M&A Market Update
By Mike Paparella and Matthew Jamison
Manufacturer, 2007 Issue No. 1 

“Riches are gotten with pain, kept with care, and lost with grief.” — Thomas Fuller

By now you have heard about the riches generated by the robust market for mergers and acquisitions across the United States. Over the course of 2006, the number of reported transactions rose 7 percent over 2005, and the value of those transactions rose nearly 20 percent, with more deals and higher values. The comparison to 2002 (the least active year in recent history) is even more impressive, with the number of transactions increasing by nearly 60 percent and the transaction value more than tripling.

There are a variety of attributes driving the high levels of activity. These too have been widely reported but warrant repeating. They include:

• High advance rates — lending institutions of all types are still aggressive in their lending and advance rates, providing unsecured debt funding for transactions of nearly all types.
• Low cost of money — interest rates are still at reasonable levels, allowing for acquisitions to achieve positive cash flow, even with high levels of borrowed money funding the transactions.
• Many buyers in the market — financial buyers and strategic buyers are both very actively seeking acquisitions, making many transactions very competitive, thereby driving up pricing.
• More sellers entering market — as more and more company owners become aware of the robust market conditions, a lot of owners seek to monetize some or all of their net worth that is held inside of the company.
• Private equity firms raising and investing capital — private equity firms continue to raise record amounts of capital for use in funding more and more transactions. In 2006, nearly $200 billion in new capital was raised by private equity groups.
• Raised Awareness — many headline deals are raising the general awareness and creating excitement for M&A.
• Cash Flow Cushion — new types of financing is creating the cash flow cushion that helps certain deals become possible where they before were not (e.g., “toggle notes”).

These attributes, and others, are certainly national trends and in some cases international trends. With the free flow of information available today, banks and other types of lenders from all over the country, as well as from overseas, are funding all types of transactions, large and small. Given the level of freely and readily available information, ranging from the unsolicited letters that seemingly every company owner gets in the mail touting a potential buyer for their company to the press reports of the latest supersized transaction, why isn’t every single company in America putting itself up for sale? Why are some regions of the country more active in M&A than others? Which regions are the most active and how is the Midwest faring in this market?

The casual observer might believe that the Midwest realizes less M&A activity than other parts of the country, such as either coast or the Southeast or Southwest. They might also observe that the region has less M&A because it is simply losing its manufacturing companies to other low-cost locations overseas or through consolidation into companies operating in other higher growth parts of the country. However, PMCF’s recent research reveals a different trend and one that is a little surprising and quite positive for the region and three of the states studied in depth, Illinois, Michigan, and Ohio.

Our most recent Market Update analyzes the level of M&A activity in each of the three states compared to the nation and other regions, including where the acquiring company is located (in the state or outside of the state), and attempts to identify other regional factors that could be driving the activity. These other factors, while largely anecdotal, may provide some insights as to why the Midwest, and particularly these three states, remains a strong contributor in the nation’s overall economy and certainly a strong contributor in the latest M&A uptick. To download a complimentary copy of PMCF’s recent Regional Market Update, visit http://update.pmcf.com.

Metals Industry Strong

The metals industry has seen a significant increase in M&A activity with 1,196 announced transactions in 2006, an increase of 20 percent over the 1,001 announced transactions in 2005.

The uptick in M&A activity has been led primarily by steel mill consolidation, but also in other metals-related sectors such as distribution, tube and pipe, and metal fabrication. A few notable metals-related transactions include Arcelor/Mittal, Tenaris/Maverick Tube, IPSCO/NS Group, and Noble/Pullman. Accessing new markets, product expansion, geographic expansion, economies of scale, and purchasing power are several of the primary reasons for acquisition activity. Additionally, strong financial performance of industry companies and growing private equity interest in metals-related businesses has supplied the funds for such transaction activity. A substantial portion of the metals-related sector’s recent strong financial performance has been driven by recent growth and strong outlooks in aerospace, commercial construction, rail, and heavy machinery.

Plastics and Packaging Transaction Activity Continues

M&A activity in the plastics industry climbed for the third straight year in 2006. Deal volume increased to 428 transactions, up from 418 transactions during 2005, representing a 2 percent increase. Both strategic and financial buyers have been active with 317 strategic deals and 111 private equity deals being completed during the year.

Favorable macroeconomic trends provided a strong year financially for many processors across industry segments. Strong fundamentals in key end markets combined with a break in raw material price increases make plastics an attractive industry for investment. Higher valuations are achieved by proprietary processors with strong growth prospects, especially in the packaging, medical, and consumer products sectors.

This market update is not an offer to sell or a solicitation of an offer to buy any security. It is not intended to be directed to investors as a basis for making an investment decision.  This market overview does not rate or recommend securities of individual companies, nor does it contain sufficient information upon which to make an investment decision.  P&M Corporate Finance, LLC will seek to provide investment banking and/or other services to one or more of the companies mentioned in this market overview.  P&M Corporate Finance, LLC, and/or the analysts who prepared this market update, may own securities of one or more of the companies mentioned in this market overview.  The information provided in this market update was obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. It is not to be construed as legal, accounting, financial, or investment advice. Information, opinions, and estimates reflect P&M Corporate Finance, LLC’s judgment as of the date of publication and are subject to change without notice. P&M Corporate Finance, LLC undertakes no obligation to notify any recipient of this market update of any such change.  This market overview is not directed to, or intended for distribution to, any person in any jurisdiction where such distribution would be contrary to law or regulation, or which would subject P&M Corporate Finance, LLC to licensing or registration requirements in such jurisdiction.