1. 2012 Review & 2013 Outlook
M&A Activity Report

2. 2012 Review & 2013 Outlook M&A Activity Report
Introduction
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Data & Methodology
To give insight into the coming year, this report reviews major trends, industries, and events
from 2012 and the expected activity for 2013. All real-time snapshots of market activity in
the report are as of December 31st, 2012.
This report analyzes 3 primary data sets:
• In-depth 1:1 interviews with a carefully screened subset of Members from across a
variety of industry verticals
• AxialMarket Network activity data
• A survey sent to 14,000 deal professionals
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3. 2012 Review & 2013 Outlook M&A Activity Report
Thanks to Participating Members
Edwin Burke, Managing Partner at Pillsman Partners
Pillsman Partners, LLC is a private investment firm that specializes in direct
investments in established, small to lower-middle market businesses. We focus on
companies with $1 to $10 million in EBITDA, stable cash flows, and strong organic
growth potential.
Stephen Connor, Director of Business Development at Hamilton
Robinson Capital Partners
Hamilton Robinson is a lower middle market PE firm that was founded in 1984.
We focus on the Commercial and Industrial sector-specialty/niche manufacturing,
industrial services and distribution. We have years of successful investing experience
and a strong knowledge base in this sector.
Marek Olszewski, Managing Partner at Catalus Capital
Catalus is an investment firm that partners with US, Canadian, and European middle
market companies and private equity funds by providing capital and operational
expertise. We facilitate expansion opportunities and strategic initiatives, and also
consider asset-backed deals.
Chris Eichmann, Managing Partner at Pillsman Partners
Pillsman Partners, LLC is a private investment firm that specializes in direct
investments in established, small to lower-middle market businesses. We focus on
companies with $1 to $10 million in EBITDA, stable cash flows, and strong organic
growth potential.
Spencer South, Partner and Principal at Lazarus Capital
Lazarus Capital Partners is a private equity firm based in Birmingham, Alabama,
focused on acquiring controlling equity interests in lower-middle-market operating
businesses. LCP’s target investment profile is concentrated in manufacturing, value-
add distribution, and business service companies.
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4. 2012 Review & 2013 Outlook M&A Activity Report
2012: A ‘Moderate’ Year
For much of the M&A world, 2012 was a year defined by perennial uncertainty. After a
lackluster start, activity never seemed to hit a rhythm. Whether it was the JOBS Act, the
presidential election, or the fiscal cliff, deal activity was stalled with uncertainty, waiting for the
next major trend.
Because of this overarching uncertainty
2012 M&A Environment: -- and still-recovering economy --
Strong 2012 was a slow-to-moderate year for
10% M&A. When asked about the year,
47% of survey respondents described
the environment as “moderate,” with
another 43% describing the year as
“slow.” Despite these views, 84% of
Moderate survey respondents reported closing at
47% least one deal in 2012.
Slow Steve Connor of Hamilton Robinson
43% Capital Partners agreed with the
‘moderate’ sentiment. He explained,
“While [activity] started off slow, it
definitely picked up during mid-year
and the summer months. By the end of October, however, the time for closing deals was
narrowing and activity began to taper off. Instead of focusing on new deals, many PE firms
and investment banks were working to close the ones in process.”
The focus on closing deals in the late fall left some quality deals on the table for firms -- like
2012 Deal Activity:
Deals Closed No Deals 1-3 Deals 3-5 Deals 5+ Deals
% of Respondents 16% 50% 21% 13%
Pillsman Partners -- who remained actively focused on cultivating deal flow. Chris Eichmann,
Managing Partner of Pillsman, explained, “Instead of maintaining a warm pipeline, groups
pushed to get their deals across the finish line before year-end. Not only did fewer close than
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5. 2012 Review & 2013 Outlook M&A Activity Report
expected, but many capital providers seemed distracted by the rush. This allocation of time
led to several quality assets coming to market that did not get much attention.”
Sent Deals & Pursuits of Deals by Quarter
250 Deals Sent Pursuits 1000
200 800
150 600
100 400
50 200
0 0
12-Q1 12-Q2 12-Q3 12-Q4
As the year came to a close, many firms found themselves with meager pipelines for
2013. This realization could have spurred the relative spike in pursuits seen in Q4.
Data: AxialMarket
The inconsistent deal activity -- both in quality and quantity -- hit many firms asymmetrically.
Marek Olszewski of Catalus Capital remarked, “2012 was both a great year and a difficult
one.” He explained, “From a returns perspective, we are making solid risk adjusted returns
for our investors. However, from the new capital invested perspective, 2012 was more difficult.
While we did make a few investments, it was fewer in number and smaller in size than
desired.”
Business Owners Not Coming to Market
For the past several months, there has been a general hypothesis that business owners would
come to market to sell before new taxes went into effect in 2013. While there was a minor
surge towards the end of the year, “at the end of the day, tax uncertainty failed to act as a
strong impetus to convince sellers that now was the best time to sell,” explained Edwin Burke
of Pillsman Partners. “Seller valuation expectations [exceeded] that which the market was
willing to ascribe to their businesses. This proved somewhat frustrating -- to compete with
sellers choosing not to sell.”
One of the major motivations for business owners to endure the potential tax hikes is the
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6. 2012 Review & 2013 Outlook M&A Activity Report
overall lackluster economic and investment environment. Connor explained, “One contributing
factor to the decreased lower middle market deal flow is the current interest rate environment. If
an owner were to sell his business today, he would have limited options to invest his proceeds on
decent yielding investments. Rather than parking their money in low-yielding CDs, many owners
are deciding to hold on to their businesses.”
“In terms of purchase price, we try and stay disciplined in the 4x - 6.5x
valuation range. - Spencer South, Lazarus Capital
”
“We really focus on deals where the acquisition multiple falls somewhere
between 3x and 6x. - Chris Eichmann, Pillsman Partners
”
“We see a fair amount of deals in the 5x - 7x EBITDA range in the lower-
middle market. - Marek Olszewski, Catalus Capital
”
Spencer South of Lazarus Capital confirmed Connor’s read on business owner temperature. “In
speaking with business owners, I have found that many who were contemplating going to market
have reassessed due to the lack of investment options for the proceeds of a sale.” As a possible
solution, South suggested pursuing partial sales. “One way we aim to combat the issue is a partial
sale of the business where the owner takes chips off the table, but stays in for 20-30%.”
The low-yield interest environment has affected business owners and deal professionals alike. As a
lender, the compressed rates have created unique challenges in 2012. Olszewski explained, “Interest
rates have continued to come down throughout the year. While this is good for borrowers, it is bad
for lenders.” He added, “Debt has been performing well -- it is a very competitive environment.”
Dry Powder, Valuations, and LBOs
The challenges of thin deal flow were supplemented by the enormous amount of dry powder sitting
in private equity funds. With the clock ticking on the more than $1 trillion in capital overhang,
many private equity firms began expanding the parameters of their investment theses.
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7. 2012 Review & 2013 Outlook M&A Activity Report
As Connor explained, “We saw some larger private equity firms coming down market and
pursuing smaller companies. Their presence continues to create an imbalance between the
supply and demand for quality companies, which has created highly competitive auctions.”
The movement of larger firms into the middle market has not only driven valuations up, it has
2012 Industries with Highest Average Pursuits
Average Active Interested
Industry Total Deals
Pursuits/Deal Investors
Industrials 1,571 6.65 529
Manufacturing 1,458 7.39 622
Technology 936 6.79 586
Energy & Utilities 701 8.18 310
Healthcare 659 6.36 471
also impacted deal financing strategies. The combination of the capital overhang and interest
rates has created a buyout-friendly environment. As Olszewski explained, “The amount of
equity going into LBOs is definitely on the rise. PE firms are using less debt and relying on
senior debt or unitranche facilities, and less on mezz or subordinated debt.” He added, “In
order to get that type of capital structure, firms are relying on high-yield and loan markets.”
2012 Deal Breakdown by Geography
South 1931
West 1274
Midwest 843
Northeast 759
In 2012, the largest number of deals originated in the Southern United States.
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8. 2012 Review & 2013 Outlook M&A Activity Report
2013 Outlook
Although the fiscal cliff is resolved -- for now -- the uncertainty that stifled activity in 2012 has
set a weak stage for 2013. According to Connor, “Because of slow pitching activity and weak
deal flow the past few months, it is unlikely we will see a torrent of deals early in 2013.”
However, a slow start does not 2013 Expected Activity:
necessarily mean a slow year. Connor
speculated that a few variables could Volume will
jumpstart activity. “One variable Plateau
that may spur M&A activity is if 21%
private equity firms start selling their
portfolio companies. Since many
funds are reaching the end of their More
investment horizons, they will need to Deals
sell their portfolio companies to show 53%
realizations in order to raise the next
fund.” Fewer
Deals
Eichmann identified a different 26%
backlog of deals that could come
to market in the second half of
2013. “In the past couple of months, many business owners have been deferring their sale
until 2013. They have told us they wanted to wait until Q1 or Q2 of 2013 -- or even 2014
-- because they are either hoping for better visibility or validating their current growth plans.”
If these business owners do decide to sell, it could mean stronger activity in 2H 2013. Not
everyone agrees, however.
Greatest Concerns for 2013:
Dry Powder 28%
Cap Gains/
25%
Carried Interest
Fiscal Cliff 22%
Other* 25%
*Other: JOBS Act, European Affairs
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9. 2012 Review & 2013 Outlook M&A Activity Report
Some -- like Olszewski -- believe that activity will spike early in the year, only to then wane
thereafter. “I don’t see 2013 as a big turning point for activity. However, I do think January
will be very busy. After a significant holiday -- like the one this year -- there tends to be a spike
in new activity. I think people will return in January to find many new deals and will be quick
to jump on them.”
Major Players: Strategics and Healthcare on the Rise
Even if activity remains modest throughout the year, the majority of survey respondents
believe that strategics -- not financials -- will be
in a better position to drive the growth. Connor
believes, “Corporates will be driving the overall
activity in 2013. While there will be some 57% of survey
sellers who prefer financials -- due to desire to respondents believe
stay involved with the business -- I expect most that Strategics will be
activity to remain in the realm of corporate
acquirers.”
better positioned for
acquisitions in 2013.
In terms of the most active industries, 35%
- AxialMarket Private Capital Survey
of survey respondents believe Healthcare
will be the most active industry in 2013. This
anticipated activity is likely tied to the present implementation of the Affordable Care Act.
Healthcare Pursuits Unaffected by ACA in 2012
1,750
1,250
Technology
Energy
Healthcare
750 Average
Q2-2012
Q1-2012
Q4-2012
Q3-2012
While Technology was visibly impacted by the Facebook IPO in the spring and Energy
cooled off in the second half of the year, interest in Healthcare Opportunities mimicked the
network average despite supposed impact of Affordable Care Act.
Data: AxialMarket
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10. 2012 Review & 2013 Outlook M&A Activity Report
Energy & Utilities is also expected to be a major player in 2013, thanks to the recent focus on
fracking and shale. The interest in Technology is not surprising to Olszewski, who described
the industry as “perennially a bright spot.” He added, “There are so many innovative
companies just beneath the surface that will likely become immensely successful.
2013 Valuations
With activity levels still uncertain in 2013, exact valuation estimates are hard to ballpark.
Because of this uncertainty, 50%
of survey respondents believe that
Anticipated Valuations in 2013: valuations will generally stay the
same this year. The remaining 50%
Valuations
will Rise are effectively split between believing
22% valuations will rise or will fall.
Valuations One subscriber to the rising valuations
will Stay camp is South. He explained, “The
the Same combination of low deal supply with the
50% high demand that is being driven by the
fund overhang and private equity being
an attractive relative asset class, coupled
Valuations with cheap, available credit, suggests that
will Fall multiples will likely rise.”
28%
Olszewski, however, believes that the
uncertainty will help drive multiples down. “The most recent data suggests that valuations
will actually come down in 2013. That could be a result of the uncertainty in economy and
regulatory environment -- if you buy a business, you have to price in that risk.”
Key Takeaways:
• Low interest rates discouraged many owners from selling their businesses, as there
were few options for post-sale investment.
• Dry powder helped drive larger PE firms down market, driving subsequent
valuations up.
• Despite the excess dry powder, 57% of survey respondents believe that strategics
will be more active in 2013.
• Strategics are expected to be the most active investors in 2013, with most activity
predicted to occur in the Healthcare, Energy & Utilities, and Technology spaces.
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11. 2012 Review & 2013 Outlook M&A Activity Report
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