DealMarket Digest_Issue 34

DIGEST

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SEE WHAT’S NEW AND NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 34

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Successful Mergers and Matchmaking • Insead research on synergy and cash flow

What are the prospects for first time VC funds?

• Dealmarket Digest asks Preqin

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US Companies Top Acquirers in M&A Global Activity • Allen & Overy M&A Index

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Blackstone Acquires Shopping Centers for $1.43 billion KKR Tops Private‐Equity Dealmakers in 2011 • Preqin reveals names

Family Aims to Take Douglas Private • Apax and BC Partners Possible Co‐investors

Clean Energy Dealmakers Ranking 2011 • BNEF’s latest investment statistics

Digital Banking Hits a Tipping Point • Survey by PWC on e‐banking trends

Quote of the Week from Mark Pincus ‐ CEO Zynga

January 19, 2012

SUCCESSFUL MERGERS AND MATCHMAKING Synergy is a driver of M&A, but do synergies result in increased cash flows and new products? The answer is yes, if certain criteria are met, according to an Insead article. Recent research found that “mergers were most successful and resulted in improved profit margins, when a firm merged with a target that was similar to itself, but different enough from its rivals to differentiate its product offerings”. The measure of similarity is the “relatedness” of the two companies. What is remarkable about this research is that it analyzes text provided in SEC 10K filings. If companies use similar words to describe themselves, then chances are it is a good match.

The professor responsible for the research says that the researchers use similar technologies to those that underlie Match.com, an online dating platform, and Facebook, social networking. “If firms use similar words to describe their products, there is a good chance that the firms share similar vision and approach to doing business as well as having products that can be successfully integrated.

We score document similarity by just comparing the product descriptions that firms publish as part of their 10Ks at the Securities and Exchange Commission. What we are attempting to capture is whether there is sufficient complementarity in firms to make their merger or acquisition a success but enough differences from potential rival firms so that rival firms cannot replicate the benefits of the merger.”

The article provides two examples of successful mergers that generated greater cash flow and new products, the Disney‐Pixar merger and the General Dynamics‐Antheon merger and that met the criteria described above.

The method however does not go as far as saying it can predict the outcome of M&A. “Failure may be the result of intangible or human factors we cannot measure.

Mergers can be viewed like R&D which often times is not successful. However the gains from success can be substantial and firms may also lose if they do nothing and do not attempt to introduce new products both through M&A and also through R&D.”

WHAT ARE THE PROSPECTS FOR FIRST TIME VC FUNDS? Preqin Answers: Conditions for first‐time and emerging venture funds of all types coming to market are undoubtedly tough, with investor attitudes colored by the fact that recent venture capital fund median performance is lagging behind its historical heights and other private equity fund types.

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The fundraising market remains extremely competitive and so first‐time and emerging fund managers who want to be successful in the venture space need to target the most appropriate investors for their offering and be able to demonstrate strong qualities ‐ particularly a history of specific‐industry expertise and/or a novel and exciting investment approach – in order to encourage potential LPs that they can find and develop that ‘home run’ investment and generate attractive returns.

Despite fundraising conditions being depressed, there are still many successful managers who are able to attract large amounts of capital quickly and this trend will likely continue through 2012.

Investor appetite in the venture space remains, but LPs are now more cautious and discriminating in their fund selection.

US COMPANIES TOP ACQUIRERS IN M&A GLOBAL ACTIVITY

On Friday Allen & Overy published the highlights of its latest M&A analysis. The report discusses the extent to which countries have become active in each other’s markets as businesses continue to look abroad for new growth opportunities.

Despite Eurozone worries companies in around the world continue to make bolt‐on acquisitions and, for the right target, are prepared to make large scale acquisitions. “For well‐regarded companies buying a target which is a good strategic fit, debt finance is still available,” says A&O. Summary of Trends • The UK remains the most popular market for US companies, which made 54 acquisitions of UK assets worth USD 47,351 billion in 2011.

• Japan and China were amongst the most active countries. China is now ranked 6th most active cross‐border acquirer, up from 18th in 2007. China’s growth represents a 195% increase the number of outbound acquisitions since 2007. Japan has risen from 13th to 3rd, representing a 158% increase in volume of outbound M&A.

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• The UAE has slipped out of the world’s top 20 outbound acquirers since 2007, when it ranked 10th with 36 transactions worth USD 36.385 billion.

• Brazil, The Republic of Ireland and South Korea have all joined the top 20 outbound acquirers with 11, 12 and 16 outbound acquisitions respectively.

• A&O says that cash held on balance sheets in 2011 has been climbing for the past two years, 32% increase, because companies remain reluctant or unable to deploy capital for M&A.

BLACKSTONE ACQUIRES SHOPPING CENTERS FOR $1.43 BILLION Blackstone Group LP and DDR Corp. are teaming up to acquire 46 US shopping centers for USD 1.43 billion from a unit of Elbit Imaging Ltd., reports BW. The acquisition is third recent investment in discount retail real estate for Blackstone. It also acquired Kimco Realty Corp., and in June it acquired 585 malls from Australia’s Centro Properties Group for USD 9.2 billion. The Centro portfolio was renamed Brixmor Property Group Inc., reports BW.

KKR TOPS PRIVATE‐EQUITY DEAL‐ MAKERS IN 2011 As the final numbers come in for last year, it turns out that the volume of PE deals increased by 29 percent compared to the previous year to USD 448 billion. The growth is attributed to better access to credit following the financial crisis, according to a report by Bloomberg, citing Preqin data.

KKR topped the activity ranking by investing USD 18.8 billion in 44 deals. Second was Bain which deployed USD 15.3 billion across 33 transactions in 2011. KKR also executed the biggest private‐ equity deal of 2011 when it agreed to buy closely held Samson Investment Co., an Oklahoma‐based oil and gas producer, for USD7.2 billion.

Also top in deal making was London’s Apax, which invested USD 13.5 billion in 26 deals last year, while Blackstone deployed USD 11.7 billion in 39 deals.

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FAMILY AIMS TO TAKE DOUGLAS PRIVATE A large PE deal is unfolding in Germany with Douglas Holding, a fragrance and consumer products retailer. The company announced in a press release that the founding family, including CEO Henning Kreke, is teaming up with buyout firms with the aim of raising its stake in the company, which has a market value of about 1.2 billion euros. The Wall Street Journal reported that Kreke’s family had approached three buyout firms including Apax Partners and BC Partners to discuss possible plans to take Douglas private.

CLEAN ENERGY DEALMAKERS RANKING 2011

Global investment in clean energy technologies and services reached a record USD 260 billion in 2011, reports Forbes, citing data from BNEF. The graphic above shows the ranking of the top 20 venture capital and PE investors. In top spot is Terra Firma Capital Partners whose one deal, acquiring Rete Rinnovable Srl, an Italian solar project developer, put it in first place.

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Japan’s Innovation Network also did just one deal to make it into second spot, while California’s VantagePoint Capital Partners with ten deals totaling USD 517 million. Its two largest investments, both around USD200 million, were in BrightSourceEnergy, a California‐based company that develops, builds, owns, and operates large‐scale solar plants and Better Place, a California‐based electric vehicle charging infrastructure company, said BNEF. Deal making Category Top Syndicated Lender Top Sponsor Legal Advisor M&A Top Acquirer VC&PE Top Investor Top Investor by Number Deals Announced Acquisition Advisors Top M&A VCPE Financial Advisor Top M&A / VCPE Legal Advisor

Company NIBC (Netherlands) NRG Energy (US) Allen & Overy (UK) EDF (France) Terra Firma Capital Partners (UK) Kleiner Perkins Caufield & Byers (US) Credit Suisse (Switzerland)

We created a chart shown here from BNEF data to show the top ranking advisors and other deal categories for readers of Dealmarket Digest.

A White Paper with more details on the ranking is available here from BNEF.

Linklaters (UK)

DIGITAL BANKING HITS A TIPPING POINT Since readers of Dealmarket Digest are already early adopters of online platforms and services, we chose to digest a report about how banking is following that trend too. PWC says in a report published this week that digital banking is set to overtake branch networks as the main way customers interact with their bank by 2015. The report finds that banks are “missing a vital new source of revenue growth as they have been too slow to respond to the digital innovations that have radically changed business models and redefined customer experience”. And they are doing it in the face of strong demand for digital banking products from consumers and the fact they are willing to pay for these.

PwC conducted research with over 3,000 banking customers across nine developed and emerging markets and found that most consumers are willing to pay up to GBP 10 a month for digital banking services if they believe they offer convenience and value.

The research reveals that there is customer demand for innovative digital offerings such as social media notifications, an electronic wallet for loyalty cards and financial tools provided by banks and that these are the products consumers are most willing to pay for selected.

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Survey Findings • In the UK, almost two thirds (65%) of respondents said they are willing to pay just over £4 a month for their bank to store loyalty card information and convert accumulated points into cash. This amounts to an annual fee income for banks of approximately GBP 50 per customer.

• Online and mobile channels are increasingly used by consumers to access financial products. 69% of those surveyed said they currently use the internet to purchase financial products.

• Some 33% use mobile to purchase financial products, but mobile banking is expected to follow a similar usage curve to internet banking, with China, India and the United Arab Emirates currently leading its adoption.

• Generation Y leads the way, with 67% of respondents saying they currently use or are considering using mobile channels for banking.

The report suggests that new entrants, such as mobile payment providers, will continue to act as a catalyst for change in the retail banking space. Dealmarket Digest checked out the trend in the news sources and found some examples. Just this week alone, India’s ICICI bank announced that it is offering access to account information via Facebook, as reported by Bizmology.

And in Turkey Ödeme, a mobile payments innovator, raised capital from a new UK‐based PE fund called Mediterra Capital Partners, which acquired a majority stake, according to AltAssets. The Turkish company enables users to make payments via mobile phones, credit cards or pre‐paid game cards. The Mikro Ödeme platform is free of charge for users.

QUOTE OF THE WEEK We've never tried to time the markets, so we weren't trying to time the markets. We were trying to go public at the right point in our company growth, and we thought that was the right point.

Who said it: Mark Pincus, CEO Zynga, in his first post‐IPO interview In Context: Pincus is responding to a comment by the journalist pointing out that Zynga's stock price is still below its IPO price, asking the question, Did the company go public at the wrong time? Pincus pointed out that the companies aimed to raise a billion dollars and to acquire some “great” long‐term investors and it succeeded in doing that. Zynga makes apps for Facebook and is best known for FarmVille. Image Source: OReilly Media clip Where we found it: WSJ

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The Dealmarket Digest empowers members of Dealmarket by providing up‐to‐date and high‐quality content. Each week our in‐house editor sifts through scores of industry and academic sources to find the most noteworthy news items, scoping trends and currents events in the global private equity sector. The links to the sources are provided, as well as an editorialized abstract that discusses the significance of the articles selected. It is a free service that embodies the values of the Dealmarket platform delivers: Professional, Accessible, Transparent, Simple, Efficient, Effective, and Global.

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Editor: Valerie Thompson, Zurich

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