1st Quarter 2010: Front Page

M&A Volumes Continue Rebound in Q4 '09
Unemployment and Taxes Key Obstacles to Economy

Q4 Spike in Deal Activity Closes Book on Turbulent 2009

After starting out as one of the worst economic and M&A environments in recent memory, 2009 finished on a positive note with deal activity and transaction multiples extending their surge from Q3 '09. Deal activity jumped 90% from Q3 '09 for disclosed middle market transactions (Enterprise Value < $500 million and > $10 million). Pent up demand and improving economic dynamics appear to be driving the resurgence in M&A activity. Despite slowly improving credit markets, future deal volume growth will be limited due to an overall lack of financing and depressed 2009 earnings. Transaction multiples for Q4 '09 increased to 6.1x enterprise value to EBITDA compared to 5.8x for all of 2009 reflecting improving credit availability and buyers becoming more aggressive in the market. We anticipate improved deal volume for transactions greater than $10 million EBITDA will be offset by continued stagnancy in smaller transactions where financing is still extremely limited.

Credit Still Restrained as Markets Slowly Begin to Unfreeze

The credit markets are beginning to show signs of life as Q4 '09 activity far exceeded the previous three quarters combined. LBO loan volume for companies with EBITDA of $50 million or less totaled $720 million in Q4 '09 versus $153 million for the first three quarters of 2009 combined. These figures compare to $260 million in Q4 '08 and $1.1 billion in Q4 '07. Despite the recent improvement, credit availability remains a significant challenge for the middle market. According to S&P, total debt-to-EBITDA was 3.3x for all of 2009 versus 4.3x for 2008. Senior debt multiples fell to 2.5x in 2009 compared to the 2008 average of 3.6x. Mezzanine multiples increased to 0.7x in 2009 versus 0.6x in 2008 partially offsetting the lack of traditional senior debt financing.

Strong Economic Indicators Mired by High Unemployment

The U.S. economy continued its rebound expanding for the second consecutive quarter. According to preliminary estimates, the economy expanded at a seasonally adjusted rate of 5.7% in Q4 '09 compared to 2.2% in Q3 '09. While consumer spending, the housing markets and export growth all contributed, a 3.4% contribution from inventory expansion was the largest factor increasing GDP. Federal, state and local government spending fell in Q4 which was a positive sign that consumers and private industry were powering growth. The sustainability of future growth is a concern with inventory driven GDP as unemployment remained near 10% in January combined with stagnate consumer spending. The potential impact of the current Administration's $3.8 trillion budget for fiscal 2011 that will increase the deficit by a record $1.6 trillion despite staggering tax increases on businesses and upper-income households is a significant threat to private industry and future economic growth.