Gs 2008 M&A Outlook

ACTIVISM\Activism and Anti-Raid\Standard Activism Materials\Standard Activism Book\Fall 2007 Update\Update Materials v13.doc lawrdu 15 Jan 2008 11:04 1/17

U.S. M&A Outlook Circa 2008

Goldman, Sachs & Co. January 2008

The New Reality

10.2%8.8% 9.0%

12.0%

8.0%

11.7%

1996 2006 TodayIllus

trat

ive

Ave

rage

Cos

t of C

apita

l

Corporates Financial Sponsors


1

M&A Outlook Circa 2008 Agenda

� Likely U.S. Deal Activity – Trends among Key Players

� Changes to Transaction Structures and Terms

� Evolution of Board, Management and Shareholder Dynamics

— Impact on Activism and Hostile Activity

� What’s Next?

This material is intended only to facilitate your discussions with Goldman Sachs as to the opportunities available to our private clients and is provided solely in our capacity as a broker-dealer. This material does not constitute an offer or solicitation with respect to the purchase or sale of any security in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. This material is based upon information which we consider reliable, but we do not represent that such information is accurate or complete, and it should not be relied upon as such. Any historical price(s) or value(s) is as of the date indicated. Information and opinions are as of the date of this material only and are subject to change without notice.

Services offered through Goldman, Sachs & Co. Member FINRA.

© Copyright 2008, The Goldman Sachs Group, Inc. All rights reserved


2

� Deal Activity The Bottom Line: Likely Net Reduction; Change in N ature of Acquirors

Key Takeaways

� Financial buyers

— Increased cost of capital

— Financing backlog from pending deals creating overhang / doability issues

− Smaller transactions and joint bids with corporates

— But, $300 billion of capital to invest and new “class” of financial buyer

− Change in the nature of deals

?

� Strategic buyers

— Sellers:

− Volatility / uncertainty = Fewer companies for sale

− More spinoff transactions (Cadbury Schweppes, Bristol-Myers)

— Buyers:

− Decrease in CEO / Board confidence and increase in risk-averse behavior

− Higher M&A “hurdle”

− But, strategic buyers will have reduced competition from financial players

− Weakness of dollar will catalyze cross-border M&A

− Reduced stock prices = more potential acquisition opportunities

� What are the likely overall results?

— Strategic activity is not likely to offset decrease in sponsor activity

— Handful of large deals could be big drivers of activity (and the big question mark)


3

� Private Equity / Financial Investors The Bottom Line: Current Conditions in the Financi ng Markets Likely to Meaningfully Reduce LBO Activity

Cost of Capital Has Swung Back in Favor of Strategi c Buyers Credit Spreads Are Considerably Higher

10.2%8.8% 9.0%

12.0%

8.0%

11.7%

1996 2006 TodayIllus

trat

ive

Ave

rage

Cos

t of C

apita

l

Corporates Financial Sponsors

100

150

200

250

300

350

400

450

500

550

1/1/06 4/1/06 7/1/06 10/1/06 1/1/07 4/1/07 7/1/07 10/1/07

CDX BB Index CDX B Index

Illustrative Financing Terms Mean More Operating / Financing Risk

Leveraged Finance Backlog Continues to Be Consider able (Issuance vs. Backlog)

Pre-Correction Post-Correction

Typical EBITDA Leverage: 7.0 – 8.0x 5.0 – 6.5x

Equity %: 20-35% 35-45%

Flex: L + 300 L + 500

Caps: 11% 15%

Covenant: No Yes

MAC Clause: No Yes (generally)

$78 $101

$39$56

$86 $91 $86 $79 $94

$33 $11$54

$66 $69$9

$226

$352

Oct

-06

Nov

-06

Dec

-06

Jan-

07

Feb

-07

Mar

-07

Apr

-07

May

-07

Jun-

07

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Pro

ject

ed(Y

E 0

7)P

eak

(7/0

7)

HY Issuance Loan Issuance HY Backlog Loan Backlog


4

� Private Equity / Financial Investors Likely Themes for 2008

� Increase in PIPEs / Hybrids / Convertibles

— Examples: E*Trade, Countrywide Financial, Freddie Mac

� Portfolio company acquisitions with greater equity component

� Partnering with strategic buyers

� Smaller deals (generally, deals will be less than $ 5 billion in the near term)

� New players, such as sovereign wealth funds

� Financial and distressed assets are key focus areas

� Strong receptivity to monetization / sale of portfo lio companies


5

� Strategic Buyers – “Traditional Corporates” Equity Markets, Volatility and Strategic Imperative s Will Drive Appetite for Acquisitions

M&A Volume is Positively Correlated with Equity Mar kets Corporates Continue to Have Balance Sheet Cas h

$0

$50

$100

$150

$200

$250

$300

Dec

-19

99

Dec

-20

00

Dec

-20

01

Dec

-20

02

Dec

-20

03

Dec

-20

04

Dec

-20

05

Dec

-20

06

Dec

-20

07

M&

A V

olum

e ($

bn)

700

1,000

1,300

1,600

S&

P 500

All Other Deals greater than $10B S&P 500

0

2

4

6

8

10

12

Dec

-73

Dec

-75

Dec

-77

Dec

-79

Dec

-81

Dec

-83

Dec

-85

Dec

-87

Dec

-89

Dec

-91

Dec

-93

Dec

-95

Dec

-97

Dec

-99

Dec

-01

Dec

-03

Dec

-05

Dec

-07

Cas

h/A

sset

s (%

)

Current 8.5%

30-yr average 5.9%

But M&A Volume Inversely Related to Volatility Inc reasing Cost to Move Down Credit Curve

0

50

100

150

200

250

300

350

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Inde

xed

M&

A/V

IX

US M&A Volume

VIX

37

91

633

149

296

74

169

Average Maximum Minimum Today

Diff

eren

tial (

bps)

A to BBB BBB to BB

1992 - 2007

Source: Thomson Financial Securities Data, FactSet


6

� Strategic M&A – Trends and Developments

Strategic Buyer Activity is Now Driving M&A Strate gic Deals are Still Happening (US Deals Since July 2007)

$0$20$40$60$80

$100$120$140$160$180

Jan-

06F

eb-0

6M

ar-0

6A

pr-0

6M

ay-0

6Ju

n-06

Jul-0

6A

ug-0

6S

ep-0

6O

ct-0

6N

ov-0

6D

ec-0

6Ja

n-07

Feb

-07

Mar

-07

Apr

-07

May

-07

Jun-

07Ju

l-07

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Ann

ounc

ed V

olum

e ($

bn)

40%

50%

60%

70%

80%

90%

100%

Str

ateg

ic M

&A

as

% o

f Tot

al

US Strategic M&A Volume

Strategic M&A as % of Total

“Mergers of Equals” Have Received Positive Market R eactions

16%18%

24%27%

12%

7%10%

6% 5% 5%

Uni

vers

alC

ompr

essi

onH

anov

erC

ompr

esso

r

Bow

ater

Abi

tibi

Ban

k of

New

Yor

kM

ello

nF

inan

cial

XM

Sat

ellit

e

Siri

us S

atel

lite

Rad

io

Tra

nsoc

ean

Glo

balS

anta

Fe

% C

hang

e in

Pric

e(D

ay A

nnou

nced

)

Acquiror Target Amt ($bn)

Basell Lyondell Chemical $18.8

Transocean GlobalSantaFe 17.4

Ingersoll-Rand Trane 11.5

Vivendi Universal Games Activision 10.5

Hexion Special Chemicals Huntsman 10.1

Petrochemical Industries Co KSC

Dow Chemicals (Petrochemicals)

9.5

Toronto-Dominion Bank Commerce Bancorp 8.6

Siemens Medical Solutions Dade Behring Holdings 7.7

Nokia NAVTEQ 7.6

National Oilwell Varco Grant PrideCo 7.5

SAP Business Objects 5.7

Henkel National Starch & Chemical (Adhesives business)

5.5

Plains Exploration & Production

Pogo Producing 5.4

Philips Electronic Respironics 5.1

SK Telecom Sprint Nextel 5.0

Source: Thomson Financial Securities Data, Capital IQ


7

� Strategic Buyers – Observations From the Last Down turn M&A Will Continue, But Overall Volume Likely to Dec line

The First Half of 2007 Looked A Lot Like 2000’s Pea k, So if LBOs are the New “Tech Bubble”…

Opportunistic Hostile Activity Will Spike Post-“Cris es”

1999-2000 1H2007

Non-Tech50.9%

Tech-Related49.1%

Strategic M&A69.0%

LBOs31.0%

10%

18%

5%

31%

8%

18%15% 17%

7%

19%24%

4% 5%5%

StockMarketCrash

(10/14/87-10/19/87)

Gulf WarConflict

(12/14/90-1/16/91)

Russia-Mexico-OrangeCounty

(10/11/94-12/20/94)

Russian-LTCM Crisis

(8/18/98-10/8/98)

Tech BubbleBurst (9/00-

3/01)

9/11 &Invasion ofAfghanistan

(9/11/01-12/7/01)

HurricaneKatrina

(8/26/05-8/30/05)

Hos

tile

as a

% o

f Tot

al M

&A 6 Months Prior 6 Months After

Traditional M&A Will Be Impacted (But Not As Much) P/E Multiples Will Likely Diverge Based on Credit Rating

-38%-33%

-73%-64%

2001 vs. 2000 2002 vs. 2001

% D

eclin

e y-

o-y

Non-Tech Tech-Related

22.6x

17.5x

19.9x

15.3x

17.8x

17.3x

17.1x

18.4x17.4x17.4x

17.8x 17.0x17.3x

17.0x16.4x16.2x16.5x

18.1x

15.5x

13.1x11.7x

2001 2002 2003 2004 2005 2006 Current

Med

ian

P/E

Mul

tiple

A- Or Higher Between BBB- & BBB+ Below BBB-

Source: Thomson Financial Securities Data


8

� Cross-Border M&A Is Accelerating

Cross-Border M&A is Nearly Half of Overall Activity Sovereign Wealth Funds – Key Investments

$2,053

$1,048$920

$589

$361$348 32%

48%

27%29%

35%

30%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

$2,200

2002 2003 2004 2005 2006 2007

Cro

ss-B

orde

r V

olum

e ($

bn)

25%

30%

35%

40%

45%

50%

Percent of Total M

&A

Cross-Border Volume

% of Total M&A

Developing World Acquiring Developed World Assets

$10 $12$22 $17 $22

$10 $7$25

$48

$73

$166

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Vol

ume

($bn

)

Abu Dhabi Inv Authority (“ADIA”) ($650-1,000 billion)

� Citigroup (4.9%), Advanced Micro Devices (8.1%), Arab Banking Corporation (26.6%), Arab International Bank (25%) Banque de Tunisie et des Emirats (38.9%), Union Cement (20.4%)

Istithmar ($8 billion)

� Barneys New York (100%), Standard Chartered (2.7%), GLG Partners (3%), Time Warner (2.4%), SpiceJet (3.34%), One Trafalgar Square (100%)

Dubai International Capital ($12 billion)

� Och-Ziff (9.9%), Doncaster’s Group (100%), EADS (3%), HSBC (Undisclosed), Mauser (100%), Merlin Entertainment Group (20%), Travelodge (100%), Sony (Undiscl.)

Mubadala Development, Abu Dhabi

� Carlyle (7.5%), Ferrari (5%), Spyker Cars (17%)

Kuwait Investment Authority ($213 billion)

� British Petroleum (Undisclosed), Daimler Chrysler (7%)

Temasek, Singapore ($108 billion)

� Barclays (2.1%), Standard Chartered (14%), Merrill Lynch (Undiscl.)

China State Investment Company ($200-400 billion)

� Morgan Stanley (9.9%), Blackstone (9.9%)

Qatar Investment Authority ($50-70 billion)

� Sainsbury (25%), London Stock Exchange (20%), OMX (10%), Lagardere, (5.1%)

Source: Thomson Financial Securities Data, FactSet, other public sources


9

� Is the U.S. “For Sale”?

Illustrative Cost of US$1 Billion Cross-Border Acquisition

� Foreign acquisitions of U.S. companies has outpaced U.S. acquisitions of non-U.S. companies for the first time � Non-U.S. companies can now acquire U.S. assets (and companies with substantial U.S. exposure) at significant discounts to historical exchange rates � However, with exchange rates at a significant discount, the value of earnings purchased is also less than it was previously

— Exchange rate dislocations historically have not been a principal driver of M&A

For the First Time, Foreign Buying of US Companies Represents Majority of US Cross-Border Flows

$123 $135

$183

$234

$82$100

$163

$217

$301

$404

2003 2004 2005 2006 2007

Vol

ume

($bn

)

US Acquisitions of Non-US Companies

Non-US Acquisitions of US Companies

Jan-06 Nov-2007 % Change Market P/E

12.55x(DJ Euro Stoxx

50)

12.42x(FTSE 100)

19.08x(S&P/TSX

Composite)

18.22x(Nikkei 225)

BRIC Countries:

15.10x(Bovespa)

13.46x(Russian RTS

Index)

27.88x

(BSE Sensex)

44.37x(Shanghai SE Composite)

18.64x(S&P 500)

€ 0.84 bn € 0.69 bn (18.8)%₤ 0.58 bn ₤ 0.50 bn (13.5)%

(15.3)%C$ 0.99 bnC$ 1.17 bn

¥ 118 bn ¥ 112 bn (5.0)%

(24.3)%R$ 1.78 bnR$ 2.35 bn

RUR 28.7 bn RUR 24.5 bn (14.8)%

(12.5)%IDR 39.3 bnIDR 45.0 bn

CNY 8.1 bn CNY 7.3 bn (9.5)%

$1 bn $1 bn N/A

Source: CapitalIQ; Thomson Financial Securities Data; Bloomberg


10

� What Will Be The Deal Dynamics?

Boards Will Assert More Control in M&A Processes

Increased Tensions Regarding “Deal Certainty” in Negotiating LBOs � Public scrutiny / risk of embarrassment � Acquirors and activist shareholders approaching board

members directly with deal ideas � Board involvement in discussing deals with shareholders and ISS � Potential “O’Neal effect” – Will CEOs be less likely to act without board authorization?

Buyer Perspectives Seller Perspectives � Reduced competition may lead to demands for less “seller-friendly” M&A terms � Fewer carveouts to Material Adverse Effect clauses � Less willing to accept go-shop clauses and reverse breakup fees

� Boards likely to demand more certainty in M&A contracts � More granularity /focus on agreements with financing sources � Increased reverse breakup fees

Bottom Line: � More focus on issues relating to deal completion � More deals will fall apart

Focus on Shareholder Support of M&A Deals Other Ke y Issues � Attempts to bring large shareholders “under the tent” prior to announcement, similar to U.K. transactions � ISS’s Contentious List — List of deals which ISS is focused on that require a

shareholder vote — ISS recommends against a significant percentage of

transactions on this list

� Emergence of new players — SPACs (Special Purpose Acquisition Companies) –

over $10 billion raised to date — Sovereign Wealth Funds — Funds paired with or formed by former executives � Shareholder vote dynamics — Stock lending and derivatives — Setting the record date — Getting out the vote � Cross-border transactions — Flowback (stock deals) — CFIUS


11

� Rule Changes Have Re-Opened Tenders as the Preferr ed Deal Structure

Number of U.S. Tender Offers Emerging Themes

3

21

3027

70

2003 2004 2005 2006 2007

# of

Ten

der

Offe

rs

� Tender offers have become more common since the implementation of SEC guidance relating to the “Best Price Rule”

� Tender offer provides tactical advantage for both sides

— Smaller window for deal jump

— Smaller window for opportunity to argue that a MAE has occurred

� More likely to get 50% approval

— Shareholders are more likely to tender than vote

— Mitigates “dead shares” problem

— No ISS involvement (at this point)

� Merger should be used if

— Regulatory delay

— Buyer shareholder vote is required (if more than 20% of shares issued)

� Can be used in LBOs, but not the preferred structure

— Financing risk Source: FactSet MergerMetrics


12

� Shareholder / Management / Board Dynamics Shareholder Activism

� Shareholder activism will continue

— Perception of “alpha” returns has resulted in increased fundraising by activists

— More direct engagement of boards, other shareholders and potential buyers

— Focus likely to shift given market conditions � divestiture of noncore assets or sale of company to strategic buyers vs. LBO or additional leverage

— New Internet proxy rules, other regulatory proposals and the removal of takeover defenses will make it easier to pursue proxy fights � Deals have become more difficult to get done

— Rapidity of trading and stock lending impacting voting trends

— Activism against transactions by hedge funds and traditional investors

— ISS influence on M&A transactions

— More topping bids / go-shops

— Process litigation is the norm

— Cross-border issues � Corporate governance used as a “wedge” to achieve ot her ends

— Pressure to remove takeover defenses

— Attack compensation and related disclosures to undercut CEO

— Threat of withhold votes – particularly at companies with “majority vote” requirements for director elections – to effect other changes or actions


13

� Institutionalization of Activism How Have the Goals of Activism Evolved?

Yesterday

(Pre-Crunch) Today

Sale of Company � �

(sales to strategic buyers)

LBO � �

Leveraged Recapitalizations � �

Change Management / Board � �

Portfolio Changes � �

(divestitures to strategic buyers)

Monetization of Balance Sheet � �

Change Governance � �


14

� Post-Bubble, Post-Proxy Season Activism

Current Drivers of Activism Post-Bubble Activism S ituations

� CalPERS increasing investments in “activist” funds from $5 billion to $12 billion

� Success of targeted activism vehicles

— Pershing Square raised $2 billion in two weeks to pursue activism at an unnamed $40 billion “U.S. icon” (later disclosed to be Target Corporation)

� Trian recently filed to raise $750 million for a SPAC

� Perception that activists have achieved “alpha” returns

� ISS support of many dissident proxy fights leading to greater success

� More funds pursuing activism

� Shifts in sector focus by activists

— In: Sector consolidation

— Out: Leveragability

(Ramius) (Icahn) (Icahn)

(Chapman Capital) (Ramius) (Barington)

(Breeden) (Knight Vinke) (S.A.C. Capital)

(Barington) (Red Mountain) (Steel Partners)

(Relational) (K Capital) (Sandell)

(Pershing Square) (Tracinda) (HealthCor)


15

� Hostile Activity Has Increased and Fewer Companies Remain Independent, Driven by Buyer Opportunism and Fewer Defenses

Hostile M&A Activity Continues to be High 1 Outcome of Hostile Bids > $250mm

$119

$264 $269

$620

$725

2003 2004 2005 2006 2007

Glo

bal H

ostil

e/U

nsol

icite

d V

olum

e ($

bn)

41%30%

29%41%

30% 28%

1997-2004 2005-2007

Remained Independent Sold to Third Party

Sold to Unsolicited Bidder

Source: Thomson Financial Securities Data 1 Hostile / unsolicited activity includes transactions that began as unsolicited.


16

� What’s Next? Final Observations

Strategic Buyers:

� Proactive, well-capitalized industry leaders can press their advantage(s)

— Cash / certainty will be king

� Inbound activity into the U.S.

� Certain buyers will be aggressively opportunistic

Financial Buyers:

� Sponsors will be more creative (PIPEs, divestitures, debt, LPDs)

� Financing terms will revert to prior periods with attendant impact on valuation (lower multiples, less exotics, market outs)

Process:

� Tougher for sellers to generate broad auctions and competition

� Wider bid / asks and longer negotiations

� Low tolerance for risk

Activism:

� Activism, driven by poor performance or industry dynamics

— Continued deal scrutiny by investors

� Gap between boards and shareholders will continue to narrow

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