Mergers and Acquisitions

• The M&A market continued to exhibit positive momentum in the first half of 2011 as both the number of deals and average deal size posted significant TTM increases of 14.6% and 20.2%, respectively.
• Valuation multiples also increased across all size ranges except for deals under $25 million. Multiple expansion was driven not only by continued robust strategic buyer participation but also by continued, albeit measured, improvement in capital market conditions that enabled financial buyers to employ more leverage in capital structures and, as a result, pay higher prices while maintaining expected return levels.
• Overall, quality companies saw strong interest from potential buyers while struggling or “story” companies are seeing tepid interest from buyers as lenders continue to restrict credit to troubled situations.
• We are conditionally optimistic with respect to M&A activity for the balance of 2011. We are seeing strong interest from sellers, private equity firm “overhang“ remains substantial, strategic buyers have accumulated significant levels of excess cash, and credit markets are conducive to supporting transactions. However, the budget drama currently being played out in Washington, downward revisions to GDP, sluggish consumer spending, stubbornly high unemployment, and international economic concerns could combine to derail deal activity.

Equity Markets

• Through August 31, 2011, all major stock indices fell with the Dow Jones Industrial Average down .5% and the S&P 500 and NASDAQ both down 4.2%.
• As the debt ceiling / budget impasse became more intense, equity markets exhibited increasing volatility. This volatile trend was actually exacerbated when Washington reached an agreement on the debt ceiling and the U.S. was downgraded by S&P.
• It would appear that volatility and directional uncertainty will continue in the second half of 2011 as markets endeavor to sort out the impact of political, domestic economic and international economic factors.

Economic Climate

• Political uncertainty, continued high unemployment, sluggish economic growth, and high deficits have begun to affect equity markets although to date, these factors have not migrated to credit markets.
• Real GDP increased at an annual rate of 1.3% in the second quarter of 2011, up from 0.4% in the first quarter of 2011.
• August 2011 unemployment remained at 9.1%, matching July 2011 levels. The unemployment rate has exceeded 9% in six of eight months thus far in 2011.

Financing Environment

• Senior debt issuance continues to show growth in 2011.
• Companies have seen fairly consistent credit metrics throughout the first half of 2011 with larger middle market borrowers (EBITDA over $15 million) benefitting the most from increased senior debt leverage multiples.
• The mezzanine market has an ample supply of investable funds with strong competition among mezzanine investors for quality deals within market leverage parameters. Market leverage parameters in the mezzanine market also vary by size of company. “Outside of the box” structures continue to find dramatically reduced levels of interest from investors.

Deal Statistics

• Domestic M&A activity in the last 12 months improved substantially versus the comparable period of 2010. The market saw particularly strong improvement in the number and aggregate value of disclosed deals above $10.0 million. We are conditionally optimistic with respect to M&A activity for the balance of 2011 as many financial and strategic buyers have accumulated significant levels of cash and credit markets are conducive to financing transactions within reasonable parameters.

Political and economic uncertainty, both domestic and international, could negatively affect the deal environment. However, except for a recent spike in equity market volatility, we do not see evidence of these considerations weighing down the transaction market.