M&AREPORT 2015 ANNUAL. DEAL COUNTS UP 12%, VALUE UP 24% in $5B+ deals account for 37% of total value in 2014 PG 9

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1 M&AREPORT 215 ANNUAL DEAL COUNTS UP 12%, VALUE UP 24% in 214 PG 7 $5B+ deals account for 37% of total value in 214 PG 9 Q&A with Rich Jeanneret and Jeff Greene of EY PG 1-11

2 We kept it simple so you get the data you need. In establishing our M&A research process, we asked our clients, what data paints a clear, accurate picture of the global M&A environment? From there, we decided to keep it simple. Unlike others in our space, our M&A data includes only companies buying companies. No minority stake deals, debt deals, share repurchases, self-tenders, open market transactions or 1 percent equity exchanges. Just mergers and acquisitions.

3 KEEPING IT SIMPLE OUR M&A RESEARCH METHODOLOGY We define M&A as a transaction in which one company, based in either North America or Europe, purchases a controlling stake in another company. Here are our qualifiers for this report: Eligible transaction types include leveraged buyouts (LBOs), control transactions, corporate divestitures, reverse mergers, mergers of equals, spin-offs, asset divestitures and asset acquisitions We don t include debt restructuring or any other liquidity, self-tenders or internal reorganizations In controlling stake transactions, more than 5% of the company must be acquired We don t include minority stake transactions (less than a 5% stake in a company purchased) The target company (the entity being acquired) must be headquartered in either the United States or Europe We don t base involvement on the location of the acquirer, seller, or either parent company The deal must be announced or completed between January 1, 214 and December 31, 214 Transactions must involve small-to-medium enterprises or corporations Small business transactions are not included in this report

4 PG 9 PG 1-11 CONTENTS Note from PitchBook Introduction Overview M&A by Deal Size Q&A: EY s Jeff Greene and Rich Jeanneret M&A Spotlight: Healthcare M&A Spotlight: IT M&A Spotlight: B2C M&A Spotlight: Energy Private Equity Q&A: EY s Jeff Bunder League Tables WANT TO BECOME A SPONSOR? PitchBook reports reach thousands of industry professionals every month. Contact us for the opportunity to advertise or sponsor. Lisa Helme Danforth Managing Director, Strategic Business Development lisa.helmedanforth@pitchbook.com M&AREPORT 215 ANNUAL DEAL COUNTS UP 12%, VALUE UP 24% in 214 PG 7 $5B+ deals account for 37% of total value in 214 Q&A with Rich Jeanneret and Jeff Greene of EY CREDITS & CONTACT PitchBook Data, Inc. JOHN GABBERT Founder, CEO ADLEY BOWDEN Senior Director, Analysis Content, Design, Editing & Data ALEX LYKKEN Editor ANDY WHITE Lead Data Analyst DANIEL COOK Senior Data Analyst Contact PitchBook RESEARCH research@pitchbook.com EDITORIAL editorial@pitchbook.com SALES sales@pitchbook.com COPYRIGHT 215 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment. 4

5 Reassessing M&A data Bigger isn t always better Tracking private market data is a tricky business, but it can be done well. In our eight years of business, we ve strived to create a reliable and comprehensive information source of private market financial data. In 27, we began tracking this data, focusing on private equity before building out our LP and fund performance numbers in 21, and then expanding into venture capital in 212. Along the way, we ve learned a thing or two about best research practices. By combining the best of human judgment with today s technology, we re on our way to becoming the industry standard for professionals who rely on data to help them build the great companies of tomorrow. After years of honing our research methods and building the PitchBook Platform, we re excited to present our newest dataset for the mergers and acquisitions space. You ll notice in this report that our numbers might be different than what you ve seen from others that s not an accident. In establishing our M&A research process, we had a few head-scratching moments. We thought it was strange that textbooks define M&A differently than many of our competitors whose M&A datasets include minority stakes, share repurchases, debt deals, self-tenders, open market transactions and even some 1% equity exchanges. In an industry that s easily swayed by perception, this bigger is better mentality can negatively impact the market as well as the decisions our clients need to make every day. There s a difference between what happens in the corporate universe and what happens in the M&A landscape; we re honing in on the latter. Above all else, we believe that M&A data needs to be accurate and reliable. Our research process represents the outcome of that belief. No matter if you re a current PitchBook customer, or just someone that enjoys our reports we re thankful for the opportunity to play a part in building the great companies of tomorrow by providing you with the world s meaningful business information and resources to understand it. Thanks, John Gabbert, CEO & Founder of PitchBook Data

6 Introduction By any measure, total M&A value was robust in 214. Final numbers were bolstered by a spate of multi-billion-dollar transactions, chiefly in the pharmaceuticals and telecommunications sectors. The underlying factors have been in place for a long time. Cash levels held by strategics have been strong for a few years, and credit has been cheap and widely available since around 212. And especially in the U.S., organic growth has been middling, at best, which made acquisitive growth the only feasible option for strategics looking to grow market share. All that was needed in 214 was a little bit of confidence, particularly for CEOs and Board members. As the economy stabilized and GDP projections slanted upward, confidence followed in a big way. Deal opportunities that were dreamt up during the recession were revisited, and several large bets were placed for industry-transforming deals that reached as high as $1 billion on more than a few occasions. Confidence was certainly key in 214, but another fundamental factor behind the M&A boom was a proactive effort by strategics to make adjustments in rapidly changing industries. For many companies, maintaining market share isn t a given today, especially for pharmaceutical and IT companies. Several large The M&A market has become something of an arms race. pharma companies face looming patent deadlines within their drug portfolios, and they ve taken to M&A to restock their pipelines and fortify their bottom lines, as well as realize global tax efficiences through inversions. Technology companies, facing unending challenges from innovative startups, are using M&A deals to stay ahead of potential disruptions. More broadly speaking, advances in technology across every sector are impacting corporate strategies. Thanks to innovation, strategics are realizing that some of their business lines have become outdated and in some instances obsolete. What were once profit-generating divisions of those companies are quickly becoming non-core assets that need to be shed. In the meantime, strategics are seeing their rivals take to the M&A market to shield themselves and safeguard their own market share. M&A activity has become something of an arms race between strategics, creating heated competition for deals and pushing valuations to record highs. We hope the information and data in this report are useful and help inform your decision-making process in the coming quarters. As always, if you have any questions, comments or suggestions, please contact us at research@pitchbook.com. GREAT DATA MEANS BETTER LEVERAGE FOR LENDERS No one offers more coverage of the private equity and venture capital landscape.

7 Overview M&A activity in the U.S. and Europe was up by both counts and value in 214. In all, 17,357 transactions were finalized last year, a 12% increase over the 15,453 deals made in 213. Total value was up about 24%, from $1.2 trillion in 213 to $1.27 trillion last year. A large part of 214 s increase was a surge in mega-deals of $5 billion or more, which helped prop up median and average transaction sizes to historically high levels. The average fourth quarter transaction topped out at $467.4 million, about 126% greater than the average recorded in 1Q 213 ($26.6 million). The median deal size in 4Q 214 was $5 million, 61% higher than the next highest median ($31 million in 2Q 214). Why the burst in activity and dollar amounts? As Rich Jeanneret and Jeff Greene of EY explain on page 1, confidence is playing a big role, particularly at the upper end of the market. Large strategics, especially in the pharmaceuticals space, are placing large bets on M&A as a means of acquisitive growth in the midst of tepid organic growth. In the case of U.S. healthcare, consolidation has been an accelerating theme across the industry, in part due to defensive maneuvering against new regulations and shrinking reimbursement rates via Medicare and Medicaid. The IT sector, especially software, is undergoing a similarly fundamental transformation. Technology giants like Google, Facebook and Microsoft are using M&A as a means of innovation, buying up venture capital-backed M&A DEAL FLOW BY QUARTER $5 $45 $4 $35 $3 $25 $2 $15 $1 $5 3,669 $18 3,793 3,994 3,997 $223 $266 $348 4,61 4,758 4,212 $28 $265 $289 3,777 $432 Total Value ($B) startups and incorporating their technologies and ideas into their own networks. Moreover, while industry-wide transformations are spurring M&A activity, strategics are trying to make sure their own market shares are positively impacted once this wave of acquisitions settles down. Those MEDIAN TRANSACTION SIZE ($M) $5 $45 $4 $35 $3 $25 $2 $15 $1 $5 Deal Count 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 efforts are, for the most part, being well-received by shareholders today. As Mr. Jeanneret notes, the markets have generally rewarded smart M&A. In many cases, share prices for both the buyers and the sellers have gone up following their announcements, which is a reversal of sorts compared to previous Median Average 7

8 Overview booms as well as the notion that M&A hurts shareholder value. Today, many selling companies are willing to be paid in stock, a sign of confidence in the market considering the extra risk involved if the buyer s share price drops following the deal. Because strategics are focusing on long-term growth with these deals, high valuations aren t impacting deal flow to a significant degree, though we suspect activity would be a bit higher if multiples came down. Valuation-to-EBITDA multiples have subsided somewhat, dropping to a median of 7.33x in 4Q 214 versus 8.47x in 1Q 213. Between 213 and the first half of 214, when valuations were flirting with 8x, acquirers were offsetting those valuations with more debt financing, reaching almost five and a half turns in 2Q 214 (5.44x) before settling back to medians of 3.75x and 3.88x in the third and fourth quarters, respectively. Another contributing factor to high valuations is the number of quality companies in the marketplace today, particularly from PE sellers, which are offloading their best portfolio companies while the demand is there. Looking ahead, M&A activity should remain strong considering the factors that led to the current boom haven t abated, and they may in fact be strengthening. One factor to consider is postacquisition performance for already completed deals; if those transactions appear to backfire, we may see some hesitation among would-be buyers and softer deal flow going forward. VALUATION TO EBITDA MULTIPLES 9x 8x 7x 6x 5x 4x 3x 2x 1x x 8.47x 3.23x 5.24x 6.83x 2.76x 4.6x 7.85x 7.7x 3.83x 4.2x 3.38x 4.32x 8.x 7.96x TOTAL DEAL VALUE BY ACQUIRER TYPE ($B) 3.27x 4.73x 2.52x 5.44x 7.17x 7.33x Debt/EBITDA Equity/EBITDA Valuation/EBITDA High valuations haven t hurt deal flow too much, with strategics focusing on synergy capture and consolidation above all else. $4, $3,5 $3, $2,5 $2, $1,5 $1, $5 PE-Backed Corporate M&A 3.42x 3.75x 3.45x 3.88x 8

9 M&A by Deal Size 214 was the year of the Big Deal. By both count and overall value, $1 billion+ deals proliferated last year and easily eclipsed 213 levels. By count, 287 deals valued at $1 billion or more closed in 214 (including 35 over the $5 billion mark), a 29% increase over the 222 billiondollar deals completed in 213. The percentages were just as high when looking at aggregate value: In all, deals of $1 billion+ added up to a whopping $855.5 billion in 214, a 29% increase over the $662.1 billion tallied the prior year. Much of that increase was in the $1 billion to $5 billion range, which combined for $59 billion in 214, a 37% boost over 213 totals. While bigger strategic players made large bets through M&A last year, the core and lowermiddle markets showed more caution, particularly at the lowest end of the market. By count, deals valued below $1 million became steadily less frequent between 1Q 213 and 4Q 214, edging down about 1% from 2,811 deals in 1Q 213 to 2,524 in 4Q 214. It will be interesting to see whether this trend reverses at all in the coming quarters, as some anticipate. One factor that may impact the lower end of the market is the outcome of all those recent mega-deals. If a significant number of them go bust, the rest of the market will likely reconsider their assumptions behind their own potential deals. If they turn out well, overall confidence should rise and boost activity throughout the market. M&A BY SIZE (#) 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % M&A BY SIZE ($) 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % $5B+ $1B-$5B $5M-$1B $25M-$5M $1M-$25M Under $1M Deals valued at $1B+ added up to $856 billion in 214, 29% higher than the $662 billion recorded in 213. $5B+ $1B-$5B $5M-$1B $25M-$5M $1M-$25M Under $1M 9

10 Richard Jeanneret Americas Vice Chair, Transaction Advisory Services EY Jeffrey Greene Global Transaction Advisory Services Leader, Life Sciences EY Richard Jeanneret is Americas Vice Chair of Transaction Advisory Services at EY and a member of the Americas Executive Board at EY LLP. Based in the firm s New York office, he leads 2,5 TAS professionals in the United States, Canada, Mexico, Central and South America, the Caribbean and Israel. Prior to his current position, he was mid-atlantic managing partner of assurance and advisory business services. Mr. Jeanneret received his bachelor s degree in economics from Boston College. He is a member of the American Institute of Certified Public Accountants, as well as the Economic Clubs of New York and Washington. Jeff Greene is the Global Transactions Leader for EY s Life Sciences Sector. Prior EY roles include Global Vice Chair Corporate Finance, US National Director for Corporate Finance, US National Director for Valuation, and Americas Markets Leader for Divestitures. Mr. Greene provides strategic valuation advice in divestitures, acquisitions, financings and restructurings. He is a recognized expert witness in federal, district, bankruptcy and tax courts on valuation, fairness and solvency matters. He received an MBA from the Harvard Business School with a concentration in finance and international business, and a BA in physics from Dartmouth College, summa cum laude, Phi Beta Kappa. As part of our debut M&A Report, we reached out to Rich Jeanneret and Jeff Greene of EY to get their thoughts on the current M&A market and their expectations going into 215. Q: Why was 214 such a big year for M&A when the current market fundamentals have been in place for a few years? RJ: 214 was a good year for M&A. It s been a bit overhyped because of the number of large deals that got done. But underlying that is the fact that the number of transactions that got done last year was only up about 5% over the prior year. The value of those transactions was up around 4%, so the story was that 214 was the year of the big deal. There were several headline-grabbing, multi-billiondollar transactions, probably the most $1+ billion transactions in a number of years. But the reality of it is, the number of transactions getting done was only up modestly. I think that s a result of one factor, and that s growing confidence. There are a lot of things that can contribute to that, like cash and credit, and those elements of dealmaking have been strong now for a couple of years. Corporate cash has been strong and private equity coffers have been full. Credit has been strong, and it got even stronger last year, but there s been a series of macroeconomic and geopolitical building blocks that have occurred over the last 24 months that have contributed to a resurging level of confidence in the C-suite. That, and growth has gotten harder. The pressure on creating shareholder value, which might be a little more acute now because of the role of activists I think has triggered the uptick in larger scale deals. The U.S. economy is at its strongest level since the Great Recession. There s a smooth transition at the Fed. There s relative political peace in Washington on issues that matter toward deal-making. What was perceived to be taper tantrum last summer came off with relative ease. The world seems to shake off large-scale geopolitical issues relatively well. The equity markets have hung in there, and I think that s given C-suite executives more confidence to make deals. JG: That s largely true in the life sciences sector. A component of last year s record was favorable tax strategies that were available, but even if you adjust for that, 214 was a really good year. We see continued robustness in 215, with that one caveat. Looking ahead to 215, have the underlying factors that led to the M&A boom last year changed significantly? RJ: I think we have momentum going into 215. While 214 was the year of the big deal, what it didn t say was the middle market (<$1B) stayed on the sidelines. >> Continued on Page 11 >> 1

11 Jeanneret and Greene >> From Page 1 >> Deal volumes for transactions under $1 billion were down roughly 1% or so, and even at higher levels throughout the year. We thought that the middle market would start to recover around the fourth quarter, based on the sentiment we ve seen through our Capital Confidence Barometer and what C-suite executives were saying. The middle market had been watching the action but wouldn t stay on the sidelines for very long. We still think they re going to come out to play and they re not going to get left behind in the M&A boom. The markets have generally rewarded smart M&A. If you watch the trades happening on the public markets, share prices for both the buying and the selling companies are going up. That s happening at a much higher level today than it has in previous years. I think that gives the middle market some confidence in doing deals in 215, which bodes well for momentum and maybe even an uptick this year, as well. The private equity industry has raised an enormous amount of capital in the last two years, and I think 215 will be a very interesting and complex year because of the swing in commodity prices like oil having a complex impact on many different industries. PE firms are very good data collectors for that kind of analysis. I think they ll spring to action faster than most. They ll have an idea about how changes in commodity prices will impact different industries. The markets have been a little more volatile because of the price of oil lately. We think the lower cost of oil, and perhaps its adverse impact on GDP, will be more than offset by an increase in consumer spending. It should be a good year for GDP in the U.S., and that means a high level of confidence for executives and investors. Do you see increases in M&A counts or value? Or both? RJ: I think we ll see more volume this year, particularly in the middle market. That might drive down a little bit the value per transaction, but I still think you ll see big deals. It will just be a mix issue, but it doesn t change the overall story. We actually started to see middle-market deal volumes start to flatten out in the fourth quarter. They sort of stopped their decline. How about activity at the upper end of the market? Do you think that s largely played out, or do you think there s still some runway left for mega-deals? RJ: There s still a level of large deal activity that will get done this year. It might be a little less than last year, which was a breakout year. A lot of people got firstmover advantage, and the equity markets have moved up again, so it s possible that larger scale deals won t be as frequent, but they haven t petered out by any means. We had such a restrained level of deal activity since 27, so there s plenty of pent-up demand for deal-making, as long as it s smart deal-making. Companies are smarter than ever before on doing deals, how they re underwriting them and doing the business analysis and diligence on them. It should be a decent year again for large-scale deals. It s hard to see activity getting dramatically larger than what it did last year, but I think it will stay reasonably strong. JG: We saw some very large deals in life sciences last year. Some of the biggest transactions were effectively bolt-ons, which can run upwards of $15 billion in the sector. We also expect to see a fair number of those in 215. And there s still potential for more very large deals as the lines continue to blur among Big Pharma, Big Biotech and Specialty Pharma. One reason we may see more large deals in the life sciences sector is because, despite having some mammoth companies with large market capitalizations, it s still fairly fragmented compared to other industries. There s still potential for consolidation among Big Pharma and Specialty Pharma companies. That segment has actually become more fragmented over the few years, so that could drive deals. To read the rest of the interview, click here. 11

12 M&A Spotlight: Healthcare Overall M&A value in the healthcare industry more than doubled in 214 to $185.7 billion from $92 billion in 213. That s not too surprising given the number of $1 billion+ deals that closed in the pharmaceuticals space last year, but the overall jump in value coincided with relative strength in underlying deal flow. To the contrary, deal counts were up 22% last year, to 1,573 transactions versus 1,289 in 213. Private equity played a part in that increase, with PE deal flow gaining 16%, but the bigger factor was strategic activity, up 25% by count over 213 levels. It s easy to pin the meteoric rise in overall value to pharmaceuticals, with several drug producers facing expiring patents for their most lucrative drug lines. As many have pointed out, it takes considerably more time and money to develop new drugs today. Instead, pharmaceutical companies are opting to buy existing drug lines already in development, and paying top dollar in the process. M&A BY ACQUIRER TYPE HEALTHCARE M&A BY QUARTER $7 $6 $5 $4 $3 $2 $ $13 $ $33 But beyond a few outlier mega-deals in the pharma space, widespread consolidation efforts in the healthcare industry help explain the overall rise in activity. Regulatory changes have spurred defensive maneuvers amongst the largest healthcare providers; with $ $ $24 45 Total Value ($B) $62 Deal Count 35 $42 more healthcare spending coming from consumers themselves, the real growth in the industry is being funneled into specialty niche-type providers and the industries that cater to them, as opposed to the more expensive and traditional hospital model. MEDIAN TRANSACTION SIZE ($M) % 3% 25% 2% 15% 1% 5% $6 $5 $4 $3 $2 $1 % Sponsor-Backed Corporate M&A % Sponsor-Backed Median Average 12

13 M&A Spotlight: IT At least by count, M&A activity in the IT industry was pronounced in 214. The 2,615 deals made last year were a 12% increase over the 2,335 completed in 213. Despite the rise in deal flow, overall value was more or less unchanged last year at $24.2 billion, just above the $23.3 billion in 213. Breaking value down by quarter reveals some choppiness, however. About $115.6 billion worth of transactions were completed in 4Q 214, accounting for about 57% of total value last year. None of the first three quarters of the year were over $35 billion. 213 was a similar case of back-loading deals, with $89.6 billion worth of transactions finalized in 4Q 213 representing 44% of total 213 value. It s no surprise the median deal size for both fourth quarters hit high levels $53.2 million in 4Q 213 and $78.9 million in 4Q 214. We expect 215 numbers to be largely unchanged, given the fundamentals affecting the IT market. Large strategic players like IT M&A BY QUARTER $14 $12 $1 $8 $6 $4 $2 556 $13 67 $44 55 $ $9 Microsoft, Google and Facebook are using the M&A market as a hunting ground for breakout technologies. The IT industry is unique among sectors in the sense that innovation and constant advances in technology can have profound impacts on its markets. 672 $28 76 $ $ Total Value ($B) Deal Count $ Hundreds of young startups, financed by deep-pocketed VC firms, can easily disrupt existing markets and the bottom lines of those technology giants. To keep pace with innovation, several strategic IT buyers are willing to bet big on new technology lines. M&A BY ACQUIRER TYPE MEDIAN TRANSACTION SIZE ($M) 8 23% $ % $8 $ % 2% 19% 18% Sponsor-Backed Corporate M&A % Sponsor-Backed $6 $5 $4 $3 $2 $1 Median Average 13

14 M&A Spotlight: B2C M&A activity in the B2C sector was up by both count and value in 214. Overall value totaled $256.9 billion last year, a 12% bump from the $23.4 billion seen the year prior. Counts were similarly up, to 3,636 in 214 from 3,278 in 213, an 11% increase. Deal sizes have been getting progressively larger on an average basis, hitting $424 million in 4Q 214, almost double the first quarter average of $216 million. Much of the strength in B2C M&A activity is rooted in lessthan-stellar organic growth in the industry. External growth has become the preferred route for strategics, which in many cases are substituting acquisitions for research & development costs. There s also healthy demand in the market, from both corporate acquirers and PE investors, for strong brand names. With an array of economic indicators showing improvement, brand strength is key for B2C buyers. Private equity firms are going after the same brands as strategics are with relatively low B2C M&A BY QUARTER $9 $8 $7 $6 $5 $4 $3 $2 $1 758 $ $ $5 $85 success, despite their dry powder levels. Instead, PE firms are largely focusing on add-on acquisitions to help average down the multiples they paid on their platform companies. Looking ahead, we may see an even bigger push toward 999 1,21 $45 $ $ Total Value ($B) Deal Count $75 1,2 1, consumer-centered M&A in the coming quarters, especially given current fuel prices. In addition to consumers having more money to spend, transportation and distribution costs may also decrease significantly, helping retailers keep prices down. M&A BY ACQUIRER TYPE MEDIAN TRANSACTION SIZE ($M) 1,2 3% $45 1, 25% $4 $35 8 2% $3 6 15% $25 $2 4 1% $15 2 5% $1 $5 % Sponsor-Backed Corporate M&A % Sponsor-Backed Median Average 14

15 M&A Spotlight: Energy Total value for energy M&A transactions hit $155.5 billion in 214, with almost half of that closing in the fourth quarter ($74 billion). On a yearly basis, 214 s total eclipsed the $11.1 billion recorded in 213 by 41%. Deal counts weren t up quite as much, with 722 deals closing in 214, an 8% increase over 213 levels. It appears there was a surge of deal signings at the beginning of the year that closed in 4Q, which helps explain the pop in value that quarter just as energy prices were cratering. While many expect strategic activity to take a breather while energy prices establish a floor, there are expectations of a resurgence of PE interest in the space, particularly if low prices cause distress in the market. Momentum is already in place in the energy market, with PE deal activity surging 22% in 214 over the prior year while strategic deal-making inched up only 2%. ENERGY M&A BY QUARTER $8 $7 $6 $5 $4 $3 $2 $ $19 $ $3 $31 PE dry powder was unaffected by the rapid drop in energy prices, while strategic acquirers took a significant hit with their share prices, which represent less firepower today than they did just a year ago. To that end, we may 167 $ $ Total Value ($B) $29 Deal Count $ see a relatively strong proportion of 215 M&A deal-making come from deep-pocketed and opportunistic PE firms, which have been struggling to compete in several markets due to valuations and competition. M&A BY ACQUIRER TYPE MEDIAN TRANSACTION SIZE ($M) 25 4% $ % 3% 25% 2% 15% 1% 5% $8 $7 $6 $5 $4 $3 $2 $1 % Sponsor-Backed Corporate M&A % Sponsor-Backed Median Average 15

16 Private Equity While PE activity overall has been high, it has been significantly hampered by strong competition from strategics. The graph to the immediate right shows consistency in PE deal flow by quarter, but PE s ratio of overall activity is highly dependent on strategic activity; when corporate M&A goes up, PE s portion of M&A activity goes down, and vice-versa. As most PE professionals will admit, the deal-making landscape is largely dominated by strategics today. Thanks to synergistic opportunities, strategic buyers are able to stretch their bids beyond what most disciplined PE investors are willing to offer. Low interest rates have certainly helped PE buyers stay competitive, but because PE is so sensitive to entry prices and eventual returns, cheap debt only provides so much firepower against aggressive strategics. If interest rates rise later this year, as many anticipate, we should expect to see the trend continue or even strengthen; more expensive debt will translate into more expensive deals (and lower returns overall) for PE firms. Versus strategics, PE firms are also losing their share of take-private acquisitions, dropping from 41% of all public-to-private deals in 213 to 37% in 214. There s some variance in those ratios by sector, but the overarching factor behind them is the fact that earnings growth is largely baked into stock prices today, undermining any hopes of lucrative turnaround opportunities. In many cases, strategics aren t as concerned about earnings potential PE AS % OF OVERALL M&A ACTIVITY BY COUNT 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 PE Sponsor-Backed with their deals the synergistic opportunities more than make up for the high valuations they re paying for listed companies. To get around its competition, private equity is largely focusing on add-on acquisitions for its existing portfolio companies. Addons typically command smaller valuations, but they can also offer some of the same synergies for their own platform companies, similar to what strategics are pursuing on a larger scale. Beyond add-ons, PE firms are also finding opportunities in carve-out transactions. For strategics deciding to sell off noncore assets, private equity is finding less competition for those deals, since rival strategics aren t likely to buy assets deemed non-core by other strategics. 63% % Corporate M&A % 37% 26% 25% 24% 23% 22% 21% PE isn t synonymous with take-privates today, with strategics scooping up about 63% of those deals in 214. TAKE-PRIVATES (#) BY ACQUIRER TYPE Financial Buyer Strategic Buyer 16

17 Private Equity If you can t beat them... While competition and high valuations have scuttled PE in many cases, strong demand from strategics has helped fuel PE exit activity through corporate M&A sales. The two graphs at the bottom show how prevalent that trend was in 214, topping out at $12 billion worth of strategic sales in the fourth quarter alone. Exits via secondary buyout have been relatively steady by quarter by both count and value; the same can t be said of strategic acquisitions. Some professionals we ve talked to have noticed that PE firms are selling off their best portfolio companies to strategics while the demand is there. If interest rates go up, we wouldn t be surprised to see this trend accelerate. Secondary buyouts have held their own in recent quarters because of the difficulty PE investors face in finding quality platform companies. While most PE firms are flush with cash, they re also very sensitive to the price of debt. All things being equal, if strategic demand remains high this year, we should see lopsided exit activity favoring corporate acquirers through 215 and possibly beyond. TOTAL DEAL VALUE BY ACQUISITION TYPE ($B) $4 $35 $3 $25 $2 $15 $1 $5 PE Sponsor-Backed Corporate M&A Thanks to strong interest from corporate buyers, PE firms are selling off their best portfolio companies through strategic sales while demand is high. PE SALES BY EXIT TYPE (#) (EX. IPO) PE SALES BY EXIT TYPE ($B) (EX. IPO) 5 $ Secondary Buyout Strategic Acquisition $12 $1 $8 $6 $4 $2 $11.7 $62.1 $46. $74.4 $56.4 $42.7 $26.9 $24.7 $44.2 $28.4 $16.6 $18.8 $26. $29.9 $35.7 $23.3 Secondary Buyout Strategic Acquisition 17

18 Jeff Bunder Global Private Equity Leader EY Jeff Bunder is EY s global private equity leader and is responsible for driving the delivery of a comprehensive service model, including transaction, audit, tax and advisory services, to private equity funds and their portfolio companies globally. Jeff has more than 25 years of experience leading due diligence engagements for both private equity and corporate acquirers. Jeff Bunder, a frequent contributor to PitchBook, lent us some of his valuable time to discuss several trends in the market, including valuations, take-private activity and his thoughts on how the PE industry is slowly evolving its structure toward a more rigorous value creation process. Q: How do you see the first half of 215 shaping up? And looking back, what are some of your thoughts on PE activity in 214? A: 214 was a robust year for private equity. Exits reached record levels, emerging as the dominant theme in 214 as strong stock markets, coupled with increasingly acquisitive corporates, propelled more PE funds to sell their existing investments. IPOs of PE-backed companies continued at a torrid pace as the number, value and percentage of PE-backed IPOs of the whole increased over a strong 213. Acquisitions clocked in at a solid level, exhibiting some variation quarter-to-quarter. There were quite a few large deals in 214, though not as many as some expected, given the amount of capital available in the marketplace. Particularly publicto-private deals. Fundraising levels have picked up over the last two years, fueled by the large number of exits and the desire of the LPs to reinvest the returned capital back into the asset class. Dry powder has ticked up and we expect a continuation of this upward trend. In addition, the co-investment capacity standing behind newly raised funds is very significant, providing additional capital in effect upsizing the funds. Allocations to private equity have been increasing recently and there is evidence of new investors coming to the table, which bodes well for 215 in terms of fundraising opportunities. We are observing significant commitments flowing in from sovereign wealth funds, pensions and high net worth individuals/family offices. There s a realization among LPs that in order to get the returns they re looking for, a healthy allocation to private equity is needed and supported by the outperformance over time versus other asset classes, including hedge funds, equities and bonds. Looking ahead, we see more of the same. The activity levels will continue to be strong for the year, although as always, not linear expect peaks and valleys to occur. We are likely to see larger buyouts, as the abundance of dry powder, significant co-invest capital and receptive financing markets will spur larger deals. We also anticipate a number of corporate carve-outs coming to market, both in the U.S. and Europe. The larger global PE funds are focused on chasing carve-outs, which are a sweet spot for private equity, particularly the larger businesses which trade in the multi-billion dollar range. Do you see a turnaround in publicto-private activity this year? Public-to-private deals always garner a fair amount of interest, although the count has been relatively low over the last few years. The primary reason is that they are complex to complete, with many stakeholders involved even in the event the business is interested in a take-private. Working through management, Boards and special committees comes with an extensive time commitment which has a high opportunity cost. In the completed take-privates it seems that activists have been involved, agitating for a sale of the company or a segment of the business. Activists have certainly played a role in providing targets for PE buyers, but we don t expect there will be a more extensive trend in take-privates. The landscape, especially in the U.S., is one of high valuations, and buyers need to pay a significant premium to take those companies private, which tends to be challenging for any buyer. There are also concerns out there about the regulatory environment for banks, more >> Continued on Page 19 >> 18

19 Bunder >> From Page 18 >> discretion around bank lending and leveraged lending. It definitely feels like banks are a little more restrained today in terms their underwriting standards. I don t think there has been a material change in buyout financing availability, but deals at the margin are impacted. If lending capacity declines further, PE buyers are either going to put more equity into deals or reduce pricing levels. What are your expectations for valuations going into 215? Do you see any signs of a slowdown? It s hard to predict, but with the equity markets still trending positive, higher pricing will likely persist. There is a correlation of deal pricing to stock market valuations, so to the extent the stock market stays elevated, we should see a similar pricing environment. Underlying the pricing equation is a very competitive market with a lot of players having access to capital and financing, translating into aggressively priced buyouts. From a private equity perspective they re looking for great companies backed by strong management teams, and to the extent they can find those companies, they ll be willing to pay up for them. If growth suffers, or if financing becomes harder to obtain or more expensive, we could see some softening. From a sector standpoint, energy will continue to be a very active sector for private equity. The decline in oil prices has clearly changed the calculus, but there is plenty of capital earmarked for energy and we expect a fair amount of deals in this sector. Having said that, many other sectors are in focus, including technology, industrials, consumer, business services and healthcare. There s some talk out there about the prices buyers are willing to pay, sort of like the price of Rembrandts and the Scarcity Theory. Everyone wants to own a premium asset when the markets are hot. There s some truth to that. What has changed over the last six to twelve months, however, is that corporates have really come back into the M&A market and have aggressively competed for businesses. They weren t as confident prior to that corporates weren t as focused on inorganic growth and didn t have the conviction they currently have. Now there s quite a bit of corporate activity on both sides, for M&A transactions and for divestment of non-core assets. That s been a trend that should continue into 215 corporates are aggressively looking to buy businesses in order to expand, maybe pulling back a bit on stock buybacks and dividends and look to deploy their capital into growth opportunities such as acquisitions. With the current strength of the U.S. economy, it seems like PE is targeting companies with built-in growth attributes. When the markets are up and the economy is expanding, there is a lot of focus on big companies and their earnings, and growth at the top end. But there are still companies in this environment that are challenged. Sustained growth is difficult to achieve, especially for some companies that lack sophistication or access to all markets. In some cases these businesses need capital or operational help, and that s the other aspect that private equity is bringing to the table today in addition to capital. They re bringing in operating partners, operational support teams and outside expertise to these companies, which may be treading water. They may not be looking to sell they re looking for smart, active capital that provides answers to the challenges these businesses are encountering. If you go back fifteen years, private equity was primarily focused on getting the deal done, followed by pushing the management team to perform with an eye towards a relatively quick sale. They weren t staffed with operating partners and they didn t have the rigorous value creation focus, if you will. PE firms weren t injecting their sector and operational expertise into their portfolio companies. That s not the case today, and private equity can be viewed in a different light. To read the rest of the interview, click here. 19

20 4Q 214 M&A League Tables LAW FIRM DEALS Kirkland & Ellis 61 Jones Day 54 DLA Piper 47 Latham & Watkins 45 Paul, Weiss, Rifkind, Wharton & Garrison 3 Weil, Gotshal & Manges 3 Paul Hastings 26 Skadden, Arps, Slate, Meagher & Flom 22 Ropes & Gray 2 Greenberg Traurig 18 Goodwin Procter 18 Shearman & Sterling 16 Dorsey & Whitney 16 Gunderson Dettmer 14 O Melveny & Myers 13 Sidley Austin 13 Vinson & Elkins 13 Honigman Miller Schwartz and Cohn 11 Dechert 1 Willkie Farr & Gallagher 1 Wachtell, Lipton, Rosen & Katz 1 Sullivan & Cromwell 1 Debevoise & Plimpton 9 Akin Gump Strauss Hauer & Feld 9 Fried Frank Harris Shriver & Jacobson 8 Perkins Coie 8 Simpson Thacher & Bartlett 8 Morgan, Lewis & Bockius 8 Gibson, Dunn & Crutcher 8 Davis Polk & Wardwell 8 Akerman 7 BakerHostetler 6 Bracewell & Giuliani 6 Proskauer 6 Baker Botts 6 K&L Gates 6 Lowenstein Sandler 6 Pillsbury Winthrop Shaw Pittman 6 ADVISOR Goldman Sachs Houlihan Lokey Barclays Robert W. Baird & Co. Lincoln International Morgan Stanley Evercore Partners BofA Merrill Lynch J.P. Morgan Moelis & Company William Blair & Company Credit Suisse Raymond James & Associates Generational Equity Harris Williams & Co. RBC Capital Markets Duff & Phelps Citigroup Deutsche Bank Lazard Sandler O Neill & Partners Deloitte Keefe Bruyette & Woods BB&T Capital Markets Jefferies Group Piper Jaffray UBS GulfStar Group Centerview Partners FIG Partners KPMG Petsky Prunier Stephens DEALS