The Emergence of Private Equity

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The Emergence of Private Equity Alternative
Financing Promoting MA Activity
David Farina Co-Head of Technology Investment
Banking
Tel Aviv, Israel June 2005
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A Unique Strategic Cooperation Agreement
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• 70 years of experience with US equity, and
  mergers and acquisitions markets
• Extensive knowledge of the Israeli Market
• 100 integrated, full coverage for languages,
  time zones and capabilities
• Strong distribution capabilities (US, Europe and
  Israel)
• Complementary Investment Banking and Commercial
  Banking solutions
• Long-term commitment to provide best-of-breed
  resources to service Israeli clients

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Significant Israeli Related Deal Traction
Building momentum by delivering on expectations

• Five Transactions Completed In The Last Nine
  Months

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William Blair Company Overview
A tradition of growth since 1935

• 100 owned by active partners
• Entrepreneurial with an intense client focus
• Senior bankers actively lead each transaction
• Continuity and consistency for 70 years
• Reputation for integrity, independence and
  quality
• Relationship-driven investment bank
• Successful transactions/repeat business
• Sophisticated wealth management services
• Lowest turnover in industry
• Investment banking expertise
• Leading middle market MA advisor, advised on
  11.8 billion of completed transactions in 2004
• Comprehensive public company experience and
  proven positioning expertise of sector leaders
• Ranked 1 for aftermarket performance of managed
  public equity offerings
• Breadth of industry coverage in-depth, quality
  research
• Execution excellence
• Name brand credibility and reputation

Data as of January 5, 2005.
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The Middle Markets Leading Investment Bank
More Than 36 Billion in Merger and Acquisition
Transactions Since 2000
Customize Midwest vs. Middle Market
Transaction Value ( Millions)
Number of Transactions

• Publicly traded and privately held companies
• Sell-side advisory and divestitures
• 65.1 of sell-sides to strategic acquirers since
  2000
• Buy-side advisory
• Special Committee advisory
• Recapitalizations, stock repurchases, and
  strategic alternative reviews
• Shareholder rights plans
• Fairness opinions
• Broad geographic and industry experience
• Proven ability to access foreign and domestic
  strategic and financial buyers

(1)
(3)
(2)

• Excludes 4.5 billion for the sale of Keebler to
  Kellogg Blair represented the WK Kellogg
  Foundation.
• Includes 7.2 billion sale of Concord to First
  Data Corporation.
• Includes closed and announced transactions as of
  May 20, 2005.

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Why It Is a Good Time To Sell Your Business
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MA Market Summary

• Corporate confidence is on the rise
• 24.9 of the 7,000 public companies increased
  dividends in 2004
• Most hikes since 1998 and 3rd year in a row of
  improvement
• Businesses created 1.7 million jobs in 2004
• Earnings outlook for companies across many
  sectors has improved
• Financing market has improved markedly
• 1,300 private equity firms today vs. 500 in 1992
  100 billion in dry powder
• Private equity firms are accepting lower IRRs
• Transaction valuations are being driven to more
  attractive levels for sellers
• Robust, high quality deal flow in the market

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MA Market Overview
JDL Updated 03/17/05

• The MA market continues to gain solid upward
  momentum
• Dollar value of transactions has exceeded 50
  billion for seven of the last twelve months and
  100 billion for two of the last three months
• Appetite among private equity funds in the U.S.
  and abroad is extremely strong and sponsors are
  competing successfully with strategic acquirers
  for growth and/or profitability
• MA valuations overall are improving
• Sarbanes-Oxley and related issues put a premium
  on very thorough, very prepared approaches to due
  diligence proactive rather than reactive
• Return of the Mega Deal 14 5 billion plus
  deals announced since December
• Challenges remain, but the outlook is very
  positive

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Valuation Trends

• Private equity firms are accepting lower IRRs
  and pressured to put money to work
• Strategic buyers are returning and for highly
  strategic deals can pay outlier valuations
• Playing field has leveled and financial buyers
  are winning
• Heated competition coupled with access to debt is
  driving outlier valuations by sponsors

6.0x 6.5x 7.0x 7.5x 8.0x 8.5x 9.0x
Two Years Ago
Financial
One Year Ago
Today
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Recent MA Activity
Total Deal Value ( in billions)
Total Deals
15.0
44.4
Total Deals
Total Deal Value
Source Mergerstat Review.
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Comparison of Market Trends
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MA Activity Long Term Trends

• In retrospect, 1997 to 2002 was an outlier period
• We have returned to normalized trend of
  historical volume levels

Announcements
Volume
Source Mergerstat Review.
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Payment Method Continues to Shift

• Cash consideration was king in 2004
• Low interest rate environment
• Perceived lower stock valuation (especially in
  first half of year relative to historic highs)
• Increased activity of financial buyers with cash
  as only currency
• End of pooling in 2001 eliminated certain
  accounting advantages of using stock

Form of Payment
Source Mergerstat Review
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MA Activity Recent History

• Largest year-over-year increase came from big
  deals
• Middle market (50 - 500 million) fairly robust
• Low-end of market (10 - 50 million) was
  challenging

Source Mergerstat Review.
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Corporate Earnings Growth

• Significant improvement in operating results
  somewhat slower than exuberant expectations
• Economic recovery is continuing at a reasoned
  pace
• Right direction

Growth
Source FactSet Research Systems as of January
10, 2005.
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State of Private Equity Investing

• Explosion of number of funds and assets under
  management
• New entrants hedge funds, distressed debt
  investors, pipe investors
• Over 100 billion of dry powder to invest with
  pressure to put money to work
• Business owners now educated as to the value of
  competitive process
• Corporate scrutiny limits non-competitive
  divestitures
• Greater percentage of transactions are done via
  competitive processes
• Proprietary deal flow and one off transactions
  are very rare, few bargains
• Rapidly maturing asset class and very efficient
  and competitive market

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Buyout Fund Universe (gt250 million)
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Increased Activity of Private Equity Firms

• Private equity firms represented 11 of all U.S.
  MA activity in the second half of 2003
• Highest in nearly 10 years
• Extreme pressure to put money to work (200
  billion in dry powder)
• The high-yield debt market is the most receptive
  in years, allowing buyout firms to stretch
  valuations and win auctions

in billions
Source Dealogic Global MA NewsSheet
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Debt Capital Markets Conditions are Driving
Current MA Valuations
Debt Market Overview

• Market conditions have changed dramatically in a
  relatively short timeframe
• Covenants continue to loosen
• Maturities continue to increase
• Loan pricing has declined, especially at higher
  leverage levels
• Default rates are approaching historic lows
• Cash flow lenders are active once again
• Institutional investors are liquid and active
• New middle-market lenders have entered the market
• For larger, sponsored leveraged financings, debt
  leverage is approaching levels last seen in the
  late 1990s

Historical Total Debt / EBITDA Multiples


Rounding.Source Portfolio Management Data.
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Average Equity Contribution to Leveraged Buyouts
Source SP/Portfolio Management Data.
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Trans-Atlantic MA Trends

• U.S. acquisitions of European targets more than
  doubled in 2003 to 75 billion
• G.E.s 9 billion purchase of Amersham PLC (U.K.)
• PGs 5 billion purchase of Wella AG (Germany)
• United Technologies 1 billion purchase of Chubb
  PLC (U.K.)
• Even more surprising due to the significantly
  weakening U.S. dollar during this period
• Reflects strengthening U.S. economy and
  confidence of domestic CEOs vs. global
  counterparts

Volume
Announcements
Source Thomson Financial
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MA Market The Challenges

• Due diligence rigor is excruciating
• Enhanced regulatory scrutiny
• Boards and management teams are nervous given
  recent scandals and their more visible corporate
  responsibilities
• Financing can still be somewhat challenging for
  companies lt 30 million EBITDA
• Time to close has been extended and certainty has
  been reduced

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