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M&A and Capital Raising in a Difficult Environment From Heaven to Hell and back?

M&A and Capital Raising in a Difficult Environment From Heaven to Hell and back?. M&A Trough. Climb in M&A activity. 2007 – A Banker’s Dream. Extraordinary financing environment M&A peak in the chemical industry High valuation from significant demand by both strategic and financial buyers.

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M&A and Capital Raising in a Difficult Environment From Heaven to Hell and back?

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  1. M&A and Capital Raising in a Difficult EnvironmentFrom Heaven to Hell and back?

  2. M&A Trough Climb in M&A activity 2007 – A Banker’s Dream • Extraordinary financing environment • M&A peak in the chemical industry • High valuation from significant demand by both strategic and financial buyers CHEMICAL INDUSTRY M&A – DOLLAR VALUE ($ in billions) Source: RSM EquiCo Capital Markets * Data as of March 17, 2008; subject to change pending future updates

  3. Increasing Valuations • Chemical Industry and middle market valuations climbed from the dip in 2001 – 2002 time period • Competitive bidding environment with financial buyers adding to the buyer pool • Overall good economy CHEMICAL INDUSTRY M&A VALUATION (EV/EBITDA) AVG. PRICE MULTIPLES PAID BY SPONSORS (EV / EBITDA) Source: RSM EquiCo Capital Markets * Data as of March 17, 2008; subject to change pending future updates Source: Standard & Poor’s * For deals with EBITDA under $50 million

  4. M&A Activity Fueled by an Abundance of Funds • The current size of the entire bank loan market exceeds $1.5 trillion • The institutional loan market represents slightly over $1 trillion HISTORICAL GROWTH OF THE LEVERAGED LOAN MARKET Includes US dollar-denominated noninvestment-grade bank debt (TL-a, revolver and institutional term loans). Source: Credit Suisse, LPC, as of 12/31/07

  5. M&A Activity Fueled by an Abundance of Funds • Through the third quarter of 2007, $199.4 billion was raised by U.S. private equity firms, well ahead of the $154.1 billion raised in the first three quarters of 2006 (source: Private Equity Analyst) • In 2007, over $500 billion was raised by private equity firms worldwide GLOBAL PRIVATE EQUITY CAPITAL RAISED ($ in billions) Source: Thomson Financial, Private Equity Intelligence

  6. US Borrowers Amount Comment Alltel $23.2B - Transaction launch delayed Cablevision $9.2B - Transaction launch delayed Chrysler $12.0B - Pulled from market; bridge financing still in place Chrysler Financial $8.0B - Transaction still seeking clearing price/structure Clear Channel $22.1B - Transaction launch delayed First Data $16.0B - Transaction launch delayed Harrah’s Ent. $9.0B - Transaction launch delayed Sallie Mae $16.5B - Transaction launch delayed Expedia $3.0B - Share buy back reduced to $750MM European Borrowers Alliance Boots £9.02B - £7.27B of Sr debt withdrawn; flexed jr capital Maxeda €1.08B - Pulled from market Springer Sci & Business Media €1.77B - Pulled from market Camaieu €1.17B - Reduced amount of facilities during syndication Telenet €2.30B - Out to relationship banks; determining structure Paroc €0.83B - Flexed: Increased margins & offering 50bps OID phs €1.03B - Reduced amount of facilities. Flexed: Increased margins & offering 50bps OID - Incr. Margins, added 100bps OID, tightened doc’s Zodiac €1.18B However, the world changed in July… • Appetite for large leveraged loans dried up suddenly as banks were overloaded and sub-prime related troubles became more apparent • In the first 6 months of 2007, $846.8 billion of transactions were conducted in the U.S. while second half figures fell to only $479.2 billion (source: Nixon Peabody) • $300 billion in deals were overhanging and are still being worked out • This number decreased to $180 billion in April 2008 NOTABLE TRANSACTION’S PULLED/DELAYED

  7. What happened by the end of 2007? • A rapid succession of events • The market was overheated • Hedge funds, which had become a source of senior sub and equity, disappeared; they were story-friendly and aggressive • CLO’s disappeared • High yield market dried up • Banks were left with “Bridges to Nowhere” and immediately tightened their standards • The CP market froze • There were no significant transactions in August • The U.S. central banks intervened • Markets were hit on both sides of the Atlantic

  8. What happened by the end of 2007? (continued) • The summer events were unusual in that it was liquidity and not credit quality which spooked the market • At below 1%, the default rate was extremely low compared to 5% to 6% during the 2002 credit crunch • In September, things looked better and we seemed to head towards normalcy • However, towards the end of 2007, the market experienced a second wave of pessimism which continued into 2008 • Further write offs and then Bear Stearns fails

  9. 2008 – A Banker’s Nightmare • Financing environment for mid to large-caps is very difficult • M&A for deals above $250 million are greatly impacted by financing difficulties • However, lower to middle market deals still healthy LEVERAGED LOAN ISSUANCE ($ in billions) Source: Reuters LPC, Dealscan, LSTA

  10. Back? Signs of Life • In April 2008, we started to see signs of life • News that Citi is selling $10 billion of their leveraged loans and $2 billion of bond bridges has driven market optimism • High yield bond market is starting to gain momentum with 6 new issues priced in April • Quarter-end amortization along with increasing repayments means cash is starting to build in investor accounts • M&A activities are resuming • May 2, 2008: Avista Capital Partners and Nordic Capital Fund VII agreed to acquire ConvaTec from Bristol-Myers Squibb Company for approximately $4.1 billion • April 28, 2008: Mars Inc., with financial support from Warren Buffett's Berkshire Hathaway Inc., announced plans to acquire The Wm. Wrigley Jr. Co. for $23 billion • April 23, 2008: Liberty Mutual Group (“Liberty Mutual”) will acquire Safeco for approximately $6.2 billion

  11. Middle Market: The Safe Harbor? • Lending activity dropped, but less dramatically than the large corporate market • There is no market risk and no syndication risk • Small is the sweetspot – the majority of the deals that will close in the next 12 months will be below $500 million in value (source: Nixon Peabody survey) • Foreign buyers are now buying and out-bidding ‘local’ buyers constrained by debt capacity • As some people have said America is on sale and larger acquisitions can be afforded by foreign buyers

  12. Middle Market: The Safe Harbor? (continued) • There is bifurcation in the market • During 4Q07 there were 3339 deals worth $500 million or less and only 156 deals worth greater than $1 billion • Usually there are 4 times as many large deals then small deals

  13. Expectations in Today’s Debt Market 1) Source: Joint study from Oxford, Urbana Champaign and Stockholm Universities

  14. LIBOR’s Downward Trend EVOLUTION OF LIBOR

  15. New Lenders Pick Up the Slack • Jumbo LBOs struggled to syndicate in 1Q08 • LBO lending fell 88% in 1Q08 to $5.4 billion from $45.9 billion in 1Q07 • The largest LBO loan to clear market was just over $1 billion • Make-up of lead arrangers shifts dramatically as Institutional volume declines • New players are emerging as corporates now represent ~60% of new borrowers, up from ~20% during Q1 2007: LARGE MIDDLE MARKET INSTITUTIONAL LEAD ARRANGER VOLUME ($ in millions) LARGE MIDDLE MARKET INSTITUTIONAL LEAD ARRANGER VOLUME ($ in millions) Source: Reuters Loan Pricing Corporation/DealScan

  16. Situation in Q1 2008 • Banks were no longer liquid; for the first time the whole banking system was in doubt • Loan default is still relatively low • 1.50% at the end of Feb. • 1.83% through Mar. • But the mark to market of collateralized sub-prime loans triggered huge write-downs • This resulted in capital adequacy issues • This is being worked out as we speak through: • Foreign investors • Going to market by issuing preferred convertibles and equity

  17. Summary • Financing is available under tighter conditions • The market has not dried out; overhang is being worked out; however, pricing is going up • Sponsored M&A lending declined 39% from the previous quarter and 60% from the first quarter of 2007 • With the continued availability of funds, what is happening to the M&A market and valuations?

  18. 2007 M&A Valuation & Volume • Good companies are still obtaining high multiples • Average EBITDA multiples for middle market companies declined from 6.5x in the first half of 2007 to 6.0x in the second half • In the $10 million to $25 million deal size, there was no appreciable decline in EBITDA multiple which is holding at 5.7x • In the $25 million to $100 million deal size, EBITDA multiples dropped from 7.0x to 6.0x VALUATION MULTIPLES

  19. 2007 Chemical M&A Valuation & Volume • Chemical industry transaction volume fell in Q3 2007 • Backlog of pending transactions has picked up again this year and we expect the second half of 2008 to be another busy season for Chemical Industry M&A VALUATION MULTIPLES

  20. 2007 Chemical M&A Valuation & Volume (continued) • Average valuations will increase in the second half of 2008 as some large transactions close: • Agrium / UAP (closed May 7, 2008) • Carlyle / Neochimiki (closed May 9, 2008) • Incitec Pivot / Dyno Nobel • Henkel / ICI Electronic Materials • Sub-$100 million deals on average are discounted up to 2x EBITDA compared to deals $500 million and above VALUATION MULTIPLES Source: RSM EquiCo

  21. Fine Chemical Transactions * Foreign Buyer Source: RSM EquiCo

  22. What Will Happen? • Will M&A dry up? • No: Strategic buyers have very strong balance sheets, un-drawn lines of credit and very good stock valuations and earnings • Will Private Equity decline? • In 2000 – 2002, total private equity deals averaged $30 billion in the U.S. and Europe • In 2006 we saw figures of $233 billion in the U.S. and $151 billion in Europe • There is $250 billion waiting to be invested and most PE firms are successfully raising larger funds

  23. What Will Happen? (continued) • Private equity maintains its advantages • Do not have to please the analyst community • No tyranny of quarterly earnings • No Sarbanes Oxley • They have in some cases become “hybrids” • They often have strategic horizons which are longer than traditional strategics • They are very quick • Strategic buyers will probably regain some advantage • Private equity hybrid platforms allow them to generate the synergies to be competitive against strategics (i.e. Hexion / Huntsman) • 2002 to 2007: the “golden age” of private equity

  24. Conclusion • There is evidence that lenders are redirecting funds to the middle market • The banks to avoid syndication risk and still generate fees • The mezzanine players who have been starved for the past year and have an abundance of funds • BDC’s are canvassing the market with their “one-stop-shop” financing • Multiples have come down between ½ to 1 turn depending on the sector • This means we are going back to 2006 which was an exciting year • The froth is gone, sanity has come back • We are open for business in the middle market

  25. RSM EquiCo M&A Activity TOP U.S. ADVISORS ($1 - $100m deal value) TOTAL LIQUIDITY CREATED BY RSM EQUICO GROWTH IN RSM M&A ADVISORY ACTIVITY Total Deal Value (millions) Source: RSM EquiCo as of 5/11/08

  26. RSM Global Presence RSM Bently Jennison (UK) 14 offices 1,000 employees RSM McGladrey & McGladrey & Pullen (U.S.) 100 offices 4,000 employees American ExpressTax & Business Services 2,500 employees RSM Hemmelrath Gruppe (Germany) 22 offices 1,000 employees RSM Hemmelrath Gruppe (China) One Office 200 employees RSM EquiCo (UK) One office Five employees RSM Nelson Wheeler (Hong Kong) Four offices 100 employees RSM EquiCo (U.S.) Four offices 150+ employees RSM EquiCo (India) One office 25 employees RSM Bird Cameron (Australia) 30 offices 500 employees RSM Audihispana (Spain) 14 offices 615 employees RSM France (France) 23 offices 1,600 employees RSM Mexico (Mexico) 24 offices RSM Brazil (Brazil) 6 offices RSM Stone Forest (Singapore & China) 400 employees

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