Recent Trends in Middle Market M&A

1. Recent Trends in Middle Market M&AMarch 7, 2008Barry E. SteinerManaging Director

2. Factors Driving M&A Market Activity

3. Since mid-2003, favorable economic and market conditions have created a near perfect M&A deal environment. The rapid pace of M&A activity in the first half of 2007 was followed by a dramatic slowdown during the second half of the year. Despite the dramatic slowdown directly resulting from the credit market crisis, the M&A market maintained its fifth consecutive year of growth in 2007. U.S. M&A Activity Continued to Increase During 2007 (# of Deals) (Deal Value - $Bn) (1) Middle-Market defined as transactions with a deal value under $1bn. This definition is consistent throughout the presentation. Sources of Information: Thomson Financial.

4. The strongest segment of the U.S. M&A market during 2007 was in billion-dollar-plus transactions. U.S. M&A activity represented nearly 35% of all global M&A transactions in 2007 and over 40% of the total dollar volume for the year. Divestitures were a major source of M&A deal volume in 2007, accounting for approximately 40% of all middle-market transactions. Private equity continued to play a significant role in the M&A markets. The median EBITDA multiple for M&A transactions in 2007 was 11.4x. Key elements which presented favorable environment have changed. 2007 M&A Trends

5. Most of the key market drivers have become uncertain or turned negative creating an uncertain M&A environment for 2008. 2007 M&A Trends (continued) Sources of Information: Thomson Financial.

6. Technology is the most active sector, representing 19% of all announced M&A transactions in 2007. The following chart details total U.S. M&A activity in 2007 by number of announced transactions. M&A Activity by Industry Sources of Information: Thomson Financial.

7. The following chart details U.S. middle-market M&A payment methods during the last ten years. During 2007, over 65% of all U.S. middle-market transactions were completed with an all cash consideration. M&A Payment Methods Note: Data is based on number of U.S. middle-market M&A deals. Sources of Information: Thomson Financial.

8. Corporate M&A activity accounted for over 87% of all U.S. M&A transactions in 2007 and is expected to increase in 2008. The number of deals involving a corporate acquiror increased for the fifth straight year in 2007. The following chart outlines all corporate M&A activity in the U.S. during the last ten years. Corporate M&A Activity (# of Deals) Sources of Information: Thomson Financial.

9. 2007 was a record year for private equity fundraising activity. Increased availability of capital, as well as declining valuations and a need to make add-on acquisitions to existing portfolio companies should drive private equity buy-side activity in 2008. The following chart shows funds raised by private equity firms during the last ten years. Private Equity Fundraising Activity ($Bn) Sources of Information: Dow Jones Private Equity Analyst.

10. 2007 experienced 12% growth from 2006 in deal flow for private equity backed U.S. acquisitions. Private equity firms continue to focus on private company acquisition targets – 59% of all private equity backed acquisitions in 2007. The following chart outlines historical U.S. private equity buy-side activity from 1998 through 2007. U.S. Private Equity Activity (# of Deals) (Deal Value - $Bn) Sources of Information: Thomson Financial.

11. The combination of strong demand and favorable financing conditions have kept valuations at the upper end of their historical ranges. The following chart details median U.S. middle-market enterprise value to EBITDA multiples during the last ten years. Middle-Market Valuation (EV/EBITDA Multiple) Sources of Information: Thomson Financial.

12. The following chart details average enterprise value to EBITDA multiples across different sectors for all U.S. M&A activity during the last ten years. Aggregate M&A Market Valuation (EV/EBITDA Multiple) Sources of Information: Thomson Financial.

13. One of the primary factors driving the M&A boom of the last five years has been the substantial amount of liquidity available to finance acquisitions. High equity prices and low interest rates, coupled with a friendly financing environment, led to creating very high demand for financing and to continuously increasing acceptable levels of debt to EBITDA. The availability of friendly financing helped to drive up valuations by allowing private equity firms to compete and bid against strategic buyers. The chart below lays out average debt multiples in middle-market M&A transactions during the last ten years for deals below and above $50mm in EBITDA. Overview of Financing Environment (Debt/EBITDA Multiple) Sources of Information: Standard & Poor’s Leveraged Commentary & Data.

14. Capital that moved to the sidelines as valuations got pricier, is now poised to return. More realistic debt pricing, leverage ratios and return expectations. Good companies will continue to be high in demand. New M&A announcements in the first month of 2008 rose just 3% from the previous month, but aggregate M&A spending dropped 17%. It is likely that M&A will slow in the short-term as buyers, sellers and sources of capital adjust to some of the changing elements in the financial landscape. 2008 and Beyond

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