Dealmaking in Today’s Turbulent Markets: Where Do We Go?

1. ® Kansas City KC Private Equity Forum: Survival, Success & Succession Dealmaking in Today’s Turbulent Markets: Where Do We Go? Presented by: Jack Helms Chairman Lazard Middle Market jack.helms@lazardmm.com 612.339.0500

2. ® Kansas City JUNE 2009 STATE OF THE M&A MARKET

3. Table of Contents STATE OF THE ECONOMY CREDIT MARKET PRIVATE EQUITY KANSAS AND MISSOURI ACTIVITY M&A MARKET

4. I. STATE OF THE ECONOMY

5. Cyclicality in the M&A Market S&P 500 LTM EPS (Proxy for U.S. Economy) Deal Volume S&P 500 Index Index LTM EPS # of Deals $1,600 14,000 $90 $80 $1,400 12,000 $70 $1,200 10,000 $60 $1,000 8,000 $50 $800 $40 6,000 $600 $30 4,000 $400 $20 2,000 $200 $10 $0 0 $0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Mergerstat and S&P M&A volume is clearly linked to the state of the economy and is highlycorrelated with equity market performance.

6. Public Market Indexes Over Time (55.6%) (53.8%) % of Index (56.8%) S&P 500 Index Dow Jones Industrial Average NASDAQ Composite Index Source: CapitalIQ, updated through 6/2/09 Note: Indexed off of September 1989 From peak to trough the DJIA, S&P and NASDAQ were down 53.8%, 56.9%and 54.8%, respectively.

7. Public Market Indexes Over Time $100 invested equally in 3 indexes on 9/1/89 $430 $400 $255 $200 $200 $190 $100 S&P 500 Index Dow Jones Industrial Average NASDAQ Composite Index 875.0 % of Index ~7 yrs ~7 yrs Source: CapitalIQ, updated through 6/2/09 Note: Indexed off of September 1989 A long term view of public equity market valuations reflect: (i) the bizarre behaviorof the NASDAQ in 1999 (tech bubble) and (ii) the recent loss of 13 years of value appreciation.

8. Comparison to 1929 Stock Market Crash Source: Capital IQ updated through 6/2/09 Is the bear dead, or is this just a “bull-bounce” in a continuing bear?

9. Bull or Bear?

10. Bear Case

11. $60 4.2x $51 3.6x 2.7x 2.6x 2.4x $26 $16 $14.3 $14.3 $9.8 $6.7 $150mm Households Business State & Local Gov't Federal Gov't Debt/GDP GDP Debt Outstanding by Sector Over the Past 15 Years Debt/GDP $65 4.5x 60 4.0x 55 3.5x 50 45 3.0x 40 2.5x 35 30 2.0x 25 1.5x 20 15 1.0x 10 0.5x 5 0 0.0x Great Depression 1993 2000 2008 2009E* Source: Federal Reserve, Department of Commerce Note: $’s in trillions *2009 is Lazard estimate for illustrative purposes There has been a dramatic increase in leverage since the Depression years.

12. Federal Government Deficit Analysis Source: Congressional Budget Office data and estimates as of 5/6/09; www.cbo.gov

13. “Net Cash”Fiscal Quarter Borrowings Paydown Treasure Quarterly Net Marketable Borrowing Net marketable borrowing through the second quarter of FY 2009has eclipsed total FY 2008 net marketable borrowing.

14. Non-Investment Grade Debt Maturities Over the Next 5 Years $3,594 $2,977 $2,364 $1,695 $1,017 $459 Source: Bloomberg and S&P as of 3/31/2009 Note: $’s in billions Over $1.5 trillion in non-investment grade debt is coming due over the next 5 years.

15. Shadow Banking System Others GSE and ABS Funds Insurance Credit Providers $ in tn Traditional Banking Source: “Downunder Daily”. Morgan Stanley Research. 1/28/09. Asset Backed Alert. www.abalert.com. Traditional banking lacks the capacity to service current debt levels. Equalization and government intervention will be the primary solutions.

16. Death of the Securitization Market US SECURITIZATION ISSUANCE Source: “Downunder Daily”. Morgan Stanley Research. 1/28/09. Asset Backed Alert. www.abalert.com.

17. Percent of Leveraged Loans in Payment Default or Bankruptcy Source: Standard and Poor’s LCD and S&P/LSTA Leveraged Loan Index Note: Comprises all loans, including those not tracked in the LSTA/LPC mark-to-market service Note: Vast majority are institutional tranches Note: 2009 Projection from Edward Altman, Stern School of Business, NYU 2009 default rate expected to end higher than 2002. Current shadow default rate is 11.3%.

18. U.S. Housing Still A Problem Housing Inventory Monthly Housing Starts Source: U.S. Census Bureau Source: U.S. Census Bureau Average Sales Price of New Homes Commercial Real Estate Vacancies Source: U.S. Census Bureau Note: Sales price include the land Source: CB Richard Ellis (historical), National Association of Realtors (projections) Note: Retail vacancy data only available back to 2005.

19. Bull Case SHORT TRADERS

20. Dow Jones Industrials Performance Post Bottom (3/9/2009) +46% +38% +34% Source: Yahoo Finance as of 6/9/09

21. Equity Mutual Fund Inflow vs. DJIA Δ in DJIA 10% $20,000 $10,000 5% 0% $0 -$10,000 (5%) (10%) -$20,000 -$30,000 (15%) (20%) -$40,000 (25%) -$50,000 Jul-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 Equity Mutual Funds Inflows (mm) DJIA Source: TrimTabs Investment Research Note: $’s in millions

22. Cash Held on the “Sidelines” Currently at Historical Highs Source: Bloomberg and Factset Cash “on the sideline” is at an all-time high compared to the value of equity markets.When will “in-flow” to equity funds begin?

23. U.S. Manufacturing and Services Inventories and Orders Inventory lags new orders and is shrinking. New orders are rising, causing an increase in new production due to low inventory. Possible increased demand for labor? Source: Institute for Supply Management ISM Services Index ISM Services Index has turned. Services drives economy much more than manufacturing. As of 5/09. Blue-shaded areas indicate periods of recession. See last slide for definition of recession. Source: Bureau of Economic Analysis, FactSet, Institute of Supply Management (ISM), National Bureau of Economic Analysis (NBER).

24. Housing Inventories Moving Down New New home inventories fully reversed bubble Existing Foreclosures still feeding into existing home inventories As of 4/09. Blue-shaded areas indicate periods of recession. See last slide for definition of recession. Source: Department of Commerce, FactSet, National Association of Realtors, National Bureau of Economic Research (NBER).

25. Home Prices Appear to be Stabilizing Note: As of 3/09. Based on S&P/Case-Shiller composite 20 Home Price Index. Source: FactSet, Standard & Poor’s .

26. Consumer Confidence – Jobless Claims Source: Bloomberg and Factset Have the bad things stabilized, and is confidence returning? Or, are they just taking a rest before continuing?

27. Layoff Announcements Down Noticeably Layoffs Layoff announcements as of 5/09. Unemployment claims as of 5/29/09. Blue-shaded areas indicate periods of recession. See last slide for definition of recession. Source: Challenger Gray & Christmas Inc., Department of Labor, FactSet, National Bureau of Economic Research (NBER). Layoff announcements are a true forward indicator.

28. No Signs of Inflation • Traditional definition of Inflation Too many dollars chasing too few goods

29. Fed flooding system: could reach $3.5T by year-end But “velocity” of money remains depressed (money not getting into economy) Money Supply and Velocity As of 6/09.Source: FactSet, Federal Reserve.

30. Too Few Goods? • The chart to the left from Goldman Sachs studies the Output Gap since 1960 as a measure of how the actual GDP can rise above or below its potential long-term average and its relationship with inflation. • Some economists believe that deflation is a near-term threat due to the recent shock to the global financial system. The Output Gap Drives Inflation Note: Dotted lines denote GS forecasts. Source: Department of Commerce, CBO & Goldman Sachs Estimates (4/09)

31. Consumer Debt and Personal Savings Change in Liabilities Consumer debt is contracting massively Consumer net increase in liabilities as of 4Q08. Personal savings rate as of 4/09.Source: Bureau of Economic Analysis, FactSet, Federal Reserve. Personal Savings as a Percentage of After-Tax Income Americans are saving more of their paychecks than at any time since February 1995. Could prolong the recession, but will strengthen the financial health of U.S. households and overall economy for the long term. 5.7% Source: Department of Commerce

32. Bull or Bear?

33. Anemic Bull • Headwinds for the Emerging Bull • Rising Energy Costs • Rising Interest Rates • Continued Consumer Delevering • Increasing Taxes • Increase in top rate, cap gains rate, dividend rate • Offshore income • Healthcare plans • Social Security • National Health • Radical Increases in Regulation

34. II. CREDIT MARKET

35. $535 $480 (71%) $295 $265 $256 $243 $185 $153 $166 $139 $139 $46 $11 (76%) Leveraged Loan Volume Trends $600.0 U.S. Dollar Denominated New-Issue Leveraged Loan Volume $500.0 $400.0 In Billions $300.0 $200.0 $100.0 $0.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1Q08 1Q09 Source: Standard & Poor’s, LCD Leveraged Lending Review 1Q09 Note: Excludes existing tranches of add-ons and amendments and restatements with no new money Leveraged loan volume was down 75% year-over-year, but up 30% compared to 4Q’08. 34

36. Middle Market Loan Volume Trends–Pro Rata and Institutional Middle Market Volume By Year Source: Standard & Poor’s, LCD Leveraged Lending Review 1Q09 Note: Middle Market defined up to $50 million of EBITDA Note: $’s in billions Institutional investors have all but left the middle market.

37. Shadow Banking System Others GSE and ABS Funds Insurance Credit Providers $ in tn Traditional Banking Source: “Downunder Daily”. Morgan Stanley Research. 1/28/09. Asset Backed Alert. www.abalert.com. Traditional banking lacks the capacity to service current debt levels. Equalization and government intervention will be the primary solutions.

38. Fund Managers That Issued Arbitrage CLOs by Year Source: Standard & Poor’s LCD, Leveraged Lending Review 4Q08 2008 CLO volume down 85%. 2007 volume: $87 billion – 2008 volume: $13 billion – 2009 YTD volume: $300 million.

39. U.S. Bond Markets 24-Month U.S. Investment Grade Issuance The market for investment grade issues appears to have reestablished itself. Source: Advantage Data and Bloomberg as of 06/10/09 24-Month U.S. High-Yield Issuance The high yield markets show signs of spring and recovery. Source: Advantage Data and Bloomberg as of 06/10/09

40. Credit Crisis Resulting in Unprecedented Price Declines Average Discounted Spread of Leveraged Loans Average Bid of Leveraged Loans (% of Par) Last Date: 5/1/09 Ending Value: L+1479 Last Date: 5/1/09 Ending Value: 75.1% Source: Standard & Poor’s, LCD LoanStats Weekly as of 5/7/09 Note: Assumes discount from par is amortized evenly over a three-year life Primary and secondary trading levels depressed by a liquidity vacuum. Cause: CLO liquidations, portfolio fire-sales, record hedge/mutual fund redemptions. Result: Limited number of active buyers reaping the benefit of forced-selling by many sellers. 39

41. Average Debt Multiples of Highly Leveraged Loans 8.8 7.1 6.7 (36%) Source: Standard & Poor’s LCD, Leveraged Lending Review 4Q08 Transaction leverage is at a 22-year low.

42. Middle Market Total Leverage Multiples Source: Standard & Poor’s, LCD Middle Market Lending Review 1Q09 Note: Defined as issuers with EBITDA of $50 million or less Note: For Q1’09, average leverage level is the Firm’s internal estimate Starting and ending attachment points for mezzanine debt continue to decline, reducing risk for lenders. Middle Market leverage was lower than overall market (see previous slide) prior to 2000, higher from 2001 through 2008, and is now lower. 41

43. Average Cash Flow Multiples of Highly Leveraged Loans (Cash Flow Coverage) +55% Source: Standard & Poor’s LCD, Leveraged Lending Review 4Q08 Cash flow coverage of new issue loans strongest in 22 years.

44. Equity Rollover Equity Sub Senior Capital Structures are More Conservative AVERAGE SOURCES OF PROCEEDS FOR MIDDLE MARKET LBO LOANS 2007 2008 2009E Source: Standard & Poor’s, LCD Leveraged Buyout Review 1Q09 Note: Defined as issuers with EBITDA of $50 million or less Capital structures continue their trend toward more equity. 43

45. Pricing of Credit • Post-Lehman • Pre-Lehman SENIOR DEBT (B Rated Credit) Rate Libor Floor Fees 5% No Libor floor 1% 5-8% W/& w/o Libor floors 1% ABL Rate Libor Floor Spread Fees 7-9% No Libor floor L+450 1-2% 10-12% Libor floor of 3-4% plus L+600-700 2-4% Cash Flow SUB DEBT Rate Cash Pay PIK Warrants 15-18% 10-12% plus 3-5% No warrants 18-20% 12% plus 6-8% and/or Warrants Source: Lazard Middle Market Credit Overview and Standard & Poor’s, LCD ABL Lending Review Q109 Note: ABL includes DIP financing

46. Pricing of Risk Yields on 5-year U.S. Treasuries drop while yields on AAA/AA-rated bonds and BB+ and below rated bonds jump dramatically. Spreads over 5-year U.S. Treasuries jump substantially more for BB+ and below rated bonds when compared to AAA/AA-rated bonds. Source: LehmanLive

47. III. PRIVATE EQUITY

48. 2003-2007: M&A Market BILL THOMAS

49. 2003-2007: M&A Market ANALYSTS’ RESEARCH LAB

50. 2003-2007: M&A Market PAT HEALY (C3 CAPITAL)