Transcript Document

A Perspective on Deals in 2014
26th Annual Tulane Corporate Law Institute
Goldman, Sachs & Co.
March 2014
This presentation has been prepared by the Investment Banking Division of Goldman Sachs and is not a product of
Goldman Sachs Global Investment Research. It should not be used as a basis for trading in the securities or loans of any
companies named herein or for any other investment decision. This presentation does not constitute an offer to sell the
securities or loans of any companies named herein or a solicitation of proxies or votes and should not be construed as
consisting of investment advice.
This presentation has been prepared and is based on information obtained by us from publicly available sources. In
preparing this presentation, we have applied certain assumptions, have performed no due diligence, and have relied upon
and assumed, without assuming any responsibility for independent verification, the accuracy and completeness of all
financial, legal, regulatory, tax, accounting and other information provided to, discussed with or reviewed by us. We
assume no liability for any such information. This presentation is necessarily based on economic, monetary, market and
other conditions as in effect on, and the information made available to us as of, the dates indicated herein and we assume
no responsibility for updating or revising this presentation. Goldman Sachs does not provide accounting, tax, or legal
advice.
2
Agenda
I.
The Backdrop
II.
Is the Market Getting Better?
III.
Okay, But We’ve Seen This Before…
IV.
Why? What Has Changed?
V.
Is the Recovery Durable?
3
The Backdrop
Global M&A Volume ($bn)
Global M&A Volumes Have Not Grown Since the
Financial Crisis…
CAGR
(2009-2013)
= 4.8%
$1,999
2009
$2,432
2010
$2,519
CAGR
(2010-2013)
$2,549
= (0.3)%
$2,409
2011
2012
2013
Source: Thomson Reuters
5
… And M&A Remains Low as a Proportion of
Global Equity Market Cap
8.5%
7.9%
7.4%
6.5%
6.2%
Average = 6.1%
6.0%
5.6%
5.5%
5.5%
5.2%
4.9%
5.4%
4.3%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
4.6%
“Lost”
M&A
$908bn
2014 *
Source: Thomson Reuters, Factset
* 2014 volume is annualized as of 20 March 2014. Excludes Charter’s bid for Time Warner Cable and Numericable’s bid for SFR.
6
U.S. M&A Has Been the Biggest Contributor to
Volume and Growth…
2009-2013
CAGR
Announced M&A Volume ($bn)
$2 432
$1 999
$2 519
$2 549
$805
$770
$751
$2 409
$726
3.7%
$846
$641
0.9%
$964
$933
$1 042
8.4%
2011
2012
2013
$929
$626
$618
$716
$754
$787
2009
2010
US M&A Volume
EMEA
Rest of World
Source: Thomson Reuters
7
… Driven By a Faster Recovery of U.S. GDP and
Strong Fixed Investment…
% Change in GDP (YoY)
4,0 %
2,5 % 2,0 %
2,0 %
2,8 %
3,2 %
2,8 %
1,9 %
1,8 % 1,7 %
1,8 %
1,6 %
0,1 %
0,0 %
(0,3)%
(2,0)%
(4,0)%
(2,8)%
(4,2)%
(6,0)%
2009
2010
2011
2012
2013
2014
2015E
% Change in Fixed Investment (YoY)
10,0 %
8,3 %
6,2 %
5,0 %
1,5 %
0,1 %
7,9 %
6,4 %
4,3 %
2,7 %
1,6 %
2,9 %
0,0 %
(5,0)%
(2,7)%
(2,3)%
(10,0)%
(15,0)%
(20,0)%
(12,5)%
(16,7)%
2009
2010
2011
2012
USA
2013
2014
2015E
Europe
Source: GS Research; Region Aggregate Nominal GDP (PPP) Weighted
8
European Corporates Still Rely Heavily on Bank
Funding
100 %
90 %
80 %
70 %
60 %
50 %
40 %
30 %
20 %
10 %
0%
France
Portugal
Germany
Bond-Market Funding
Italy
Greece
Spain
US
Bank Loans
9
… And European Banks Are Still in Recovery Mode
180%
S&P 500 Banks Index
79.1%
Stoxx Europe 600 Banks
160%
Indexed Price
140%
120%
100%
(2.5)%
80%
60%
40%
ноя-2009
ноя-2010
ноя-2011
дек-2012
Daily from 02-Nov-2009 to 24-Mar-2014
дек-2013
Source: Bloomberg
10
Cross-Border M&A Has Been a Remarkably
Stable Contributor to M&A Activity
Cross-Border M&A by Industry – 2009-2014 YTD
Strategic Cross-Border M&A
​Healthcare
9%
35%
$765
31%
33%
33%
$686
16%
​Natural
Resources
32%
​Financial Institutions
10%
$638
​Consumer
Retail
13%
28%
25% 40%
34%
36%
36%
$404
Cross-Border M&A by Industry – 2013-2014 YTD
84%
47%
60%
64%
​ inancial
F
Institutions
9%
66%
64%
53%
2009
​Technology,
Media &
​Industrial Telecom
14%
17%
$551
% of Total M&A
Announced M&A Volume ($bn)
$693
​Real Estate
5%
​Real Estate
8%
​Healthcare
12%
2010
Cross-Region
2011
2012
Intra-Region
2013
2014*
​Consumer Retail
12%
​Technology,
Media &
Telecom
22%
​Natural
Resources
21%
​Industrial
15%
% of Total M&A
Source: Thomson Reuters. 2014 YTD as of 20 March 2014. Total volume excludes Charter’s bid for Time Warner Cable and Numericable’s bid for
SFR. Analysis is for deals >$250 million.
* 2014 volume is annualized as of run rate on 20 March 2014.
11
Applied Materials’ Merger With Tokyo Electron
September 24, 2013
Applied Materials
​Other
11%
​Japan
1%
Tokyo Electron
​Japan
1%
​Other
9%
$70
$20
​US
88%
​ S
U
90%
​Japan
54%
$20,17
​US
22%
​US
27%
$21
​Japan
55%
​Other
19%
​Other
23%
$58,99
$60
$19
+13%
+9%
$18
$50
$17
$16
$15
сен-2013
дек-2013
мар-2014
$40
сен-2013
дек-2013
мар-2014
Source: Bloomberg, Thomson Reuters
12
M&A Mix by Industry
TMT and Natural Resources Are Going Through Significant Structural
Changes
2009-2012
2013-2014 YTD
​Healthcare
9%
​Real Estate
9%
​Healthcare
9%
​Natural Resources
29%
​Technology, Media &
Telecom
26%
​Industrial
10%
​Consumer Retail
10%
​Industrial
11%
​Financial
Institutions
9%
​Financial Institutions
16%
​Technology, Media
& Telecom
16%
​Consumer Retail
12%
​Natural Resources
20%
​Real Estate
15%
Source: Thomson Reuters. 2014 YTD as of 20 March 2014. Volume excludes Charter’s bid for Time Warner Cable and Numericable’s bid for SFR.
13
While Broad Financial Sponsor Activity is Growing,
“Pure” LBO Activity Remains at 5% of Volume
Financial Sponsors Activity (ex IPOs)
36%
43%
44%
49%
16%
12%
15%
$231
22%
17%
$170
44%
42%
14%
35%
48%
34%
42%
2009
2010
7%
2011
2012
2013
$134
6%
55%
$140
6%
$138
6%
5%
68%
79%
2%
$45
$38
28%
43%
25%
66%
47%
34%
Sponsor as Seller
2014
YTD
Secondary Sponsor Sales
Sponsor as Buyer
% of Total M&A
57%
% of Total M&A
20%
23%
25%
$176
26%
% of Total M&A
Announced M&A Volume ($bn)
$491
24%
$606
Announced M&A Volume ($bn)
$604
$576
LBO Activity
45%
64%
32%
21%
2009
36%
2010
2011
Public Company Target
2012
Other
2013
2014
YTD
% of Total M&A
Source: Thomson Reuters. 2014 YTD as of 20 March 2014. Total volume excludes Charter’s bid for Time Warner Cable and Numericable’s bid for SFR.
14
Divestitures and Spin-Offs Are Almost Half of M&A
Activity, Largely Driven by Activist Pressure…
Annual Divestiture Activity
Recent Significant Divestitures / Spin-offs
46%
Divestiture Volume ($bn)
$1,045
43%
$1,063
44%
$967
$913
$683
36%
35%
Divestitures as % of Total M&A
$1,177
34%
2009
2010
2011
Divestitures
2012
2013
2014*
% of Total M&A
Source: Thomson Reuters. 2014 YTD as of 20 March 2014. Total volume excludes Charter’s bid for Time Warner Cable and Numericable’s bid for SFR.
* 2014 volume is annualized as of run rate on 20 March 2014.
15
… Which Has Intensified as Their Funding Has
Grown
$93.1
$65.5
$50.9
AUM ($billion)
$46.8
$36.2
2009
2010
2011
2012
2013
Source: HFR Global Hedge Fund Industry Report
16
Activism May Be the New Form of Hostile M&A
600%
173
500%
Indexed Value
400%
300%
200%
$335
100%
$128
0%
26
-100%
2009
2010
2011
Global Hostile Volume ($bn)
2012
2013
2014 Annualized
Activism Situations (#)
Source: Thomson Reuters, Factset. 2014 is annualized based on totals as of 20 March 2014.
17
… Although Deal Jump Activity Has Been Active
Bidders
Year
Target
Initial
Topping
Jurisdiction
Industry
Amt
($bn)
Winning
Bidder
2014 Time Warner Cable
Charter Communications Comcast Corp
US
Media
$70.7
Pending
2012 Sprint Nextel
Softbank
DISH Network
US
Telecom
37.8
Initial
2013 Dell
Silver Lake,
Management
Blackstone /
Carl Icahn
US
Technology
22.9
Initial
2014 SFR (Vivendi)
Bouygues Telecom
Numericable Gp
Europe
Telecom
18.1
Pending
2012 Clearwire
Sprint Nextel
DISH Network
US
Telecom
9.9
Initial
2013 Tele2 Russia Holding
VTB
A1 Investment /
Investor Group
Europe
Telecom
4.2
Initial
Commonwealth Ppty
Office Fund
GPT
DEXUS Ppty, CPPIB
Australia
Real Estate
3.5
Topping
2013 Rede Energia
COPEL, Energisa
Energisa
Latin America
Nat Res
2.0
Initial
2014 Amcol International
Imerys
Minerals Technologies
US
Nat Res
1.7
Topping
Sinochem
BC-10 Petroleo Ltda
Latin America
Nat Res
1.5
Topping
US
Retail
1.5
Pac-Man
Successful
2013
2013
Block BC-10, Parque
das Conchas
2013 The Men’s Wearhouse Jos A Bank Clothiers
Total
N/A
$173.8
Source: Thomson Reuters
18
Is the Market Getting Better?
M&A Volumes Have Improved over the Last
Three Quarters…
$847
$711
$671
Global M&A Volume ($bn)
$647
$566
$490
Q1 12
Q2 12
Q3 12
Q4 12
$502
$525
Q1 13
Q2 13
$684*
$599
Q3 13
Q4 13
Q1 14
* Estimated quarterly total for Q1 2014 based on volumes as of 20 March 2014.
Source: Thomson Reuters. Global volume excludes Charter’s bid for Time Warner Cable and Numericable’s bid for SFR. 2014 YTD as of 20
March 2014.
20
…With 2014 M&A Volumes Outpacing the Same
Period In the Prior Two Years…
$641
Global M&A Volume ($bn)
$599
$457
$429
2009 YTD
$420
2010 YTD
2011 YTD
2012 YTD
$439
2013 YTD
2014 YTD
Source: Thomson Reuters. 2014 as of March 20, 2014. Excludes Charter’s bid for Time Warner Cable and Numericable’s bid for SFR.
21
Significant Year on Year Gains 2013-2014
Global
U.S. Only
YTD
YTD
($ in billions)
Total M&A Volume *,**
2014
2013
% change y-o-y
($ in billions)
Total M&A Volume *
2014
$223
Strategic Cross-Border
74
19
Divestitures & Spinoffs
75
81
101
Hostile M&A
69
28
148
(41)
LBO
30
60
(50)
$458
Strategic Cross-Border
223
107
108
Divestitures & Spinoffs **
218
201
8
Hostile M&A
73
36
LBO
43
73
36 %
2014
2013
% change y-o-y
208
155
$1bn *,**
111
$5bn *,**
$10bn *,**
$500mm
32 %
280
(8)
YTD
YTD
*,**
% change y-o-y
$295
$623
Number of Deals over:
2013
Number of Deals over:
*
2014
2013
% change y-o-y
83
67
24 %
$1bn *
47
38
24
129
$5bn *
6
6
0
100
$10bn *
4
4
0
34 %
$500mm
82
35
16
7
8
4
Source: Thomson Reuters, as of March 25.
* 2014 YTD volume excludes Charter’s bid for Time Warner Cable ($62.6 billion)
** 2014 YTD volume excludes Numericable’s bid for SFR ($16.3 billion)
22
A Shift from Tactical M&A to Strategic M&A…
2013
Financing / "Clean-Up" Transaction
Acquiror
Target
Size ($bn)
Technology,
Media &
Telecom
Consumer /
Retail
Healthcare
2014
Strategic Transaction
Acquiror
Target
Size ($bn)
Time Warner
$19.3 Comcast
$70.7
Cable
Investor Group
Dell
Verizon
Communications
Verizon Wireless
Comcast
NBC Universal
Investor Group
HJ Heinz
Investor Group
Neiman Marcus
Thermo Fisher
Scientific
Valeant
Pharmaceuticals
Life
Technologies
Bausch + Lomb
11.6 McKesson
Celesio
Fiat
Chrysler
$4.4 AMEC
Foster Wheeler
Koch Industries
Molex
130.3 Facebook
WhatsApp
19.5
14.7
$27.3 Suntory
6.0 AB Acquisitions
$15.4 Actavis plc
Beam
Safeway
Forest Labs
$15.7
9.2
$23.3
7.0
$2.8
Industrials
6.7 Verso Paper
NewPage
4.3
Source: Thomson Reuters
23
… Which is A Marked Shift in Tone
5%
% of $ Volume of $1bn+ Deals
17%
8%
3%
2%
1%
1%
27%
2%
5%
13%
9%
23%
6%
2%
8%
11%
5%
2%
10%
29%
2%
3%
2%
5%
10%
2%
39%
24%
74%
52%
54%
59%
42%
2009
2010
Corporate / Corporate
Public to Private
2011
2012
Divestiture - Corporate Buyer
Spinoff
42%
2013
2014
Divestiture - LBO Buyer
Other
Source: Thomson Reuters. U.S. targeted deals >$1 billion. Other includes negotiated share repurchases and rescues. Analysis for 2014 as of 20
March 2014.
24
Corporate Leaders are More Confident…
65
60
55
Above 50 = Positive
50
Below 50 = Negative
45
40
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013
CEO Confidence
Source: Factset
25
…The Impact of Share Buybacks is Less
Pronounced…
6.0%
S&P 500 Trailing 12-month Yield
5.0%
4.0%
3.0%
2.8%
Buyback Yield
2.2%
2.0%
1.0%
0%
1992
Dividend Yield
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Note: Buyback yield is defined as shares repurchased divided by shares outstanding at the beginning of the period.
Source: GS Research
26
As Interest Rates Rise, Companies Are
Accelerating M&A Projects
$250
14%
$200
12%
10%
$150
8%
$100
6%
4%
US Announced M&A Volume ($bn)
10 Year US Treasury Rate (Constant Maturity)
16%
$50
2%
0%
янв-1983
$0
янв-1987
янв-1991
янв-1995
10Y US Treasury Rate
янв-1999
янв-2003
янв-2007
янв-2011
US M&A Volume ($bn 3mo Moving Avg.)
Source: Bloomberg and Thomson Reuters
27
Okay, But We’ve Seen This
Before…
… How Is the Market Different
Today?
There Has Been A Demonstrable Shift Toward
Shareholder Support of M&A…
One-Day Indexed Stock Price Reaction for Buyers
5,2 %
3,6 %
Indexed Stock
Price Reaction
3,1 %
1,8 %
0,3 %
(1,3)%
0,3 %
(1,9)%
One-Week Indexed Stock Price Reaction for Buyers
Indexed Stock
Price Reaction
3,6 %
4,7 %
4,1 %
2,0 %
0,0 %
(0,1)%
(1,7)%
2008
(1,7)%
2009
2010
2011
2012
2013 1H
2013 2H
2014 YTD
Note: Stock Price reaction relative to the S&P 500. Deals with transaction value greater than $1,000mm with a US public acquiror.
Source: Bloomberg, Thomson Reuters, Capital IQ
29
…Which Started to Accelerate in Q3 2013…
Proportion of Deals with Positive Acquiror One Day Stock Price Reactions
Proportion of Deals with Positive
One Day Stock Price Reactions
75,0 %
73,3 %
69,6 %
54,2 %
50,0 %
Q1 2013
Q2 2013
Q3 2013
Q4 2013
2014 YTD
Source: Bloomberg, Thomson Reuters, Capital IQ. Deals with transaction value greater than $1,000mm with a US public acquiror.
30
…Driven by Investor Sentiment Regarding EPS
Impact…
Dilutive Transactions1
2009-2010
2013-2014 YTD
Accretive Transactions2
2009-2010
Acquiror Stock Price Reaction One Day
Post-Announcement
6,0 %
2013-2014 YTD
5,4 %
4,0 %
2,0 %
0,7 %
0,2 %
0,0 %
(2,0)%
(4,0)%
(3,9)%
(6,0)%
Source: Thomson Reuters, Company disclosure. Deals with transaction value greater than $1,000mm with a US public acquiror.
¹ Includes deals announced as dilutive or accretive in years after FY1.
² Deals that are announced as immediately accretive or accretive in FY1.
31
…And Clear Evidence That Investors Believe in
the Value of EPS Accretion Again…
2009-2010
2013-2014 YTD
15%
30%
25%
R² = 0.1015
10%
R² = 0.428
20%
5%
0%
(40)%
(20)%
0%
(5)%
20%
FY2 Accretion
FY2 Accretion
15%
10%
5%
0%
(40)%
(20)%
0%
20%
40%
(10)%
(5)%
(15)%
Acquiror One Day Post Announcement
Share Price Reaction
(10)%
Acquiror One Day Post Announcement
Share Price Reaction
Source: Thomson Reuters, IBES, Company’s disclosures. Deals with transaction value greater than $1,000mm with a US public acquiror.
Notes: (1) FY2 accretion represents FY2 expected accretion disclosed by the acquiror when available, or is otherwise FY2 EPS IBES estimate immediately
post close (or 6 months post announcement when close has not yet occurred) relative to FY2 EPS IBES estimate immediately pre-announcement.
32
… Strong Projected Earnings Are Driving Stock
Prices Higher…
Key Drivers
Scientific Game
Corp / WMS
Industries
108.3%
5,5%
Salix
Pharmaceuticals
/ Santarus
Actavis /
Warner Chilcott
 Strong strategic rationale, significant revenue synergies
31,1%
15,0%
 Operational synergies and tax benefits totally more than
$400mm (~30% of target’s EBITDA)
30,0%
1,3%
23,2%
Packaging
Corp / Boise
 Strong consolidation rationale and significant synergies
(~35% of target’s EBITDA)
10,8%
20,0%
Advance Auto
Parts
 Strategic rationale and significant synergies (~70% of
target’s EBITDA)
16,6%
20,0%
Devon /
GeoSouthern
 Use of leverage to finance growth, market focus on
execution of forward growth plans
5,0%
0,0%
FY2 Accretion
 Significant cost and tax synergies (96% of target’s EBITDA)
17,5%
35,0%
100.0%
52,5%
120.0%
70,0%
Acquiror Stock Price Reaction at Announcement
Notes: (1) FY2 accretion represents FY2 expected accretion disclosed by the acquiror when available, or is otherwise FY2 EPS IBES estimate immediately post close (or 6 months
post announcement when close has not yet occurred) relative to FY2 EPS IBES estimate immediately pre-announcement.
(2) Stock price reaction one day post announcement is relative to the undisturbed date.
Source: Thomson Reuters, Capital IQ
33
… With Significant Underlying “Synergies”
Announced Synergies as a % of Combined EBITDA
122.0%
RF Micro Devices Inc /
TriQuint Semiconductor Inc
21,0%
63.0%
Actavis plc /
Forest Laboratories
5,0%
Minerals Technologies /
AMCOL International
20,2%
0,6%
108.3%
Martin Marietta Materials /
Texas Industries
3,9%
13,8%
Entegris Inc /
ATMI Inc
11,2%
Signet Jewelers Ltd /
Zale Corp
13,7%
Brookdale SeniorLiving Inc /
Emeritus Corp
13,1%
18,1%
1,5%
Kite Realty Group Trust /
Inland Diversified Real Estate Trust
Comcast Corp /
Time Warner Cable Inc
12,7%
3,4%
6,5%
(4,4)%
(10,0)%
Synergies as % of Combined EBITDA
5,0%
20,0%
35,0%
50,0%
100.0%
65,0%
150.0%
80,0%
Acquiror Stock Price Reaction At Announcement
Source: Bloomberg, company filings
34
… Illustrated by Signet’s Acquisition of Zale…
February 19, 2014
$100
$99,04
+25%
$95
Closing Price (USD)
+18%
$90
$85
 41% premium
 Investors expect deal to be dilutive due to
the high premium
 Announces synergies of $100mm,
representing 143% of the target’s EBITDA
$80
$75
18-фев-2014
25-фев-2014
4-мар-2014
Source: Bloomberg, company filings
35
However, Reaction Has Varied by Sector…
10.0%
9.3%
7.6%
8.0%
6.5% 6.4%
6.3%
Acquiror Stock Price Reaction
6.0%
4.0%
7.3%
5.4% 5.6%
5.1%
3.9%
3.0%
3.0%
2.7%
2.0%
2.0%
1.1%
0.5%
2.4%
0.7%
One Day
(2.0)%
One Week
One Month
(1.5)%
(1.6)%
(2.3)%
(4.0)%
Consumer Retail
Industrials
Healthcare
TMT
Real Estate
Energy and Power
Financials
Note: Includes deals from 2013 and 2014 YTD with a transaction value of $1,000mm or greater and a US public acquiror.
Source: Capital IQ, Thomson Reuters
36
And Investors Can Still Be Cautious
Energy XXI’s Acquisition of EPL Oil & Gas
March 12, 2014
$23,6
$23,2
 Energy XXI announces the acquisition of EPL Oil & Gas
for $2.2 bn
 Transaction was announced as additive to EPS
 Investors were expecting share repurchases
Acquiror Closing Price (USD)
$22,8
$22,42
$22,4
$22,0
$21,5
-7%
$21,1
10-мар-2014
12-мар-2014
14-мар-2014
16-мар-2014
Source: Bloomberg, company filings
37
Why? What Has Changed?
… Positive Investor Sentiment Has
Been the Missing Piece
There Are Fewer Opportunities to Invest in the
Public Markets…
4,450
4,401
# of Domestic Companies Listed on NYSE and
Nasdaq
4,400
4,350
4,300
4,279
4,250
4,200
4,180
4,171
4,150
4,102
4,100
4,050
4,000
3,950
2009
2010
2011
2012
2013
Source: World Federation of Exchanges
39
… And There Are Record Inflows Into Equity
Mutual Funds…
$ 500
$ 462
$ 405
$ 400
Net New Flows ($ bn)
$ 300
$ 200
$ 100
$ 44
$0
$(40)
$(100)
$(149)
$(200)
2009
2010
2011
2012
2013
Source: Strategic Insight Simfunds
40
… Which Is Helping the US and European IPO
Markets…
European IPOs Year to Date
45
16
27
8
6
4
$8.6
25
$6.8
30
20
$3.5
10
2
0
0
2012 YTD
2013 YTD
Deal Value ($bn)
2014 YTD
# of Deals
US IPOs by Industry (2013-2014 YTD)
$ Vol ($bn)
40
12
10
50
# of IPOs
$ Vol ($bn)
14
16
14
12
10
8
6
4
2
0
$13.7
30
50
40
30
19
15
20
$3.1
# of IPOs
US IPOs Year to Date
10
$0.7
0
2012 YTD
2013 YTD
Deal Value ($bn)
2014 YTD
# of Deals
European IPOs by Industry (2013-2014 YTD)
CRG, 4 %
CRG,
TMT, 7 %
14 %
TMT,
RE, 11 %
8%
RE, 13 %
NR, 14 %
IND, 5 %
FIG, 48 %
HC,
10 %
NR,
11%
FIG, 32 %
IND, 23 %
HC, 0 %
Source: Dealogic and Thomson Reuters; YTD as of March 19. Industry mix based on dollar volume.
41
Investors Are Turning to “Active” Funds Again…
Flows to Passive Funds ($bn)
$ 350.0
$ 250.0
$ 288.7
$ 225.2
$ 157.6
$ 168.1
$ 155.2
$ 150.0
$ 46.5
$ 50.0
$(50.0)
2009
2010
2011
2012
2013
2014 YTD
$(150.0)
$(250.0)
$(350.0)
Flows to Active Funds ($bn)
$ 350.0
$ 250.0
$ 180.0
$ 173.6
$ 150.0
$(0.1)
$ 50.0
$(50.0)
$(150.0)
$(250.0)
$(111.1)
$(197.8)
$(350.0)
2009
$(316.9)
2010
2011
2012
2013
2014 YTD
Source: Strategic Insight Simfunds, 2014 YTD as of Feb-14
42
… And “Active” Fund Managers Need to Create
Alpha and Generate Superior Returns
Cumulative Average Returns to Passive Funds (%)
30,0%
28,5%
25,0%
18,5%
20,0%
13,3%
15,0%
12,3%
10,0%
5,0%
1,4%
(4,9)%
0,0%
(5,0)%
2009
2010
2011
2012
2013
2014 YTD
Cumulative Average Returns to Active Funds (%)
30,0%
26,8%
25,0%
20,0%
15,3%
12,3%
15,0%
10,0%
11,5%
(1,5)%
5,0%
1,6%
0,0%
(5,0)%
2009
2010
2011
2012
2013
2014 YTD
Note: Returns are net of fees
Source: Strategic Insight Simfunds
43
Which is Driving Some Investors Into Deal
Stocks to Create Alpha…
Multiple to Acquiror Pre-Announcement 3 Month
ADTV
6,4x
5,4x
5,7x
3,5x
2010
2011
At Announcement
2013
2014 YTD
Source: Thomson Reuters, Bloomberg, Deals with transaction value of $2,000mm or greater, with a US public acquiror.
44
… And Some Targets To Trade Through Offer
Prices...
Acquiror One Week Gross Arbitrage Spread
AMCOL International / Minerals Technologies
8.4%
Sirius XM / Liberty Media
5.8%
Celesio AG / McKesson Corp
3.2%
ArthroCare Corp / Smith & Nephew
2.6%
CEC Entertainment / Apollo Global Management
0.3%
Santarus / Salix Pharmaceuticals
0.3%
Zale / Signet Jewelers
0.2%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Acquiror One Week Gross Arbitrage Spread
Source: Thomson Reuters, Capital IQ
45
… Until Investors Read the Filings
Smith & Nephew’s Acquisition of Arthrocare
3.0 %
6-Mar-2013: Arthro files a merger proxy
 Arthro shares trade as high as 2.5% above offer price
as investors expect competing bid(s)
 SEC filings indicate that the company ran a full process
with 8 other potential acquirors
 Stock price closes at offer price of $48.25 as
competing bid appears unlikely
Gross Spread
2.0 %
1.0 %
0.0 %
31-Jan
3-Feb
6-Feb
9-Feb
12-Feb
15-Feb
18-Feb
21-Feb
24-Feb
27-Feb
2-Mar
5-Mar
Source: Bloomberg, company filings
46
Is the Recovery Durable?
Investors Are Strongly Encouraging Companies
to Invest and Grow to Fill the Growth Gap
70%
66%
60%
Cumulative Growth Since
30-Sep-2011
50%
46%
40%
PE Multiple
Expansion
30%
20%
14%
10%
0%
(10)%
Sep-11
Feb-12
S&P 500 Increase
Jun-12
Oct-12
Feb-13
FY1 PE Increase
Jun-13
Oct-13
Mar-14
Earnings Increase
Source: Bloomberg
48
What if M&A Activity Approached Historic Levels
of Relative Volumes?
+38%
Announced M&A Volume ($bn)
+27%
+11%
$3,315
$655
$253
$2 407
2013 Global M&A
Additional M&A Volume if US Additional M&A Volume if Asia &
Returns to 10-year Average of
Europe Return to 10-year
Market Cap
Average
Proportion to US Volume
2013 + "Return to Normal"
Source: Thomson Reuters and FactSet
49
But… There Are Plenty of Headwinds
Shuanghui Intl / Smithfield Foods
Glencore Intl / Xstrata
Silver Lake / Dell
Shareholders
CITIC / AsiaInfo-Linkage
Regulators
McKesson / Celesio
Boise / PCA
Government
AT&T / T-Mobile
Shanghui Intl / Smithfield Foods
United Parcel Service / TNT Express
Coca-Cola / China Huiyuan Juice
Deutsche Borse / NYSE Euronext
BHP Billiton / Potash Corp
Anheuser-Busch InBev / Grupo Modelo
BAE Systems / EADS
AMR Corp / US Airways
50
The Long Term View of M&A Market is Volatile…
But Upward Trending
4,500
4,000
Global M&A Volume ($bn)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1985
1989
1993
1997
2001
2005
2009
2013
Source: Thomson Reuters
51