x 5.16x$351M - $500M 3.60x 3.74x 3.68x 4.28x 4.49x 3.31x 3.36x 2.62x 4.18x 4.10x 3.93x 3.71x 3.58x 4.19x 4.88x$501M+ 2.94x 3.49x 3.78x 4.24x 3.89x 3.71x 3.13x 2.77x 3.87x 4.06x 3.87x 4.18x 3.76x 4.62x 4.18x

LBO - Total Debt/EBITDA 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q-3Q14$200M or Less 3.95x 3.40x 3.74x 3.72x 4.49x 4.74x 4.79x 5.57x 4.26x 3.39x 4.09x 4.05x 4.44x 4.47x 4.40x$201M - $350M 3.90x 3.58x 3.90x 4.38x 4.53x 5.28x 5.26x 5.49x 4.64x 3.93x 4.54x 4.66x 4.58x 5.66x 5.18x$351M - $500M 3.93x 4.21x 4.37x 3.79x 4.50x 5.42x 5.12x 6.04x 4.87x 2.40x 4.49x 4.78x 5.24x 4.85x 5.46x$501M+ 4.33x 5.04x 5.08x 4.82x 5.28x 5.71x 5.73x 6.89x 6.60x 4.89x 4.92x 5.83x 5.56x 5.61x 6.27x

LBO - Sr Debt/EBITDA 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q-3Q14$200M or Less 3.23x 2.72x 3.08x 2.77x 3.55x 4.19x 4.15x 4.98x 3.31x 2.61x 3.26x 3.49x 3.68x 4.23x 4.40x$201M - $350M 3.16x 2.59x 3.04x 2.96x 3.66x 4.31x 4.60x 5.07x 3.93x 3.93x 3.91x 4.51x 4.30x 5.50x 5.12x$351M - $500M 2.94x 2.63x 2.35x 1.96x 2.99x 4.66x 4.24x 5.48x 3.97x 2.40x 3.96x 4.58x 5.16x 4.73x 5.46x$501M+ 3.31x 3.43x 3.81x 3.58x 3.62x 4.58x 4.93x 6.26x 5.96x 3.53x 4.86x 5.67x 5.39x 5.56x 6.27x

LBO - Cash Interest Coverage 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q-3Q14$200M or Less 2.69x 3.80x 4.23x 3.69x 3.63x 2.81x 2.65x 2.04x 2.76x NA 3.40x 3.49x 2.97x 3.97x 3.74x$201M - $350M 2.44x 3.18x 3.65x 3.62x 3.44x 2.50x 2.28x 2.30x 3.05x NA 3.05x 3.12x 3.37x 2.99x 5.51x$351M - $500M 2.72x 2.35x 2.98x 3.46x 3.29x 2.52x 2.35x 2.30x 2.24x NA 3.24x 3.18x 2.94x 3.35x 3.67x$501M+ 2.75x 2.73x 2.61x 3.05x 3.03x 2.49x 2.14x 1.93x 2.50x NA 2.95x 2.59x 2.93x 3.17x 3.30x

LBO - Purchase Price Multiple 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q-3Q14$200M or Less 6.61x 6.24x 6.77x 6.72x 7.46x 8.09x 8.00x 9.09x 7.86x 7.49x 7.94x 7.88x 8.17x 8.17x NA$201M - $350M 6.34x 6.00x 7.01x 7.15x 7.25x 8.44x 9.03x 9.31x 9.06x NA 9.56x 8.60x 8.02x 8.63x 8.52x$351M - $500M 5.84x NA 6.79x 7.91x 7.41x 8.40x 8.59x 9.27x 9.59x NA 8.08x 8.66x 8.49x 7.89x 9.26x$501M+ 6.59x 6.94x 7.13x 7.18x 7.72x 8.88x 8.99x 10.63x 10.32x NA 8.72x 9.88x 9.29x 8.60x 9.55x

LBO - Equity Contribution 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q-3Q14$200M or Less 37.83% 41.42% 43.51% 42.24% 38.18% 38.94% 39.28% 36.02% 44.78% 50.86% 48.17% 44.45% 41.65% 45.95% NA$201M - $350M 32.87% 36.49% 34.03% 39.80% 32.99% 33.56% 37.16% 37.02% 45.18% NA 45.46% 43.26% 41.84% 39.68% 41.03%$351M - $500M 30.85% NA 35.48% 37.05% 32.34% 28.12% 28.71% 32.89% 42.80% NA 41.36% 39.16% 38.75% 42.34% 42.03%$501M+ 31.83% 37.56% 29.28% 29.28% 27.67% 30.10% 30.54% 31.81% 34.47% NA 39.26% 35.55% 38.77% 34.24% 37.97%

*Please note LCD requires a minimum of 3 observations (after excluding for outliers) in order to publish a statistic. Cells that are blank or NA reflects that we did meet that requirement for that time period.

Middle Market Coverage Fact Sheet

2 0 1 4 M & A C O N F E R E N C E Email Questions to [email protected]

Equity Contribution – Middle Market LBOs

► Equity contributions for middle market LBOs have remained relatively consistent in 2014 from 2013

► However, in the lower middle market, equity contributions have decreased to 43% from 50% last year

28

Source: Standard & Poor Leveraged Commentary & Data and Thomson Financial

Average Equity Contribution for Middle Market LBOs(Defined as issuers with EBITDA of $50 million or less as a % of purchase price)

0%

10%

20%

30%

40%

50%

60%

2007 2008 2009 2010 2011 2012 2013 YTD 9/14 3Q14


2 0 1 4 M & A C O N F E R E N C E

Current Equity Market Environment

Dow Jones Industrial Average S&P 500

Source: Bloomberg and FactSet, Research Systems as of September 2014.

29

Volatility Index

10,000

12,500

15,000

17,500

20,000

1,000

1,250

1,500

1,750

2,000

0

5

10

15

20

25

30

DJ Industrial Average S&P 500 Nasdaq Composite Russell 200052 Week High 17279.7 2011.4 4598.2 1208.752 Week Average 15680.6 1754.9 3919.4 1102.6Current 17042.9 1972.3 4493.4 1101.7% of Average 108.7% 112.4% 114.6% 99.9%% of High 98.6% 98.1% 97.7% 91.1%

2 0 1 4 M & A C O N F E R E N C E Email Questions to [email protected]

Abundance of Available Investable Capital

► The market is flush with capital that needs to be deployed. Financial investors have nearly $400 billion in dry powder

► Strategic acquirers (made up of the S&P 500) are holding an additional $1.7 trillion in investable cash

► Fierce competition to invest the approximately $2.1 trillion of “dry powder” is one of the factors that has driven valuations

30

Source: Pitchbook, Prequin and Capital IQ

$0

$100

$200

$300

$400

$500

2007 2008 2009 2010 2011 2012 2013

$ in

billi

ons

Private Equity “Dry Powder” S&P 500 Companies Cash Balance

$0

$400

$800

$1,200

$1,600

$2,000

2007 2008 2009 2010 2011 2012 2013 Q22014

$ in

billi

ons


2 0 1 4 M & A C O N F E R E N C E

Buyer Trends –Private Equity Capital Invested Already Beyond 2012 Level

31

Source: PitchBook; as of September 30, 2014

$79

$148

$222

$307

$483

$846

$357

$158

$362 $374 $376

$489

$328

$393

912

1,291

1,764

2,149

2,692

3,193

2,382

1,520

2,114

2,273 2,272

2,791

2,036 2,097

0

500

1000

1500

2000

2500

3000

3500

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q-3Q2013

1Q-3Q2014

Num

ber of Deals

Aggr

egat

e D

eal V

alue

($ B

illion

s)

Capital Invested ($ billions) Number of Deals

Annual U.S. Private Equity Deal Activity and Capital Invested ($ in billions)

2 0 1 4 M & A C O N F E R E N C E

Quarterly Private Equity Exits By Type

Breakdown by type shows recovery in equity markets from 2008-2009 lows

32

Quarterly Private Equity Exits by Corporate Acquisition, IPO and Secondary SaleFor the Periods Ended 1Q06 through 3Q13

67 62 56 70

93 65

81 91 88 61

80

40 43 38 32 56

72 78 78 96

72 86 93 100

127

96 82

132

73 101 93

125

91 93 83

19 12

8

24

8

17 10

14 4

5

2

3 5 4

17 7

14 9

17

9 9

8 9

16

11 11

5

11

208

22

12 1714

36 34 61

59 61

71 55 43

47

33

43

29 19 16 13

20

41 34 34

85

38

62 64

81

65

82 83

134

59

6390

98

80

99 96

-

50

100

150

200

250

300

Corporate Acquisitions IPO Secondary Buyout

Source: PitchBook, as of September 30, 2014.


2 0 1 4 M & A C O N F E R E N C E

Private Equity Portfolio Company Inventory

33

Inventory of U.S.-based, private equity-backed companies continued to grow in 2013, reaching a new high of 7,413

3,102

3,702

4,438

5,291

5,928 6,241

6,630 6,970

7,272 7,413

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

2009 - 2013*

2005 - 2008

2000 - 2004

Pre 2000

Year of Investment

Source: PitchBook, as of September 30, 2014.

Current Inventory of Private Equity-Backed Companies


2 0 1 4 M & A C O N F E R E N C E

2 0 1 4 M & A C O N F E R E N C E

35

From Fishing Lures to Medical Guidewire Leader: The Sale of Lake Region Medical

Bruce Engler, Faegre Baker DanielsJoseph Fleischhacker, Lake Region MedicalAmy Roberts, Grant Thornton LLPModerator: Kate Sherburne, Faegre Baker Daniels

2 0 1 4 M & A C O N F E R E N C E

Lake Region Medical: 65 Years of History

36


2 0 1 4 M & A C O N F E R E N C E

1960s• Lake Region developed

a method to manufacture small diameter pacing lead coils for Medtronic

1947• Lake Region founded by

Joseph Fleischhacker Sr.

2011• SMART Wire

Technologies R&D initiative implemented

1994• Opened manufacturing

facility in New Ross, Ireland

2009• Acquired Brivant Medical in

Galway, Ireland - expanding interventional device development capabilities

1970 - 1989• Standard and

custom guidewireproduction, specialty wire forming, and precision machining became the primary product lines


37

2009• Opened sales office in

Shanghai, China

2 0 1 4 M & A C O N F E R E N C E


38

• Global company with over 1,700 employees• Locations in Minnesota, Ireland (2), and China• Proprietary products & technology platforms• Supplying key global players in the medical

industry


2 0 1 4 M & A C O N F E R E N C E

Accellent

►Outsourced precision manufacturing and engineering services

►Target markets: cardiology, orthopedics, and endoscopy

►Private equity portfolio company with a history of growing through acquisitions

39

2 0 1 4 M & A C O N F E R E N C E

The Decision to Sell

►Second generation family business with no clear third generation successor

►Pressure in marketplace as customers try to narrow their vendor ranks and reduce costs

►Extremely favorable debt markets improve pricing and accelerate timing

40


2 0 1 4 M & A C O N F E R E N C E

Synergies with Accellent

►Complementary businesses – IP Rights (Lake Region) and Contract Manufacturing Expertise (Accellent)

►Accellent had technologies that Lake Region Medical otherwise would have needed to acquire to stay competitive

►Strong brand in Lake Region

►Customer overlap and favorable market perception

►Credible and collaborative leaders, good chemistry

►Financial strength of private equity backers (KKR and Bain Capital)

41

2 0 1 4 M & A C O N F E R E N C E

Overview of Deal Terms

42

►Accellent acquired Lake Region Medical in a $420M merger► $345M in cash

► $75M (~ 20% of siblings’ holdings) in rollover investment

►Accellent refinanced its existing debt, allowing it to fund the acquisition, reduce interest expense, and terminate its voluntary filer status with the SEC.

First meetings in January

2014

Signed February 2,

2014

Closed

March 12, 2014


2 0 1 4 M & A C O N F E R E N C E

Deal Issues: Reverse Due Diligence for Rollover

►Significant rollover for sibling shareholders

►Deal economics

►Potential synergies

►Reverse due diligence into Accellent operations and financial condition

►Expansive reps and warranties from Accellent

43

2 0 1 4 M & A C O N F E R E N C E

Deal Issues: Antitrust Clearance

►“Give it to them, we don’t care, we’re not competitive …”

►Broad NAICS medical device codes = significant legal, but not practical, overlap

►Telephone interview between FTC, counsel, CEO, marketing and sales representatives

►Requested customer names for additional follow-up

►Ran the full waiting period

►Ireland filing required due to operations of other KKR portfolio companies

44


2 0 1 4 M & A C O N F E R E N C E

Deal Issues: Repatriation Dividend

Accellent had Irish operations, but did not need

cash

Accellent had Irish operations, but did not need

cash

Lake Region had a significant

amount of cash in Ireland

Lake Region had a significant

amount of cash in Ireland

Forced to repatriate and take tax hit

45

2 0 1 4 M & A C O N F E R E N C E

Deal Process: Eight Cold Days in January

►Two days of all-hands in-person due diligence and synergy sessions to kick-off transaction

►Eight days of in-person negotiations with key decision-makers present

►The final emotional moments before the dealwas signed

46


2 0 1 4 M & A C O N F E R E N C E

Integration: What Accellent Did to Make the Integration Successful

►Collaboration!►Two in the Box – reps from historical Lake Region and

Accellent staff on all initiatives

►Relying on experience

►Selling systems, not components

►Commitment to best practices

►Delivered on promises

47

2 0 1 4 M & A C O N F E R E N C E

Integration: Customer Reactions

Satisfied customer desire to reduce vendor counts

“Don’t screw this up.”

“We have a great relationship with both companies. We see two great suppliers coming together. Some issues to deal with, but nothing we see as a problem.”

“Can you share your integration strategy with us?”

“Will you be closing any sites?”

“How will we be affected and, if so, how many products will move? By when?”And, of course, last but not least …

“How will this affect price reductions?”

48


2 0 1 4 M & A C O N F E R E N C E

2 0 1 4 M & A C O N F E R E N C E

53

Shareholder Activism:An Emerging Asset Class

Mark Gentile, Richards, Layton & Finger, PAEileen Nugent, Skadden, Arps, Slate, Meagher & Flom LLPJon Nygren, Faegre Baker DanielsMatt Sherman, Joele Frank, Wilkinson Brimmer KatcherModerator: Mike Stanchfield, Faegre Baker Daniels

2 0 1 4 M & A C O N F E R E N C E

Shareholder Activism: Growing Resources

►Heightened levels of activist activity set to continue.

►More capital, more campaigns.

$19

$29

$48$55

$32$36

$47$51

$66

$93$100

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1 2014

+

Estimated Activist Fund Assets Under Management ($ billions)

54


2 0 1 4 M & A C O N F E R E N C E

The number of activist campaigns has increased

►Activist campaigns (2000 – 2013)

27

65 6878

49

95

138

203 202216

178189

197214

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: FactSet SharkRepellent data as of December 31, 2013

55

2 0 1 4 M & A C O N F E R E N C E

Activist 13Ds over time

►13Ds filed by known activists with specific demands (2007 – 2013)

160

113

46

78 8271 74

2007 2008 2009 2010 2011 2012 2013

Source: 13D Monitor as of December 31, 2013.


2 0 1 4 M & A C O N F E R E N C E

Schedule 13D Requirements

►Schedule 13D► Greater than 5% stake

► Possible intent to change or influence control or 20% stake

► Filings must be amended promptly for any material change (including 1% ownership change)

► Initial filing due 10 days after hitting 5% threshold► Subject to insider-trading and antitrust rules, shareholder may continue

to acquire ownership interests before filing

► Beneficial ownership may not capture all economic interests

57

2 0 1 4 M & A C O N F E R E N C E

Proxy fight statistics post-2008

Proxy fight outcomes

Source: FactSet SharkRepellent data as of November 3, 2014.Includes completed proxy fights for meeting dates from January 1, 2009 to December 31, 2014

Dissident election

Dissidents won at least one seat in ~46% of all proxy fights by either settlement or shareholder vote

Withdrawn 25%

Went to Vote 35%

Settled for board seats

28%

Settled without board seats

13%

At least one activist

candidate elected 52%

No activist candidate

elected 48%

58


2 0 1 4 M & A C O N F E R E N C E

The number of proxy fights rose in 2013, following a decline after the financial crisis

33 37 37 3417

36 38 31

68

83 88

61

6640

5154

2007 2008 2009 2010 2011 2012 2013 YTD 2014Seeking majority Seeking minority

101

120125

95

7683 8589

Source: FactSet SharkRepellent data as of November 3, 2014(1) Campaigns where formal notice of dissident proxy is publicly disclosed.(2) Seeking more than half of the Board seats.

(39%)

17%

(2)

Proxy contests (1)

59

2 0 1 4 M & A C O N F E R E N C E

Shareholder support for dissident nominees has increased in recent years

14 1621 13 8

9

23

74

11

22

6

1

2637

24

2512 17

18

2007 2008 2009 2010 2011 2012 2013Dissident win majority of seats sought Dissidents win minority seats sought Incumbent wins

47 57 56 40 3222 42(4)

Source: FactSet SharkRepellent data as of December 31, 2013(1) Includes winning half of the seats sought and campaigns which were settled prior to a vote and after an ISS recommendation was issued.(2) Includes campaigns that were settled prior to a vote and after an ISS recommendation was issued.(3) Includes campaigns that were withdrawn prior to a vote and after an ISS recommendation was issued.(4) Includes 4 campaigns settled post ISS recommendation. Sandridge Energy, Ferro Corp., Hess Corp., Tessera Technologies.

(2)

Vote results

(3)(1)

Average ~46% of

fights won at least 1

seat 45%

35%

57%

38%45% 47%

57%

60


2 0 1 4 M & A C O N F E R E N C E

ISS has recommended in favor of dissidents approximately 50% of the time

1514

22 16 10

9

21

28 39

30 22 1021

18

4 4 4 2 2 2 3

2007 2008 2009 2010 2011 2012 2013For Majority Dissident Slate For Minority Dissident Slate or Incumbent No ISS Recommendation

47 57 56 40 3222 42

Source: FactSet SharkRepellent and ISS data as of December 31, 2013Note: Percentages based on the total number of proxy fights where FactSet captures the ISS recommendation.(1) Includes supporting half the dissident slate.(2) Proxy fights that went to a vote with no ISS recommendation. ISS does not cover targets that are LLPs, LLCs, privately held, or have no ISS client investors.

(2)

ISS vote recommendations

(1)

35%26%

42% 42%50%

30%

54%

61

2 0 1 4 M & A C O N F E R E N C E

Given the relative dissident success in contests, it’s not surprising that many targets have decided to settle

47 41 42 4427

36 43

27 4121 24

22

24 12

5251

37 25

28

3029

2008 2009 2010 2011 2012 2013 2014Settlements Withdrawn Went to Vote Pending

126

10093

77

9097

13

Source: FactSet SharkRepellent data as of November 3, 2014

37% 31% 42% 47%

35%40%

44%

133

62


2 0 1 4 M & A C O N F E R E N C E

Timken Company (November 1, 2012 to June 30, 2014)

CalSTRSproposal and

Relational ownership stake are publicly

disclosed on Schedule

13D

13D amended to

reflect increased Relational ownership

Relational and CalSTRS

send joint letter to Board

members

Graph Source: Yahoo! Finance

Shareholder vote to

recommend spinoff

Board appoints strategy

committee and retains Goldman

Sachs

Board approval of

spinoff

Initial Form 10 is filed

Spinoff is effective

63

2 0 1 4 M & A C O N F E R E N C E

Combination of Strategic Acquirer and Activist –Allergan

April 21 - Activist investor Pershing Square acquired almost 10% stake in drug-maker Allergan, and plans joint bid with healthcare company Valeant

April 22 - Valeant and Pershing Square jointly make unsolicited cash and stock takeover offers for Allergan; Allergan rejects offer and adopts poison pill

May 7 – Allergan reports better than expected Q1 earnings, states considering offer

May 12 – Allergan rejects offer

May 13 – Pershing Square files documents to call non-binding shareholder vote on proposal

May 28 – Valeant increased bid by $10, to around $163 per share plus contingent right to receive additional $25 per share

May 30 – Valeant raises bid again, to around $177 per share

June 2 – Pershing Square files documents to begin proxy fight to oust directors

June 10 – Allergan rejects raised Valeant offer

June 12 – Pershing Square seeks clarity from Chancery Court as to whether efforts to hold special shareholders’ meeting will trigger poison pill

June 18 – Valeant launches exchange offer for Allergan shares

May 2014 June 2014April 2014

64


2 0 1 4 M & A C O N F E R E N C E

Combination of Strategic Acquirer and Activist –Allergan (continued)

July 7 – Pershing Square announces dissident slate, for 6 director positions

July 11 – Pershing Square files definitive solicitation statement

August 1 – Allergan sues Pershing Square and Valeant in California, accusing Pershing Square and Valeant of violating tender offer rules regarding insider trading

August 22 – Pershing Square submits request for shareholder meeting

September 4 – Allergan schedules special shareholder meeting for December 18

September 15 – Parties settle Delaware litigation, and allow special shareholder meeting to proceed

August 2014 September 2014July 2014

65


2 0 1 4 M & A C O N F E R E N C E [email protected]

2 0 1 4 M & A C O N F E R E N C E

75

International M&A Trends, Strategies & Deal Points

Gary Laitner, Partner, Faegre Baker Daniels (London)Euan Rellie, Sr. Managing Director, Business Development Asia John Potter, Partner, PricewaterhouseCoopers LLPNii Quaye, VP of M&A, PentairModerator: George Martin, Partner, Faegre Baker Daniels

BDA Trends in Emerging Markets M&A November 2014


Global Cross Border M&A H1 2014 vs H1 2011 140 14060

2002011 2014Outbound Inbound

US$bn 60 125160 1502011 2014Outbound Inbound

US$bn 75 6344 54

2011 2014

US$bn

Outbound Inbound27 2215 112011 2014

US$bn

Outbound Inbound

Asia (excluding Japan)

78

45.8 65.5 89.8 82 74.7 113.376.8 71.8 79.4 81.1 108.2 173.5050100150200250300350

H1'2009 H1'2010 H1'2011 H1'2012 H1'2013 H1'2014

Q2 M&A Value Q1 M&A ValueHistorical H’1 M&A Total Deal Values Deal value US$bn

40 5520

5030 40 5342

6540 45 50 40 30

010203040506070

H1'2011 H2'2011 H1'2012 H2'2012 H1'2013 H2'2013 H1'2014Inbound Outbound

Deal value US$bnCross Border Breakdown


China

79

Deal value US$bn

24 25 26 40 37 6347 26 31 38 5293

050

100150200

H1'2009 H1'2010 H1'2011 H1'2012 H1'2013 H1'2014

Q2 M&A Value Q1 M&A Value

920

519 9 8 1819

46

1736 39 30 34

05101520253035404550


Deal value US$bn

Historical H’1 M&A Total Deal Values

Cross Border Breakdown

Japan

80

Deal value US$bn

Deal value US$bn

10.6 13.9 12.3 14.1 8.1 5.514 7.3 17.2 26.3 15.3 6.205

1015202530354045

H1'2009 H1'2010 H1'2011 H1'2012 H1'2013 H1'2014


4 5 4 5 1 10 133 33 38

76

1135 33

01020304050607080





Emerging Markets

81

57.1 129.5 142.4 103.3 93.5 107.386129.5 108.4 138.2 133.2 172.6

050100150200250300

H1'2009 H1'2010 H1'2011 H1'2012 H1'2013 H1'2014


58 60 59 50 4059 59

3250

31 40 30 2145

010203040506070


Deal value US$bn

Deal value US$bn



Africa & the Middle East

82

Deal value US$bn

Deal value US$bn

5.3 25.4 19.8 8.8 12.7 6.748 6.5 13.5 21.6 14.5

0510152025303540

H1'2009 H1'2010 H1'2011 H1'2012 H1'2013 H1'2014

Q2 M&A Value Q1 M&A ValueHistorical H’1 M&A Total Deal Values


12 13 13 1220 19

8

23

6 8 10 8 716

0510152025

H1' 2011 H2' 2011 H1' 2012 H2' 2012 H1' 2013 H2' 2013 H1' 2014Inbound Outbound


Europe

83

Deal value US$bn

Deal value US$bn



162100 130

65119

70110

50100 75 89

4080

130

020406080100120140160180


121 127 183 171 135 17178 114241 186 199 282

0100200300400500

H1' 2009 H1'2010 H1'2011 H1'2012 H1'2013 H1'2014


37.4%

11.8%11.1%8.4%

5.6%4.9%4.5%3.7%2.9%2.7% 7.0% ChinaAustraliaJapanSouth KoreaHong KongIndiaThailandSingaporeKazakhstanIndonesiaOther

Value Volume

Asia-Pacific M&A Geographic Breakdown

31.0%

14.0%14.6%9.4%

4.0%8.8%1.4%3.5%0.5%2.5% 10.3%


Asia-Pacific M&A Sector Breakdown14.6%

12.4%3.2%

21.9%10.8%11.5%

4.0%2.2%5.5%4.4%4.5%

Industrials & Chemicals Consumer Business ServicesEnergy, Mining & Utilities Technology Financial ServicesPharma, Medical & Biotech Leisure Real EstateConstruction Transportation Media

Value

European M&A Sector BreakdownValue

12.3% 8.3%9.5%

19.1%2.2%1.8%15.0%

31.8%

Industrials & Chemicals ConsumerEnergy, Mining & Utilities Pharma, Medical & BiotechLeisure MediaTelecomunications Other


Africa & the Middle East M&A Sector BreakdownValue

3.3% 13.1%

26.2%3.3%19.7%

9.8%24.6%

Industrials & Chemicals ConsumerEnergy, Mining & Utilities Pharma, Medical & BiotechTechnology TelecomunicationsOther

2 0 1 4 M & A C O N F E R E N C E [email protected]

Focus on Compliance!

88

Market Update: Current Deal Activity, Valuations and Outlook

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