2010 The Annual M&A Outlook Survey

READYING for
Resurgence
 Readying for Resurgence...............................................................2
Contents

M&A Outlook 2010 Survey Results............................................ 6

Expert Voices
Ray Liguori, Vice President, Mergers and Acquisitions,
Walmart International..................................................................8

Ted Virtue, CEO, MidOcean Partners . ..................................... 9

Mark Copman, Vice President, Corporate Development

and Mergers and Acquisitions, 3M..............................................10

Scott Glassberg, Managing Director & Carey Do,

Director, Wells Fargo Capital Finance....................................... 11

KPMG & The Deal 1 The Annual M&A Outlook Survey

Readying for
Resurgence
M&A Prospects for the Next 12 Months
By Sherrie Nachman

T
he M&A market continued to face numerous challenges in 2009.
Global mergers and acquisitions activity for 2009 was $2.3 trillion,
down 22% from $2.94 trillion in 2008. Although the GDP appeared
to be improving, unemployment reached a multi-decade high of 10%,
making consumer demand and revenue projections less predictable.
However, there have been some recent positive signs for dealmakers. Globally, deal volume jumped 15% in the fourth
quarter of 2009 from a year earlier. Deal activity was particularly strong in the U.S., where deal volume more than doubled
from the fourth quarter of 2008 to the fourth quarter of 2009. Several large deals dominated the headlines in the fall and
indicate that M&A activity may become more robust in 2010. In December, Exxon Mobil Corp. announced plans to buy
XTO Energy Inc. in a deal valued at $31 billion. A month earlier, Warren Buffett’s Berkshire Hathaway Inc. agreed to buy
Burlington Northern Santa Fe Corp. in a $34 billion deal. According to the Berkshire Hathaway press release, the deal
was motivated in part by Buffett’s general optimism concerning the U.S. economy. Another recent noteworthy deal is
Comcast Corp.’s acquisition of NBC Universal from General Electric Co., which values the media company at $30 billion.
The takeover battle for Cadbury plc indicates that the financing atmosphere may also be improving. If Kraft Foods Inc.’s
bid succeeds, nine banks have agreed to provide $9.3 billion in financing.
It appears that 2010 may be a transition year in which deal volumes increase, with certain sectors and certain deal
structures dominating the landscape. In order to gain a timely perspective on the M&A market, KPMG LLP and The
Deal LLC conducted a recent survey of 360 M&A professionals, including public companies, private companies and
private equity funds. The findings of this survey are summarized herein.

KPMG & The Deal 2 The Annual M&A Outlook Survey

Deal Volume May Rebound
Many deal professionals are hoping that 2009 marks
the bottom of the deal cycle, and the respondents in
our survey seem to believe that it will. In 2009, 35%
of all respondents did not engage in any M&A activity.
However, 31% completed between one and two deals;
17% completed between three and four deals; and 11%
completed five to 10 deals. Six percent of respondents
were extremely active and completed more than 10 deals.
Compared with 2008, 40% of those who participated in
the survey stated that their companies did fewer acquisi-
tions in 2009 than in 2008.
Companies and PE funds intend to complete more
deals in 2010 than in 2009. Only 26% of the respondents
in our survey stated that they would not be involved in any
acquisitions in 2010. A respectable 33% stated that they
planned to buy between one and two companies, and 19%
stated that they planned between three and four acqui-
sitions. In the coming year, 15% said that they planned
to complete between five and 10 acquisitions, and 6%
planned on completing more than 10 acquisitions. All in all,
74% of respondents said that they planned on completing
an acquisition in 2010, compared with 65% who actually
completed an acquisition in 2009. Dan Tiemann, Amer-
icas Transactions & Restructuring Leader, says that those
results are consistent with what he is seeing in the market-
place. “There is a sense among dealmakers that 2010 will be
a better year for M&A. The improvement in both the debt
and equity markets has made buyers slightly more confi-
dent about pursuing deals,” Tiemann says. Cherie Homa,
Managing Director and Co-Head of KPMG Corporate
Finance LLC, adds that “due to the challenging economic
environment, companies have been hoarding cash for the
past year. This has resulted in a number of companies with
strong balance sheets that are in an excellent position to
use cash to fund acquisitions in 2010.”
In general, respondents believe that the M&A tide
is turning. A robust 74% said that they were more opti-
mistic about the economic environment today than they
were a year ago, and 70% said that they were more opti-
mistic about the deal environment today than they were
a year ago. When asked where we are in the economic
cycle, 6% said that they saw a sustainable recovery taking
place at the end of 2009, and 48% said that they thought
the economy was leveling and would begin to improve in
2010. However, 32% said that they expected the economy
to continue to decline until 2011, and 14% did not expect
the economy to recover until 2012 or beyond.
Deal Size May Also Increase
Deal size continued to be relatively small in 2009. In our
survey, an overwhelming 83% said that the average enter-
prise value of each of their company’s acquisitions was
KPMG & The Deal
less than $250 million. Just 9% said the average enterprise
value of their acquisitions was between $250 million and
$500 million; 4% valued their average deal at between
$500 million and $1 billion; and only 3% stated that their
average acquisition was between $1 billion and $5 billion.
However, survey respondents anticipate that deal
size will increase in 2010. The vast majority of respon-
dents still plan to focus on relatively small deals in 2010;
76% said that they expected the average enterprise value
of their acquisitions would be less than $250 million in
2010. However, 15% said that they expected their average
acquisitions to be valued at between $250 million and
$500 million; 5% expected their average acquisition to
be valued at between $500 million and $1 billion; and
4% believed their average deal size would be between $1
billion and $5 billion.
Change in Strategic Focus Fuels
Divestitures
The prevalence of smaller deals may also be a result of
companies needing or choosing to divest divisions or
subsidiaries. In the survey, 25% of respondents said their
organization completed between one and two divesti-
tures in 2009. A total of 9% said they completed between
three and four divestitures, and 5% said they completed
between five and 10 divestitures. A substantial 42% said
they increased the number of divestitures in 2009 from
the previous year. Companies said that they expect to
complete about the same number of divestitures in 2010.
For the coming year, 27% said that they planned between
one and two divestitures, and 7% said they planned
between three and four divestitures.
What is motivating these divestitures? When asked for
their top two reasons for conducting a divestiture, 44%
said it was because of a change in their strategic focus;
32% said the divestiture was opportunistic; and 23% said
they were motivated by a desire to raise cash or improve
liquidity. Other sellers were interested in deleveraging
their balance sheets (18%), downsizing their business to
meet current demand (10%) or in response to regulatory
requirements (7%).
Sector Turmoil Creates M&A
Opportunities
It is not surprising that the industries that have been expe-
riencing the most turmoil are those where respondents
expect to see the most deal activity. Respondents stated
they expected the most active industries to be banking
(41%), healthcare (32%) and financial services (30%). Other
industries that were expected to be active include: infor-
mation technology (22%), energy (19%), real estate (15%)
and retail (12%). Banking and financial services are indus-
3 The Annual M&A Outlook Survey
tries that have been subject to a large amount of govern-
ment investment, regulation and scrutiny. Over 130 banks
failed in 2009, creating numerous investment opportuni-
ties for PE funds and other investment institutions. “While
many of these industries may seem troubled, they also
present huge restructuring and investment opportunities
for the right buyers, particularly private equity investors,”
says Shawn Hessing, National Managing Partner, Private
Equity. “I do expect some of the industries that are in tran-
sition to be more active in terms of M&A.”
Healthcare has been placed at the top of the federal
government’s legislative agenda. Any change to the current
healthcare industry will likely also create a number of
M&A opportunities. “Certain sectors will have a degree of
uncertainty lifted in 2010,” says Jonathan Lynch, Managing
Director & Head of Investor Relations for CCMP Capital
Advisors LLC. “For example, healthcare has been shrouded
by impending reform. As the healthcare picture gains
able revenue projections (20%), disputes concerning valu-
ations (17%) and generally negative market conditions
(16%). “In addition, many businesses are trying to antici-
pate how any new tax legislation or regulatory require-
ments will affect their valuations,” says Lisa Madden,
National Leader, M&A Tax.
In the current environment, it has become more diffi-
cult to make accurate revenue and profit projections.
When asked which factors acquirers considered when
evaluating earnings potential, 62% of respondents cited a
“slowing growth environment.” Other concerns included
earnings dilution (33%), commodity price volatility and
exposure (28%) and the relative strength or weakness of
the dollar (19%). Some of those issues undoubtedly caused
some buyers to walk away from deals in 2009. Last year,
32% said they aborted between one and two deals.
When asked how the current economic conditions will
affect their M&A plans in 2010, 39% said that the condi-

A
robust 74% said that they were more

optimistic about the economic environment

today than they were a year ago, and 70% said

that they were more optimistic about the deal

environment today than they were a year ago.

clarity in the coming months, that should benefit transac- tions would cause a reduction in the number of deals, and
tion decision making” Lynch says. 32% said that they would be using a higher ratio of equity
In terms of which countries will have the most active when financing deals. However, a portion of the group
M&A markets in 2010, 65% of respondents ranked North saw opportunities in the current environment: Twenty-
America as most active. Those who participated in the nine percent said that economic conditions would cause
survey also believe that China (49%), Western Europe them to increase the number of deals they would pursue.
(28%) and India (23%) would be among the more active A percentage of the group (27%) would use more cash to
markets. finance deals and another percentage (21%) would rely
more heavily on deferred or contingent payout structures.
In addition to the general recessionary pressures, 32%
Challenges Still Exist said that they thought the primary cause of distressed
Despite some relative optimism in the industry, there businesses was the fact that companies were still burdened
are still numerous obstacles that are hindering a robust by too much debt. An additional 20% blamed misman-
deal environment. When asked which single factor will agement, 18% believed it was the inability to maintain or
make it hardest for deals to be completed in 2010, respon- renegotiate credit lines, and 12% said it was the inability to
dents said the availability of debt financing was the No. issue new credit at reasonable terms. A total of 11% cited
1 obstacle (37%). Dealmakers also believe that the deal excess fixed capacity, and 8% thought commodity expo-
environment is being negatively affected by unpredict- sure was the main cause.

KPMG & The Deal 4 The Annual M&A Outlook Survey

 I
t is not surprising that the industries that have
been experiencing the most turmoil are those where
respondents expect to see the most deal activity.
Distressed Assets May Create
Opportunities
While the recent recession has affected almost all busi-
nesses, it has also created buying opportunities for those
who have access to funding. Companies with solid balance
sheets who can borrow or use stock and those with cash
on hand will have the chance to acquire distressed assets,
frequently at a discount.
In fact, 42% of the respondents in the survey said that
their companies will be opportunistic buyers of distressed
assets in 2010, and 7% said that their companies would be
focused, repeat buyers. “Investing in or acquiring distressed
businesses and assets presents numerous financial, tax and
operational complications for buyers,” says Drew Koecher,
KPMG’s U.S. Restructuring Leader. He says acquirers of
distressed targets need to understand the opportunities
and risks in out-of-court transactions and carefully assess
the motivations and positions of the players in the capital
structure. “Sometimes it will be beneficial to pre-empt
a process while the target is in distress. At other times,
bringing fresh capital into a prearranged or prepackaged
bankruptcy process may be more compelling and offer
better risk protection,” Koecher says. When asked at what
point they typically look at distressed assets, 41% said that
they do so in an out-of-court, private basis. Only 4% sought
out deals in a post-confirmation bankruptcy setting and
only 3% did so in a bankruptcy court context.
For those who were buyers of distressed assets, 29%
were attracted to the turnaround opportunity; 27% were
motivated by a reduced purchase price; and 10% liked the
ability to cherry-pick attractive components of a business
in a bankruptcy court-approved sale. Last year may have
been a record year for distressed M&A. Peter Gilhuly, a
partner with law firm Latham & Watkins LLP who special-
izes in the sale of distressed assets, says that several factors
contributed to the large number of asset sales. “Many
companies that could not obtain debtor-in-possession
financing and those that could not refinance their debts
were not able to reorganize and wound up being acquired,
in whole or in part,” he says. “Buying and selling businesses
in Chapter 11 has become almost a routine process.” Sales
were also prompted by companies that needed to quickly
convert assets into cash or satisfy debts. Gilhuly expects
KPMG & The Deal
distressed M&A to continue to be extremely active in 2010.
Strategic buyers, distressed bond funds and hedge funds
with expertise in this area will likely make up the bulk of
the buyers.
Private Equity Deals Should
Increase
With the credit markets under siege, private equity activity
decreased substantially in the last two years. “Uncertainty
breeds inaction,” says Lynch. “However, with greater visi-
bility in earnings and improving stability in financing, some
of that uncertainty is dissipating. Deal flow will follow.”
Respondents are optimistic that PE dealmaking is about
to make a comeback. A significant 61% of respondents said
they believed that financial-sponsored M&A activity would
increase in 2010; 30% said they expected it to stay the same;
and only 9% expected it to decrease. In fact, several large
private equity deals were announced in the second half of
the year, including TPG Capital and the Canada Pension
Plan Investment Board’s $4 billion deal to buy IMS Health
Inc. and General Atlantic LLC and Kohlberg Kravis
Roberts & Co.’s acquisition of defense contractor Northrop
Grumman Corp.’s TASC consulting unit for $1.65 billion.
Last year, several PE portfolio companies filed for bank-
ruptcy, including Chrysler LLC, Fortunoff and Reader’s
Digest Association Inc. When asked how the bankrupt-
cies of portfolio companies might affect future PE deals,
51% said that they expected leverage ratios to decrease,
while 25% expected an increase in government regulation,
and 17% did not believe the bankruptcies would have any
significant long-term effect.
Conclusion
Last year was another challenging year for those involved
in M&A. Strained credit markets and slowing consumer
and business demand made acquirers cautious. However,
numerous large deals were recently announced, and an
improving GDP and a stock market rally have helped to
improve morale in the M&A community. The vast majority
of respondents are optimistic that 2010 will be better both
for the general economy and for those looking to make
deals. We hope they are right. ♦
5 The Annual M&A Outlook Survey
 M&A OUTLOOK 2010 SURVEY RESULTS
Approximately how many acquisitions do you antici- What do you anticipate the average enterprise value
pate your own organization will complete during 2010? per acquisition will be in 2010?
By % of respondents By % of respondents, among those who anticipate completing at least one acquisition during 2010

33

76%

26%

19

15

6 15

5 4
0
More
0 1-2 3-4 5-10 than 10 Less than $250M– $500M– $1B– > $5B
Average No. of acquisitions: 2.8 $250M $500M $1B $5B

How does your firm anticipate financing future In 2010, what top three industries do you think will be
acquisitions? most active in mergers and acquisitions?
By % of respondents, among those who anticipate completing at least one acquisition during 2010 (Choose up to three) By % of respondents
Banking 41%
Healthcare 32
61 Financial Services 30
Information Technology 22
Energy 19
Real Estate 15
Pharmaceuticals 13
Retail 12
Automotive 12
Industrial Products 10
Telecommunications 9
Software 9
31%
Consumer Products 9
Professional Services 8
Insurance 8
Food & Beverage 8
Media 7
Electronics 7
Chemicals 4
6 Transportation 4
Investment Mgmt. & Funds 4
2 Higher Ed./Not-for-profit 3
Government – Federal 2
Government –State & Local 1
Combination6 of Source: KPMG LLP and The Deal LLC
All cash All debt All stock all three Other 3 Annual M&A Survey 2010

KPMG & The Deal 6 The Annual M&A Outlook Survey

 M&A OUTLOOK 2010 SURVEY RESULTS
In 2010, do you expect the amount of financial- Are you more optimistic about the economic
sponsored M&A activity to ... environment today than you were a year ago?
By % of respondents By % of respondents

61%
74%

30

26

Increase Decrease Stay the same Yes No

Are you more optimistic about the deal environment What single factor do you believe will make it
today than you were a year ago? hardest for deals to be completed in 2010?
By % of respondents By % of respondents

70% Availability of 37%

debt financing

Unpredictable
revenue projections 20

Dispute concerning
valuations 17

General negative
market conditions 16

30
High borrowing costs 5

Burdensome debt
terms 3

Large declines in
stock prices (to be 1
used as currency)

Yes No Other 1
Source: KPMG LLP and The Deal LLC Annual M&A Survey 2010

KPMG & The Deal 7 The Annual M&A Outlook Survey


Where do you think the retail M&A market
will be focused in 2010?
Ray Liguori: It is important to remem-
ber that from an M&A perspective Wal-
Mart Stores Inc. has an international
focus. We were one of a few global retail-
ers looking for opportunities in 2009,
but there weren’t many sellers of quality
assets. Things have settled down and val-
uations are rebounding, so we anticipate
that there will be more willing sellers.
However, I still think that there will
be few willing cash buyers. Geographi-
cally, we see good opportunities in the
developing markets of Asia and Latin
America, and I think we will see the big
retailers consolidate their positions in
large high-growth markets such as Bra-
zil and China. These same players will
rationalize their portfolios in underper-
forming markets.
Has Walmart’s strategy changed in response
to the slowing economy?
Our M&A strategy hasn’t changed. We
are strategically focused. We look to buy
retailers that are focused on the “Save
Money. Live Better” value proposition.
We have clear priorities on where we’d
like to expand. We don’t wait to see if a
company is for sale. We identify targets
that will be a good strategic fit for Wal-
mart, then develop the opportunity.
In retail it’s different because most of
the targets are local family-owned com-
panies. This means that we establish
relationships over time and ultimately
convince them to join the “Walmart
family.” It’s a long process but a success-
ful way to move forward. Last year, we
closed one deal early in the year and
then worked on relationship building.
In 2010 we will continue to build the
pipeline.
When evaluating a potential transac-
tion or investment, will you be looking at
KPMG & The Deal
➡ Ray Liguori, Vice President, Mergers and Acquisitions,
Walmart International
A Long-Term Approach to Growing
the “Walmart Family”
anything differently than you would have that can really have a profit impact.
two years ago? The large developing markets are very
One of the things that the economic attractive to us.
crisis has taught us is the importance of We have a strong presence in Bra-
focusing on quality companies. During a zil and China and have partnered with
recession, everyone struggles. We have Bharti to build a retail presence in India.
more confidence with solid brand names We also have a team on the ground in
and quality management teams. Also, Russia, and we continue to evaluate that
when buying a group of existing stores, country’s opportunities. In the Ameri-
there is no substitute for location. We cas, we are the No. 1 retailer in Mexico,
can fix a “bad store,” but can’t fix a bad Central America and Chile. We have
location. It is difficult to improve a bad strong businesses in Brazil and Argen-
brand name as well. tina, where we need to build scale.
It’s important to note that only 30% In Asia, it’s mostly about China and
of our international revenue comes from Japan. We have a business in Japan that’s
the Walmart or Sam’s Club-branded recently turned the corner. We see a tre-
stores. In other countries, we own local mendous opportunity to consolidate and
brands, and not all of them are big- improve the market dynamics because
box stores. But all of them consistently it’s very fragmented in Japan. China
embody the Walmart concept of “Save is simple because there is tremendous
Money. Live Better.” growth potential. A very small portion of
China is served by formal retail. We are
What are the new deal breakers, domestic or improving customers’ lives by providing
international? basic necessities in a clean environment
The biggest change for dealmaking over at affordable prices.
the past few years has been the increased
importance of Foreign Corrupt Practices Overall, where do you see the M&A market
Act (FCPA) diligence. One of the nice headed in the next year?
things about working in the developed Financing is slowly becoming available.
world is that most places do business the The investment banking community has
way we do in the United States. However, recovered—faster than the U.S. economy.
there are many places where the customs Access to credit will increase, but lend-
and norms are very different. We need ers will be more cautious. Lenders will
to know that a potential target’s business be more focused on core-value proposi-
practices are consistent with Walmart’s tions. Future growth projections should
high ethical standards. We conduct a fair be fairly conservative.
bit of forensic diligence to confirm that The worst scenario in the M&A mar-
the business conducts its affairs legiti- ketplace is when there is too much credit
mately. We must ensure that we don’t available and acquirers are out there
subject our company to criminal and just looking to do deals, regardless of
reputation risk. whether the deals make economic sense.
We are fairly conservative. Coming out
Name the international markets that are of the “financial contraction,” people
beginning to heat up, and why? will be more sensible and realistic in how
The regions that come to mind are they invest. I’d be very surprised to see
Latin America and Asia. For a company crazy premiums being paid like a couple
our size, we’re looking for opportunities of years ago. ♦
8 The Annual M&A Outlook Survey

Over 70% of those who participated in our
survey were optimistic about both the economy
and M&A for 2010. Is that consistent with
your firm’s views?
Ted Virtue: We’re a little more cautious
than the public markets. There is a con-
sensus that the rebound in S&P earnings
growth will be about 30%. That may be a
bit high. The public markets and PE firms
will probably see a more choppy recovery,
as there’s still a lot of debt deleveraging
to be done and unemployment will weigh
heavily on consumer spending for some
time. However, there will be a significant
uptick in M&A activity.
I think that there will be strategic
activity in the marketplace that will ben-
efit the PE world. Currently, there are
many companies that need PE capital
because there are not a lot of banks and
creditors to offer financing. This will
shift a number of companies into the
hands of private equity as we come out of
the downturn.
What lessons can the PE community take from
the economic turbulence of 2009?
It seems that the “100-year flood” hap-
pens every five years now. We live in a
more volatile time. Most of the major
markets are heavily correlated with each
other, such as debt, fixed income and
private equity—on a global basis. That
correlation creates the potential for an
increase in volatility. Going forward, we
will have to incorporate that type of vola-
tility into our valuation models and it will
affect financing.
There is a belief that the PE com-
munity welcomes chaos because chaos
may create added opportunity. That’s
not necessarily the case. There is a
point where too much chaos brings
paralysis to deal flow. It is tough to
execute change-of-control transac-
tions during chaotic periods. And it’s
certainly been proven prudent for pri-
vate equity firms to remain patient and
disciplined and stay focused on long-
KPMG & The Deal
➡ Ted Virtue, CEO, MidOcean Partners LP
Seeking Opportunities with
Cautious Optimism
term goals during periods of turbu- positioned in an industry sector undergo-
lence and not let this quarter’s disaster ing rapid and significant transformation.
drive long-range plans. Structuring-wise, this is a traditional
deal and does not involve any unex-
How do you think financing or deal struc- pected leverage ratios. We were familiar
tures will change for PE firms in the near with the marketing space and the man-
future? agement team as well; MidOcean puts
This relates to the credit markets. Bond a premium on superior management as
markets have come back to high-yield a primary growth driver in all our busi-
spreads and are close to historic norms. nesses. I think there is a lot more caution
Credit markets are open to high-yield out there on the PE side, and extra effort
and dividend recap deals. The appetite is being made to really “diligence-out” sta-
for traditional credit, buyouts and tra- bility and growth. There is bifurcation of
ditional financings has begun to return. thinking regarding where the public mar-
There is a growing demand for equity, kets and PE view growth. I think there
both primary and secondary, in larger will be over-leveraged companies coming
companies. out of the “extend-amend-and-pretend”
However, this is not true in the smaller game with banks. Solid companies will
and midcap spaces. We don’t see a lot of need capital to survive and will turn to
banks flooding back into those markets, PE to solve some capital issues.
and those that have returned are mov-
ing slowly and cautiously before approv- Two target sectors for MidOcean are listed as
ing any financing. There could be some “Consumer & Leisure” and “Media & Enter-
inefficiency in this space, so PE firms can tainment.” With consumer confidence creeping
bring liquidity into these markets. There back up and media in transition, how are you
may be more structured deals instead of approaching these industries?
change-of-control deals. This will be a In general, a lot of companies are in need
great opportunity for us over the course of capital. Our review process hasn’t
of the next 12-to-18 months. And in the changed. We look for great brands so
absence of this financing, we may see an we can bring transformative growth and
emphasis on companies with the ability high-quality management. There will be
to grow organically, or a focus on acquisi- strong opportunities to purchase compa-
tions that may provide a company with a nies that normally wouldn’t be for sale in
growth catalyst. normal times, and stronger companies in
the consumer sector recognize that it is a
Are there any particular deals MidOcean good time to acquire market share at the
closed in 2009 that serve as an illustration of expense of weaker competitors. The same
things to come? is true in the media sector. There are a
We acquired the Allant Group in Octo- ton of distressed traditional media com-
ber 2009, which may be indicative of panies, no matter how they’re backed.
future deals. Allant is a leading provider Old media must transform to new
of marketing optimization solutions that media by bringing in the right strategies
combines database management, ana- and the right people. There is an oppor-
lytics and predictive intelligence that tunity to capture value in those markets.
we were able to acquire at a relatively We think that’s going to be a big oppor-
low valuation from its founder. With tunity for private equity, particularly
a capital infusion and several improve- those private equity teams experienced
ments, we believe that we can grow the in working with industry knowledge and
business substantially, as we feel it is well management rather than with leverage. ♦
9 The Annual M&A Outlook Survey
 ➡ Mark Copman, Vice President, Corporate Development
and Mergers and Acquisitions, 3M Co.

Strict Due Diligence Leads to a

Disciplined Approach

How do you determine if a deal makes sense who they can go to with their questions. However, we are pleased with the
for 3M? It’s people that drive the business. quality of the businesses we acquired
Mark Copman: 3M has a very well You have customers and suppliers rely- in 2009. Our acquisition of Ace Ban-
established due diligence process that ing on you to maintain a smooth tran- dage is one good example. Ace’s product
begins by asking the same six questions, sition. When we make an acquisition, line and brand strength dovetails nicely
regardless of the type of deal. we do so because the business has real with our growing consumer healthcare
We ask: 1. Is there a strategic fit? value; our goal is to enhance that value. portfolio.
2. Is there a financial fit? 3. What are
the primary risk factors associated with You only made four acquisitions in 2009, as How do you feel about the prospects for
the deal? 4. How will we integrate the opposed to 17 in 2007. Was that a function 2010?
company? 5. Why is this company being of the economy or was it because of other There was a lot of uncertainty and a lot
sold? and 6. What’s the process to get strategic reasons? of concern in 2009. This year, there’s
to a successful conclusion? As we pro- You are right: 2009 was a slower year. In still uncertainty. But it certainly seems
ceed in the due diligence process, we get part, that’s because the opportunities that the market has a more positive
more granular in addressing these six we saw weren’t appealing, and partly outlook. There is a general sense in the
questions. because we were especially cautious business community that we have seen
with how we spent shareholder dollars the bottom.
When 3M completes an acquisition, you focus given all of the market uncertainty that At 3M, we feel that the current envi-
on the first 100 days. Why? prevailed for much of the year. ronment offers significant opportuni-
From the time we have a nonbinding Sometimes the most appealing ties for value creation both organically
letter of intent, we dedicate a team opportunities you see are those where and through acquisition. We are look-
to create a complete integration plan. the operating performance of the busi- ing forward to 2010.
The team reports to a business person ness is sound but the balance sheet has
who has strong integration experience, some troubling issues. We looked for How has your naval training and service
rather than asking the leader to learn those opportunities but didn’t see as as an officer influenced your approach to
on the job. many as we’d hoped to find. Another business?
We believe it is extremely important reason is probably the fact that in many One common theme in both the mili-
to be able to hit the ground running day cases sellers didn’t want to sell into a tary and in business is the emphasis on
one after close. We strive to ensure that market trough and where it was very the power of the team. At 3M, we have a
the plan is communicated to everyone hard to make accurate profit predic- strong collegial environment, much like
in the company being acquired right tions that both sides could agree on. what I experienced in the Navy. Any
away. We may not have every answer, The environment was challenging for success you have, there’s a lot of people
but we want the organization to know both buyers and sellers. that deserve credit. ♦

KPMG & The Deal 10 The Annual M&A Outlook Survey

 ➡ Scott Glassberg, Managing Director,
Wells Fargo Capital Finance
➡ Carey Do, Director, Wells Fargo
Capital Finance

A Continued Focus
on the Fundamentals

What are your thoughts on M&A as we Where do you see activity taking place in booming M&A days of 2005-2007. Our
enter 2010? the M&A market in 2010 that was lacking analysis is substantial and examines the
Do: Due to the tough lending environ- in 2009? underlying fundamentals of a company,
ment and the overall softness in the Do: Tough to specifically pinpoint a the strength of the management team,
economy last year, M&A activity was sector but from what we’ve seen, rela- the trends of the industry and the track
slow, particularly in the first half of tive to other industries, technology as a record of the sponsor (if there is one)
2009. Sponsors were mostly focused sector has performed fairly well in 2009, when we do our evaluation.
on managing their portfolio compa- as these companies were able to more One area where we probably focus a
nies rather than putting new money to quickly reduce capital spending and cut bit more time on these days is assessing
work. costs. We believe tech will continue to a borrower’s downside case.
However, though we’re off to a slow be strong in 2010.
start, we believe M&A activity will We spend a lot of time in this space, Glassberg: Liquidity is paramount. We
gain traction this year as liquidity con- especially on the software side, and look at whether or not the transaction
tinues to come back into the market saw activity really pick up starting is properly capitalized, we make sure
and buyer/seller expectations become the second half of 2009. Healthcare projected cash flows leave a margin for
more aligned. is another area, and has remained one error, and we pay attention to the fore-
of the more recession-resistant spaces casts we are working off of and that they
Glassberg: The “PE fire” went out for that did not seem as impacted during are in line with what we expect, given
a time in 2009 and we saw a lot of PE the downturn. where things are in the economy and
firms focus on operational and debt Impending healthcare reform should the industries our borrowers are in. We
restructurings of their portfolio com- also create additional M&A opportu- are not alone.
panies and, add to that, there was not a nities. In general, improving liquidity I think there are a lot more conserva-
lot of credit available for M&A activity in the debt markets will bode well for tive approaches in the marketplace than
in general. overall M&A activity in 2010. there were 18 months ago. However, I do
We clearly saw that start to change believe, now that we’ve gotten through
toward the end of the second half of Glassberg: Overall, there will be more the rougher part of this economic cycle
2009. In 2010, PE is ready to refocus activity in the M&A marketplace, and it looks like we are headed in the
and put some money back into the largely because PE money that has been right direction, there may be some loos-
marketplace and we’re looking to help. sitting on the sidelines is probably going ening up as investors and their lenders
By the middle of the second quarter, to get deployed. look at things from every possible angle
we expect to see more activity within I think that private equity players and see more opportunity and are less
the middle-market leveraged buyouts will be trying to gauge which indus- fearful of the future.
area. tries, such as homebuilding supplies, for
At the end of 2009, we started to see example, or industrial and commodity- What are the new deal breakers, domestic
purchase multiples on deals increase. linked businesses, are at the bottom of and international?
It’s still early in the cycle, but there have the cycle and represent good value. This Do: I think that aggressive multiples
been some specific deals that we have may trigger more activity. and “covenant-lite” structures are things
been involved in where private equity of the past, at least for 2010. The spon-
firms were willing to pay a higher multi- What are the factors in determining if a deal sor now must have meaningful skin in
ple than we would have expected, given makes sense for Wells Fargo and how have the game. In some cases, there was very
market conditions. I think this has those factors changed over the past 12-to-18 little equity on the line 18 months ago
been, thus far, limited to certain situa- months? because leverage multiples got so out of
tions, but I expect the trend to continue Do: Our approach has remained rela- whack. That has currently changed.
in 2010. tively consistent, even throughout the continues ➡

KPMG & The Deal 11 The Annual M&A Outlook Survey

Glassberg: In general, the bar is higher
than it was 18 months ago on most deal
terms and on company performance.
Specifically for us, we are more
focused on where the PE firm is in
terms of its investment level and com-
mitment to the companies we finance,
and on having good capital structures,
which we may not have focused on quite
as much two years ago.
Thinly capitalized transactions and
divided recaps are still deal breakers for
most lenders involved in M&A right now.
What lessons have the banking community
learned with regard to M&A activity as
a result of the challenging global economic
climate?
Do: Don’t just chase deals, make sure
the fundamentals are there and each
deal makes sense. Oftentimes, we are
willing to trade pricing for better struc-
tures and credit quality. Also, there will
be a refocus on due diligence and qual-
ity of earnings. Pro forma EBITDA
addbacks and adjustments that were
glossed over in the past are now more
heavily scrutinized.
Glassberg: From a lending perspective,
don’t get caught up in the latest trends.
Stick to the fundamentals—that’s a lot
of what we did. We stuck to our knitting,
so to speak. A lot of people didn’t do that
and got caught up in what was going on
and forgot that things can go wrong on
you very quickly.
It’s a simple lesson: know what you do
and try to stick to it and be disciplined.
I think the industry will remember this
period for a long time, and the practice
of doing thorough, quality diligence
and structuring deals for the downside
potential—with good capital structures
and liquidity—will be on the forefront
of M&A for a while. ♦

The information obtained in this article was the result of an annual outlook M&A survey conducted jointly by KPMG
LLP and The Deal LLC in the fall of 2009. The survey was sent to contacts at KPMG and to subscribers of The Deal
magazine. More than 300 M&A and corporate development executives from Fortune 1000 and middle-market compa-
nies and private equity firms participated in the survey.
Due to rounding/the exclusion of “don’t know” responses, graph totals may not equal 100 percent.

KPMG & The Deal 12 The Annual M&A Outlook Survey

 Shawn Hessing

Contacts
National Managing Partner, Private Equity
shessing@kpmg.com
212-872-6928

Cherie Homa
Managing Director and Co-Head,
KPMG Corporate Finance LLC
csmith@kpmg.com
410-949-8692

Drew Koecher
U.S. Leader, Restructuring
dkoecher@kpmg.com
214-840-2576

Lisa Madden
National Leader, M&A Tax
lamadden@kpmg.com
202-533-3050

Dan Tiemann
Americas Transactions & Restructuring Leader
dantiemann@kpmg.com
312-665-3599