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J5081 M&A Quarter Review v2.

qxd:Layout 1 11/6/09 13:14 Page 3

JUNE 2009

The era of globalized M&A


Winds of change
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 4

All inquiries should be directed to any of the


individuals at J.P. Morgan or Thomson Reuters
listed below.

Sam Bridges
Associate
10 Aldermanbury, London EC2V 7RF
0207 325 0545

Hernan Cristerna
Managing Director
10 Aldermanbury, London EC2V 7RF
0207 325 4631

Vincent Flasseur
Deals Intelligence, TR
30 South Colonnade, London, E14 5EP
0207 542 1958
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 1

The era of globalized M&A 1

Table of contents
1. Introduction 2

2. M&A Vs ECM 3

3. Cross-border 5

4. Deals consideration and valuation 8

5. Sector analysis 14

6. Private equity fund raising 17

7. Summary observations 19
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2 Winds of change

1. Introduction
In this research document we have examined the M&A cycle from a period starting from
1990 through to May 31 2009 to quantify the effects of globalization on M&A and the
impact of macroeconomics. This timeline covers two very distinct cycles of M&A deal
activity, taking a look at the telecoms bubble of 1999-2000 and the leverage bubble of
2005-2007. The report aims to reaffirm that high valuation bubbles are the precursor to
a swift downturn and that rapid consolidation across non-cyclical sectors are on the
whole prevalent during peak M&A.

Speculators have played a significant role in two cycles identified in this report. They
contributed to the over-valuation of technology and telecoms stocks in the “dot.com” era
and piled into commodities and real estate during the bull market of 2007 which again
led to over valuation above normal inflationary rises.

The dot.com bubble origins can be traced back to around 1995 when venture capital
spawned numerous technology companies which followed the rapid expansion of the
internet. When these companies were IPO’d the demand from investors resulted in
unrealistic valuations based on flawed earnings projections. The emergence of private
equity in 2005 and highly leveraged transactions as a result of cheap debt was also
accompanied by speculators fuelling real estate and driving up commodity prices. The
tiger economies of Asia and the demand for oil and steel further added to the inflated
commodity prices and sub-prime lending in the consumer market added to the
dislocation in the credit markets. So the two M&A cycles we have identified were borne
from very distinct bubbles and rapid global growth.
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The era of globalized M&A 3

2. M&A Vs ECM
The correlation between the equity markets and global M&A was evident across global
and regional analysis. Global deal value has been tracking the volatility of the equity
markets, lagging on average by one quarter. This assessment is true by both value and
number of transactions and has tracked the equities market since 1990. While growth in
the equity markets encourages M&A to grow at similar rate, a consequence of falling
confidence in the equity markets is that M&A activity dries up.

Exhibit 2.1

M&A value v. equity markets performance

Global M&A ($bn) Datastream world index (monthly avg.)

1,600 1,800

1,400 1,600

1,400
1,200

1,200
1,000
1,000
800
800
600
600

400
400

200 200

0 0
1Q90
3Q90
1Q91
3Q91
1Q92
3Q92
1Q93
3Q93
1Q94
3Q94
1Q95
3Q95
1Q96
3Q96
1Q97
3Q97
1Q98
3Q98
1Q99
3Q99
1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09

Source: Thomson Reuters

Exhibit 2.2

M&A deals v. equity market performance

Global M&A (No. of deals) Datastream world index (monthly avg.)


12,000 1,800

1,600
10,000
1,400

8,000 1,200

1,000
6,000
800

4,000 600

400
2,000
200

0 0
1Q90
3Q90
1Q91
3Q91
1Q92
3Q92
1Q93
3Q93
1Q94
3Q94
1Q95
3Q95
1Q96
3Q96
1Q97
3Q97
1Q98
3Q98
1Q99
3Q99
1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09

Source: Thomson Reuters


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4 Winds of change

Looking at the US and Europe the correlation between M&A and the equities market was
the same as the global view, however it was quite noticeable that spikes in certain
quarters, for example in the fourth quarter of 1999, which the $111 billion acquisition of
Warner-Lambert by Pfizer contributed disproportionably higher deal value than in more
normalized quarters. The same was true for Europe when the fourth quarter of 1999
produced the biggest ever M&A deal in Vodafone’s acquisition of Mannesmann for $171
billion.

Exhibit 2.3

M&A value v. equity markets performance

US targeted M&A ($bn) Datastream US mkt. index (monthly avg.)

800 1,800
1,600

700 1,600
1,400

1,400
600 1,200

1,200
500 1,000
1,000
400 800
800
300 600
600

200 400
400

100 200
200

0 0
1Q90
3Q90
1Q91
3Q91
1Q92
3Q92
1Q93
3Q93
1Q94
3Q94
1Q95
3Q95
1Q96
3Q96
1Q97
3Q97
1Q98
3Q98
1Q99
3Q99
1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
Source: Thomson Reuters

Exhibit 2.4

M&A value v. equity markets performance

EU targeted M&A ($bn) Datastream European mkt. index (monthly avg.)

700 3,000

600
2,500

500
2,000

400
1,500
300

1,000
200

500
100

0 0
1Q90
3Q90
1Q91
3Q91
1Q92
3Q92
1Q93
3Q93
1Q94
3Q94
1Q95
3Q95
1Q96
3Q96
1Q97
3Q97
1Q98
3Q98
1Q99
3Q99
1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09

Source: Thomson Reuters


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The era of globalized M&A 5

3. Cross-border
The era of cross-border M&A heralded in part the opportunity to grow outside the
domestic market with protectionism against national interests diluted in a number of key
markets. Cross-border activity is more prevalent in upturns as shown in the below exhibit,
accounting for over 35% market share of all global M&A in 1999 and then accounting for
45% of all M&A in 2007.

Exhibit 3.1

Cross-border M&A

Global M&A ($bn) Cross border M&A ($bn) % of total

4,500
4,500 50%
50%

4,000 45%
45%
4,000
40%
40%
3,500
3,500
35%
35%
3,000
3,000
30%
30%
2,500
2,500
25%
2,000
20%
1,500
15%
1,000
10%

500 5%

0 0%
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: Thomson Reuters

The total number of cross-border deals peaked in both the dot.com bubble and the
leverage bubble, topping out at around 3,500 transactions in both time periods.

Exhibit 3.2

Cross-border M&A

Cross border M&A ($bn) Global M&A ($bn) No. of cross border deals

1,600 4,000

1,400 3,500

1,200 3,000

1,000 2,500

800 2,000

600 1,500

400 1,000

200 500

0 0
1Q90
3Q90
1Q91
3Q91
1Q92
3Q92
1Q93
3Q93
1Q94
3Q94
1Q95
3Q95
1Q96
3Q96
1Q97
3Q97
1Q98
3Q98
1Q99
3Q99
1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09

Source: Thomson Reuters

European targeted cross-border activity by number of deals grew almost on a yearly basis
from 1990 until 2000 tailing away until the upturn in activity from 2005-2007. Emerging
markets (EM) cross-border activity grew from almost non-existent levels in 1990 and
followed the same pattern of growth until 2000. North American cross-border activity has
remained conservative in comparison to Europe and the emerging markets with the
number of transactions flat until around 1994.
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6 Winds of change

Exhibit 3.3

Cross-border M&A–US v. Western Europe v. emerging markets

US target ($bn) Western EU target ($bn) EM target (No. of deals) Western EU target (No. of deals)
EM target ($bn) US target (No. of deals)

600
600 1,600
1,600

1,400
1,400
500
500
1,200
1,200
400
400
1,000
1,000

300
300 800
800

600
600
200

400
100
200

0 0
1Q90
3Q90
1Q91
3Q91
1Q92
3Q92
1Q93
3Q93
1Q94
3Q94
1Q95
3Q95
1Q96
3Q96
1Q97
3Q97
1Q98
3Q98
1Q99
3Q99
1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
Source: Thomson Reuters

US acquirors have also recorded lower cross-border M&A which accounted for a high of
34% in 2003 but has fallen every year since 2006 despite the accelerated growth in M&A
at the time. European cross-border M&A as a percentage of the total peaked in 1991 with
activity accounting for 75% of all M&A but in recent times has moderated to around 55%
of total cross-border deal activity. Emerging markets acquiror cross-border activity has
recorded year-on-year growth since 2004 with a marginal decline in 2007 but post 2007,
activity in cross-border deals has outstripped the US for a second year in a row.
Cross-border activity in 2009 year-to-date now stands at 28% of total M&A, with Europe
falling to around 40%, we may yet see emerging markets become the leading region for
acquisition based M&A.

Exhibit 3.4

Cross-border M&A by acquiror ultimate parent nation/region

(US$mm) (%)
US value ($mm) Western EU value ($mm) EM value ($mm)
1,800,000 US % of total Western EU % of total EM % of total 80%

1,600,000 70%

1,400,000
60%

1,200,000
50%
1,000,000
40%
800,000
30%
600,000

20%
400,000

200,000 10%

0 0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

However despite the percentage gains in cross-border activity as a total of M&A, as the
market for deals declines further then value of cross-border also falls. The number of
European cross-border deals by acquiror has recorded the highest fall of 56% from the
second quarter 2007 until the end of May 2009 while the US fell by 49% and emerging
markets by 37%. US cross-border deal value fell by 54% during the same time period with
emerging markets falling 48% and Europe with a less severe fall of 21%.
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 7

The era of globalized M&A 7

Exhibit 3.5

Cross-border M&A by acquiror ultimate parent nation/region

(US$mm) (%)
US value ($mm) Western EU value ($mm) EM value ($mm)
1,800,000 US % of total Western EU % of total EM % of total 70%

1,600,000
60%

1,400,000
50%
1,200,000

1,000,000 40%

800,000 30%

600,000
20%
400,000

10%
200,000

0 0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Exhibit 3.6

Cross-border M&A by acquiror ultimate parent nation/region

(US$mm) US value Western Europe value EM value (No. of deals)


US (no. of deals) Western Europe (no. of deals) EM no. of deals
600,000 2,000

1,800
500,000
1,600

1,400
400,000
1,200

300,000 1,000

800
200,000
600

400
100,000
200

0 0
1Q90

1Q91

1Q92

1Q93

1Q94

1Q95

1Q96

1Q97

1Q98

1Q99

1Q00

1Q01

1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 8

8 Winds of change

4. Deals consideration and valuation


M&A as a percentage of GDP gives an indication of the relative overheating of the
mergers and acquisitions market compared to the rest of the economy. Over the past two
cycles global M&A activity consistently outgrew the World economy during two key
growth periods (1999-2000) and (2005-2007). Equally, the level of announced M&A
activity collapsed at a much faster pace than the World Economy upon each subsequent
downturn. Looking back at the 1999-2000 peak, M&A as a percentage of GDP reached its
upper limit after 7 years of continuous growth and stagnated for 2 years at 10% to finally
collapse and return within 2 years to 4%. In contrast, between 2006 and 2007, whilst
M&A was at an all time high level, the same ratio found a new upper limit at 8% and
followed the same 2 year high-plateau pattern before suddenly collapsing with the credit
crisis in 2008.

It is probably worth noting that, against the generally accepted conception, the level of
merger activity reached during the first M&A TMT-driven bubble, though significantly
smaller in absolute $ value was in fact of greater proportion relative to the world
economy than the latest credit-driven cycle we’ve just gone through.

Based on the hypothesis that the M&A/GDP pattern could repeat itself global activity as % of
GDP could reach 3.6%, 3.7% & 4.5% in 2009, 2010 and 2011 respectively, mirroring the
upturn of 2002, 2003 and 2004. When matched with IMF GDP forecast for the same years
this could mean that M&A activity could return to slow growth as early as this year and next
and eventually reach US$2,622bn by 2011.

Exhibit 4.1
Global M&A ($bn) Global M&A as % of world GDP

4,500 12%
Estimates Based on 12%
4,500
Previous M&A Cycle
4,000 & IMF Forecast
4,000
10%
10%
3,500
3,500

3,000
3,000 8%
8%

2,500
2,500
6%
6%
2,000
2,000

1,500
1,500 4%
4%

1,000
1,000
2%
2%
500
500

00 0%
0%
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: Thomson Reuters


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The era of globalized M&A 9

Exhibit 4.2

M&A considerations

50% All shares (% of total) All cash (% of total) Hybrid (% of total)

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Thomson Reuters

The use of all cash consideration has grown on an almost annual basis except for 2003
with a peak in 2007 of 46% of total M&A. All share deals have declined almost at the
same rate that cash grew from 2000 with a slight rebound in 2008 but falling to 7% of
total M&A. Hybrid or mixed consideration of cash and shares has seen a surge from 2008
accounting for 28% of the total M&A.

Global bid premiums continue to grow despite the current downturn. The one month
median is 33% compared to 22% at the height of deal activity in 2007.

Exhibit 4.3

Global bid premiums 1995-2009 year-to-date

40 One-day % median One-month % median

35

30

25

20

15

10

0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

The current high premiums can be explained by the two exhibits below. Taking exhibit 4.4
for example and we can see that the market has undervalued Eidos stock relative to the
index performance. However the offer price in this example has factored in the stock
undervaluation and the implied premium is reduced as the index performance picks up by
week 6 (post announcement date). In exhibit 4.5 we can see that BPP has been
undervalued when rebased against the index performance, so the implied premium
would appear higher.
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10 Winds of change

Exhibit 4.4

Eidos stock performance rebased against AIM

Eidos AIM
35 25

30
20

25

15
20

15
10

10

5
5

0 0
01/01/2009 26/01/2009 20/02/2009 18/03/2009 12/04/2009 07/05/2009 02/06/2009

Exhibit 4.5

BPP stock performance rebased against AIM

700 BPP AIM 450

400
600

350
500
300

400 250

300 200

150
200
100

100
50

0 0
01/01/2009 26/01/2009 20/02/2009 18/03/2009 12/04/2009 07/05/2009 02/06/2009

The upward trajectory of the dot.com M&A started in 1997 and ended in 2000 while the
emergence of private equity started around 2001 and peaked in 2006. Globally TMT
M&A activity for the period 1999-2000 rally accounted for 45% of the total M&A
announced. Private equity accounted for about 22% of the total M&A market during a
peak in 2006. In the US TMT accounted for 48.3% of all M&A while private equity
equalled around 25.4%. In Europe, TMT made up 34.2% of total M&A and private equity
accounted for 18.7%.
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The era of globalized M&A 11

Exhibit 4.6

Global M&A drivers

Global M&A ($bn) TMT acquisitions as % of total Buyside financial sponsor as % of total

4,500
4,500 50%
50%

4,000 45%
45%
4,000
40%
40%
3,500
3,500
35%
35%
3,000
3,000
30%
30%
2,500
2,500
25%
2,000
20%
1,500
15%
1,000
10%

500 5%

0 0%
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
Source: Thomson Reuters

TMT deal activity was driven by all share deals in the dot.com period and then cash
accounted for 60% of all TMT deal value in 2007.

Exhibit 4.7

TMT M&A considerations

TMT M&A ($bn) All share (% of total) All cash (% of total)

1,800
1,800 70%
70%

1,600
1,600 60%
60%
1,400
1,400
50%
50%
1,200
1,200

1,000 40%
40%
1,000

800 30%

600
20%
400
10%
200

0 0%
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: Thomson Reuters


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12 Winds of change

Exhibit 4.8

Key M&A drivers for the dot.com bubble and the leverage bubble

US targeted M&A ($bn) TMT acquisitions as % of total Buyside financial sponsor as % of total

1,800
1,800 50%
60%

1,600 55%
45%
1,600
50%
40%
1,400
1,400
45%
35%
1,200
1,200 40%
30%
1,000 35%
1,000
25%
30%
800
25%
20%
600 20%
15%
15%
400 10%
10%
200 5%
5%

0 0%
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
Source: Thomson Reuters

The global squeeze on the money markets from mid 2007 through to 2009 year-to-date
has had major repercussions for M&A. Correlating against previous downturns on a
global scale proved difficult but looking at a regional level and we saw similarities
between the Japanese banking crisis and the global credit crunch.

The Japanese banking crisis of the 1990’s was caused by an overvalued Japanese stock
market, financial liberalization and deregulation. By 1997 several large financial
institutions failed and went into bankruptcy with the recapitalization and fiscal cost of
repairing the banking industry estimated at about 12% of GDP. Financials accounted for
about 70% of all Japanese targeted M&A in 1999, at the height of the crisis. The parallels
between the Japanese crisis and the credit crunch which started in the summer of 2007
are quite stark. Liberalization of the financial market and the abundance of credit
inflated a debt bubble which unbalanced the global economy. Coupled with low interest
rates, low unemployment above inflation year-on-year growth in real estate, record
earnings in the oil & gas industry and strong equity markets, pushed M&A to record
levels during the second quarter 2007.
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The era of globalized M&A 13

Exhibit 4.9

Japanese banking crisis

Japanese target M&A ($bn) Financial target M&A ($bn) Financials as % of total

250 100%
250 100%
90%
90%
200 80%
200 80%
70%
70%
150 60%
150 60%
50%
50%
100 40%
100 40%
30%
30%
50 20%
50 20%

10%
10%

0 0%
0 0%
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
The cyclical nature of certain sectors has also had a profound impact on global M&A.
TMT at its height in 1999 accounted for over 55% of total M&A deal value while the last
peak of M&A in 2007, TMT deal value comprised of just 16% of total M&A. Financial
institutions have on the other hand peaked either prior or post the height of M&A in
1999 and again 2007.

In the US, TMT followed the global trend of peaking in the 1999 boom and then declining
in the last boom in 2007. Financial institutions appear to have no cyclical characteristics
and tend to be volatile in activity.
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 14

14 Winds of change

5. Sector analysis
Exhibit 5.1 Exhibit 5.2

TMT acquisitions Financials acquisitions

Global M&A ($bn) TMT as % of total Global M&A ($bn) Financial as % of total
(000’) TMT targeted M&A ($bn) (000’s) Financial targeted M&A ($bn)
4,500 50% 4,500 30%
50%

4,000 45% 4,000 45%


25%
40% 40%
3,500 3,500

35% 35%
3,000 3,000 20%

30% 30%
2,500 2,500
25% 15%
25%
2,000 2,000
20% 20%

1,500 1,500 10%


15% 15%

1,000 1,000
10% 10%
5%
500 5% 500 5%

0 0% 0 0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

Source: Thomson Reuters Source: Thomson Reuters

Exhibit 5.3 Exhibit 5.4

TMT acquisitions Financials acquisitions

US targeted M&A ($bn) TMT as % of total US targeted M&A ($bn) Financial as % of total
(000’s) TMT targeted M&A ($bn) (000’s) Financial targeted M&A ($bn)
1,800 60%
50% 1,800 35%
50%

55%
1,600 45% 1,600 45%
30%
50%
40% 40%
1,400 1,400
45%
35% 25%
35%
1,200 40% 1,200

30%
35% 30%
1,000 1,000 20%

30%
25% 25%
800 800 15%
25%
20% 20%

600 20% 600


15% 15%
10%
15%
400 400
10% 10%
10%
5%
200 5% 200 5%
5%

0 0% 0 0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

Source: Thomson Reuters Source: Thomson Reuters


J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 15

The era of globalized M&A 15

In Europe TMT again peaked in 1999 and fell away again during the last upturn in 2007.
With lower debt to equity compared to other sectors, TMT is long overdue another round
of consolidation.

Exhibit 5.5 Exhibit 5.6

TMT acquisitions Financials acquisitions


EU targeted M&A ($bn) TMT as % of total EU targeted M&A ($bn) Financial as % of total
(000’s) TMT targeted M&A ($bn) (000’s) Financial targeted M&A ($bn)
1,800 40%
50% 1,800 60%
50%

55%
1,600 45% 1,600 45%
35%
50%
40% 40%
1,400 1,400
30% 45%
35% 35%
1,200 1,200 40%
25%
30% 30%
35%
1,000 1,000
20%
25% 30%
25%
800 800
25%
20% 20%
15%
600 600 20%
15% 15%
10% 15%
400 400
10% 10%
10%
200 5% 200
5% 5%
5%

0 0% 0 0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

Source: Thomson Reuters Source: Thomson Reuters

Global healthcare has experienced 4 cycles of increased M&A activity, the first in 1995, the
second in 1999, the third in 2003 and the last cycle started during the first quarter of 2009
and currently accounts for over 25% of global M&A. Utilities is not a cyclical sector with
sustained periods of activity since 1990 but especially from 1995 until the present day.

US healthcare activity has been limited to 3 very distinct spikes with the latter spike
forming part of the activity in the first quarter of 2009 and accounting for nearly 75% of
the total deal value.

Exhibit 5.7 Exhibit 5.8

Healthcare acquisitions Utilities acquisitions


Global M&A ($bn) Healthcare as % of total Global M&A ($bn) Utilities as % of total
(000’s) Healthcare targeted M&A ($bn) (000’s) Utilities targeted M&A ($bn)
4,500 20%
50% 4,500 9%
50%

4,000 18%
45% 4,000 45%
8%

16%
40% 40%
3,500 3,500 7%

14%
35% 35%
3,000 3,000 6%
12%
30% 30%
2,500 2,500 5%
10%
25% 25%
2,000 2,000 4%
8%
20% 20%
1,500 1,500 3%
6%
15% 15%

1,000 1,000 2%
4%
10% 10%

500 5%
2% 500 1%
5%

0 0% 0 0%
0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

Source: Thomson Reuters Source: Thomson Reuters


J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 16

16 Winds of change

Exhibit 5.9 Exhibit 5.10

Healthcare acquisitions Utilities acquisitions


US targeted M&A ($bn) Healthcare as % of total US targeted M&A ($bn) Utilities as % of total
(000’s) Healthcare targeted M&A ($bn) (000’s) Utilities targeted M&A ($bn)
1,800 60%
50% 1,800 7%

1,600 45% 1,600


6%
50%
40%
1,400 1,400
5%
35%
1,200 40% 1,200

30%
1,000 4%
1,000
30%
25%
800 800 3%
20%

600 20% 600


15% 2%

400 400
10%
10%
1%
200 5% 200

0 0% 0 0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

Source: Thomson Reuters Source: Thomson Reuters

Exhibit 5.11 Exhibit 5.12

Healthcare acquisitions Utilities acquisitions


EU targeted M&A ($bn) Healthcare as % of total EU targeted M&A ($bn) Utilities as % of total
(000’s) Healthcare targeted M&A ($bn) (000’s) Utilities targeted M&A ($bn)
1,800 14%
50% 1,800 25%
10%

1,600 45% 1,600 9%


12%
40% 20%
8%
1,400 1,400
10%
35% 7%
1,200 1,200

30% 6%
15%
1,000 8% 1,000
25% 5%
800 6% 800
20% 10%
4%

600 600
15%
4% 3%

400 400
10% 2%
5%
2%
200 5% 200 1%

0 0% 0 0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

Source: Thomson Reuters Source: Thomson Reuters


J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 17

The era of globalized M&A 17

6. Private equity fund raising


Despite the fact that the PE buyout market was adversely impacted immediately as a
consequence post June 30 2007, buyouts dropped away as the credit markets contracted
and financing became difficult and expensive, however 2007 and 2008 were effectively
the two largest years in history for PE and buyout fundraising in terms of capital
committed to funds. Given that investors in PE are aware that PE investment is a
comparatively long term game the shock to PE investment activity did not impact fund
investment returns with anything like the same ferocity or velocity. Due to the cumulative
effect of the PE boom in subsequent years of the decade PE firms were still delivering
market leading returns post credit crunch, the driving force behind them being able to
attract unprecedented levels of fund raising.

These conditions now leave PE firms in an extraordinary situation whereby they have
never had more ‘dry powder’ (unspent fund commitments) yet have barely ever had a
more challenging environment in which to try to invest and realise investments with the
virtual disappearance of the IPO market, sales to strategic buyers hampered by uncertain
markets and low M&A activity and little access to cheap and easy leverage, the tenant on
which the buyout business model has thrived.

The bulk of PE fundraising in the years leading up to, and subsequent to, the credit crisis,
is buyout fundraising. In the dot.com boom, however, which peaked in 2000, the same
year that the highest number of new funds have ever been raised, the majority of new
funds were VC, and not buyouts. This was likely due to the desire to capitalize and invest
in dot.com start ups.

PE has, for a number of years, been considered to be a driver of M&A activity and this
seems to be true in a negative as well as a positive sense as it is clear that PE fundraising
strategy manifestly reflects the mistakes and does not predict or escape from the
downturns in the market, but rather demonstrates clearly an over exuberance in the
boom market rather than any prophetic insight prior to the subsequent busts.

What is clear is that if anything like favourable conditions return to the credit markets
there is all likelihood that PE activity will return as quickly as it disappeared as PE firms
are finally able to spend the huge amounts of money for which they have commitments,
and once again contribute something akin to the 20-25% of total M&A volume as per the
years preceding the credit crisis. If they can take advantage of depressed exit multiples in
the meantime and acquire assets at favourable values they may be able to offset
somewhat the lack of leverage available which previously allowed for such successful
returns.
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 18

18 Winds of change

Exhibit 6.1

Private equity fund raising

All private equity fund raising ($bn) No. of PE funds


Buyout & Mezzanine ($bn) No. of Buyout & Mezzanine funds
(000’s) Venture capital ($bn) No. of VC funds
600 2,500

500
2,000

400
1,500

300

1,000
200

500
100

0 0
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009¹
Source: Thomson Reuters

Historical volumes of syndicated loans and leveraged loans illustrate the growing
importance and availability of this asset class as a financing instrument for corporations.
Barely affected during the previous M&A downturn (2001-2002) syndicated loans
issuance grew for 5 consecutive years fuelled by the even faster growing leverage
market culminated in 2007, just before the credit crisis.

Exhibit 6.2

Leveraged loans issuance

Global Syndicated loans ($bn) Leveraged loans ($bn) Leveraged loans as % of total
(000’s)
5,000
5,000 50%
40%

4,500
4,500 45%
35%
4,000
4,000 40%
30%
3,500
3,500 35%

3,000 25%
30%
3,000

2,500 25%
20%

2,000 20%
15%
1,500 15%
10%
1,000 10%
5%
500 5%

0 0%
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 19

The era of globalized M&A 19

7. Summary observations
Several important trends have emerged during the globalization of M&A:

• The correlation between the equity markets and M&A is self-evident. When the stock
markets rally, it is inevitable that M&A activity increases in line with the pace of the
equity markets

• Bubbles are nearly always prevalent during peak M&A. We have seen this in the
Japanese banking crisis which saw inflated real estate valuations. The dot.com bubble
of 1999 and more recently the leverage and real estate bubble in 2007 have all fuelled
M&A directly and indirectly

• We should expect to see further M&A activity in sectors like healthcare and TMT which
appear to consolidate during downturns

• During the dot.com cycle, M&A contracted for approximately 8 quarters before M&A
rebounded. The credit crunch cycle is so far through 7 quarters of contraction which
could see total M&A bottom out during the second quarter of 2009

• Cross-border M&A trends track those of total M&A trends

• In M&A cross-border activity tends to outgrow or decline at a faster rate than the
general trends

• M&A is confidence-driven rather than opportunity driven as demonstrated by the surge


and decline in activity relative to the broader macroeconomic environment

• The percentage of cross-border M&A activity has been demonstrably high (above 20%)
for the last two decades

• Western Europe is the primary driver of cross-border activity. US targeted cross-border


activity disproportionately deteriorates during downturns. As it stands US targeted
activity accounts for only 10% of global cross-border activity, a level not seen since 1992

• Emerging markets demonstrates growing maturity and currently outpaces the US


market both in terms of target and acquiror cross-border activity

• In real terms the most recent boom and bust in M&A was not as high as the previous
dot.com boom as a percentage of global GDP

• As expected the consideration of choice in the lead up to the dot.com bubble was in the
form of all share deals whereas the leverage bubble was driven by cash only deals

• The current high premiums are artificially high due in part to stock undervaluation

• In 2000, TMT acquisitions accounted for up to 45% of all M&A activity. In 2006 financial
sponsors accounted for up to 20% of total M&A, demonstrating the two drivers of the
last two M&A cycles

• The financial crisis in Japan in the late nineties led to rapid financial consolidation
which culminated in financial targeted M&A comprising 70% of the total Japanese M&A
market in 1999

• Despite the fact that the PE buyout market was adversely impacted as a consequence
of post June 30 2007, in fact 2007 and 2008 were effectively the two largest years in
history for PE and buyout fundraising in terms of capital committed to funds
J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 20
J5081 M&A Quarter Review v3.qxd:Layout 1 11/6/09 13:36 Page 5

Disclaimer

Note: The information contained herein is based solely upon


publicly available information, including information
provided by Thomson Reuters. All market statistics are
based on deals announced through 01/01/1990 with data
sourced on 31/05/2009. In contested transactions, only the
highest offer is counted. Partial purchases are included if
they exceed $100mm or involved an advisor. Data can
change from quarter to quarter as a result of updates or
reclassifications made by Thomson Reuters. Numbers in
various tables may not sum due to rounding. Distribution of
this report is permitted to J.P. Morgan’s Investment Banking
clients, subject to approval by J.P. Morgan. This edition of
the M&A Review reflects recent changes to achieve global
standardization in our commentary. The most important of
these is a shift to use of “target volume” rather than
“involved volume” for European M&A. Although many track
total European M&A activity by combining European target
volume with European acquisition volume of non-European
targets (“European involved volume”), this counts
non-European target deals twice in any global analysis, i.e.,
in European volume and in the volume of the target region
which, for Europeans, is primarily the United States, but also
Canada and Latin America. With the “target” approach, all
region totals add to the global total, but European volumes
appear lower in this report than in past editions due to this
change. We have also conformed our definitions of the TMT
and industrials sectors globally by moving aerospace volume
out of the technology sector (i.e., TMT) in the United States
and into the industrials sector. We have standardized our
analysis of premiums to measure the “one-day” announced
premium and the “one-month” premium in both Europe and
the United States. Throughout we use the “announced and
not withdrawn” classification of Thomson Reuters
Thomson Reuters makes no representation or warranty
regarding the accuracy or completeness of any information
provided in this report and any reliance you place on such
information will be at your sole risk. This report does not
constitute a recommendation to buy or sell securities of any
kind. In no event will Thomson Reuters or its third party
suppliers be liable for any damages of any kind, including
without limitation, direct or indirect, special, incidental, or
consequential damages, losses or expenses arising in
connection with your use of the report. You may not
distribute or sell this report to any third party without the
consent of Thomson Reuters

The following mergers and acquisitions analysis document is


a research initiative and collaboration between Thomson
Reuters and JP Morgan.

Copyright 2009 JPMorgan Chase & Co. All rights reserved.


J5081 M&A Quarter Review v2.qxd:Layout 1 11/6/09 13:14 Page 2