Themiddlemarket mergers and acquisitions december 2013

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ThemiDDlemarkeT.com

December 2013

Against the backdrop of department store consolidation, retailers and investors seek

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Contents December 2013 | Volume 48 | Number 12

Cover Story

Boutique Appeal Against the backdrop of department store consolidation, retailers and investors seek specialty shops

24

Watercooler

6 • Dealmaking Thrives at Midwest ACG • Spy Tech Pays Off for GTCR

Cover Photograph by Matt Greenslade / photo-nyc.com

8 3Qs W/ Stephen Gurgovits, Tecum Cap 10 • Quiksilver Deal Marks Extreme Debut • Struggling Salon Tries to Up Revenue 14 The M&A Scene: Midwest ACG Capital Connection

Feature

30 ACA Reshuffles the Deck 36 Buyer’s Guide

Experts Corner

40 GPs Eye New Ruling 42 Some LPs Find Less is More 46 People Moves

December 2013

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15 16 18 22

Columns

Private Equity Perspective The Buyside Finance Finesse Marketing Solutions

48 Deal Flow

MERGERS & ACQUISITIONS

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Inside Word December 2013 Editor-in-Chief Assistant Managing Editor Reporter Contributing Editor

-FBEJOH *OEJDBUPS

I

n this issue, we introduce the Mid-Market M&A Conditions Index (MACI), an important new barometer that measures dealmaking activity in the middle market. Created by Mergers & Acquisitions and published in partnership with PwC, the MACI is based on a monthly survey of executives at private equity firms, corporations, investment banks, law firms and other M&A advisory firms. Participants answer questions about various activities, including actionable leads seen, letters of intent or engagement signed, transactions closed and divestitures made. Other components of the survey cover deal quality, bidders, availability of financing and level of M&A staffing. The MACI is a diffusion index, with readings above 50 showing expansion and below 50 indicating contraction. At 57.7, the initial reading, based on polling dealmakers in October, showed a modest uptick in activity, a sign that may bode well for the middle market in the fourth quarter. We invite you to participate in the new research project. Please see our website, www.themiddlemarket.com, for details. One sector that has seen a lot of M&A throughout the year is retail. In this issue’s cover story by reporter Allison Collins, it’s specialty shops that are creating 80 new opportunities for well-known retailers. The Gap Inc.’s (NYSE: GAP) $130 million 50 purchase of the Intermix Holdco Inc. chain embodies the trend. 20 Also in this issue is contributing editor Danielle Fugazy’s look at new products and services, including newcomer Independent Studios, which produces video tours for companies seeking buyers. Also see assistant managing editor Anthony Noto’s The Buyside column, which showcases SFX Entertainment Inc. (Nasdaq: SFXE), an electronic-music festival producer that has been snatching up competitors. Finally, we give heartfelt congratulations to Harry Nikpour, who SourceMedia Inc. has promoted from publisher of Mergers & Acquisitions to vice president, capital markets; and we bid a fond farewell to Michael Stanton, former senior vice president, capital markets, who joined bond insurance company Build America Mutual as head of corporate strategy and communications in November.

Volume 48, Number 12 Mary Kathleen Flynn marykathleen.flynn@sourcemedia.com Anthony Noto anthony.noto@sourcemedia.com Allison Collins allison.collins@sourcemedia.com Danielle Fugazy dfugazy@fugazygroup.com

Group Editorial Director, Banking & Capital Markets Richard Melville richard.melville@sourcemedia.com VP, Capital Markets Harry Nikpour harry.nikpour@sourcemedia.com Director of Research

Dana Jackson dana.jackson@sourcemedia.com

Hope Fitch-Mickiewicz hope.fitchmickiewicz@sourcemedia.com Art Director Nikhil Mali nikhil.mali@sourcemedia.com General Manager, Digital Content Paul Vogel paul.vogel@sourcemedia.com Executive Director, Print & Digital Manufacturing & Distribution Michael Candemeres michael.candemeres@sourcemedia.com Production Manager Barbara W. Lau barbara.lau@sourcemedia.com Group Creative Director

Reprint Sales Marketing Director Marketing Coordinator

Joylyn Yaw joylyn.yaw@sourcemedia.com Jeannie Nguyen jeannie.nguyen@sourcemedia.com Ashley Tavoularis ashley.tavoularis@sourcemedia.com

CHIEF EXECUTIVE OFFICER Douglas J. Manoni CHIEF FINANCIAL OFFICER Rebecca Knoop EVP AND MANAGING DIRECTOR, BANKING AND CAPITAL MARKETS Karl Elken EVP AND CHIEF CONTENT OFFICER David Longobardi EVP, MARKETING SOLUTIONS Adam Reinebach CHIEF DIGITAL OFFICER Minna Rhee SVP, CONFERENCES John DelMauro SVP, TECHNOLOGY Aneel Tejwaney SVP, HUMAN RESOURCES AND OFFICE MANAGEMENT Ying Wong

Reproduction or electronic forwarding of this product is a violation of federal copyright law! Site licenses are available -- please call Customer Service (800) 221-1809 or custserv@sourcemedia.com Mergers & Acquisitions (ISSN 0026-0010) Vol. 48 No. 12, is published monthly by SourceMedia, Inc. One State Street Plaza, 27th Floor, New York, NY 10004. Telephone: (212) 803-8200. Customer Service: For subscriptions, renewals, address changes, or delivery service issues contact our Customer Service Department at (800) 221-1809 or (212) 803-8333; e-mail at custserv@sourcemedia.com; or send correspondence to Customer Service-Mergers & Acquisitions, SourceMedia, One State Street Plaza, 27th Floor, New York NY 10004. Periodicals postage paid at New York, NY, and additional mailing offices. Subscriptions: Yearly subscription is $695; add $175 for foreign airmail. Please address subscription questions to Customer Service. Postmaster: Send address changes to: Mergers & Acquisitions/ Source Media, Inc., One State Street Plaza, 27th Floor, New York, NY 10004. Advertising: For information, contact Harry Nikpour at (212) 803-8638 or harry.nikpour@sourcemedia.com. Reprints/Web Rights: To obtain Reprints/Web Rights Permission/PDF’s, contact Joylyn Yaw at (800) 267-3989 or (212) 803-8368; joylyn.yaw@ sourcemedia.com.

Mary Kathleen Flynn Editor-in-Chief Mergers & Acquisitions | TheMiddleMarket.com

MERGERS & ACQUISITIONS

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This publication is designed to provide accurate and authoritative information regarding the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering financial, legal, accounting, tax, or other professional service. Mergers & Acquisitions is a registered trademark used herein under license. © 2013 Mergers & Acquisitions and SourceMedia, Inc. All rights reserved.

December 2013

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What’s going on @

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Connect with us on LinkedIn at Mergers & Acquisitions— themiddlemarket.com. Like us on Facebook at Mergers & Acquisitions. And follow us on Twitter @themiddlemarket

December 2013

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Watercooler

Dealmaking Thrives in the Midwest

C

hicago is very active in dealmaking, says Leonard Tannenbaum, CEO of Fifth Street Finance Corp. (Nasdaq: FSC), at the 2013 Midwest ACG Capital Connection at McCormick Place in Chicago. “Although we’ve expanded our business, Chicago continues to account for 45 percent of our revenue, which is impressive,” Tannenbaum tells Mergers & Acquisitions. Much of Fifth Street’s business is driven by handful of well-known middle-market private equity firms that are headquartered in Chicago: Baird Capital, Beecken Petty O’Keefe & Co., Chicago Growth Partners, GTCR, Sterling Partners and Thoma Bravo. Chicago is also active in the lower middle market, reports Thomas Turmell, managing director of TMT Capital Partners LLC, a fundless sponsor and advisory firm located in Chicago. “The challenge this year has been deal flow,” says Turmell, who is president of ACG Chicago.

Looking ahead to 2014, Turmell is “cautiously optimistic.” One sign that he says bodes well for the Chicago area is the rise of “in-sourcing.” As interest in U.S. manufacturing increases, the Midwest in general and Chicago in particular are well-positioned with a solid infrastructure for manufacturing, says Turmell.

Spy Tech Pays Off for GTCR

D

efense spending has changed over the last few years, with money “coming out of war-based and troop-based areas and into intelligenceand signal-processing capabilities,” explains Craig Bondy, managing director of GTCR. The Chicago private equity firm recently agreed to sell portfolio company Six3 Systems Inc. to CACI International Inc. (NYSE: CACI), a provider of information products and services to government customers, for $820 million. Six3 provides services aimed at the intelligence community, the U.S. Department of Defense and civilian security agencies. The McLean, Va., company was formed in 2009 by GTCR and Robert Coleman, the former president of ManTech International Corp. (Nasdaq: MANT). Richard Daley “We partnered with Bob and brought in as CFO Jack Pearlstein, The local M&A trends are also reflected which was the fourth time we partnered in the fact that attendance at ACG Chicago with Jack,” recalls GTCR managing direcis up in 2013. About 1,150 people were tor Craig Bondy. (Pearlstein also served as in attendance. Speakers included: Richard an executive at GTCR-backed Solera HoldDaley, who served as Mayor of Chicago ings, DigitalNet Holdings and AppNet.) from 1989 to 2011 and who now serves as “Intelligence technology had gotten to counsel at Chicago law firm Katten Muchin the point where the ability to collect data Rosenman LLP; and former Chicago Blackwas exceeding the government’s ability to hawks Reginald John Kerr, Cliff Koroll and process it,” Bondy explains. “For example, Grant Michael Mulvey. there was a tremendous amount of video in—Mary Kathleen Flynn formation coming out of Iraq and Afghanistan from unmanned aerial vehicles, or drones, but there wasn’t the ability to process, analyze and do something with POLITE CONVERSATION that information. Similarly, there was a lot of forensic and biometric informa“You have to figure out if this team sitting across from tion coming off weapons and explosive you is still going to like you 10 years down the road if the devices that were not getting analyzed portfolio didn’t perform the way they hoped it would perfor their intelligence value, such as form. You have to figure out who these people are and how identifying who our adversaries were.” they’ll interact going forward.” Together, GTCR and Coleman set —Gijs van Thiel, managing partner at 747 Capital, on LPs investing in funds out to assemble a series of assets and

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December 2013

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Watercooler

3Qs With... Stephen Gurgovits Managing Partner, Tecum Capital

T

he Volcker Rule has spurred many a banker to begin sourcing deals in the lower end of the middle market, says Tecum Capital’s Stephen Gurgovits, a managing partner of the recently launched fund FNB Capital Partners. The Wexford, Pa.-based fund and small business investment company (SBIC) came about via the spin out of the merchant banking business of FNB Corp. (NYSE: FNB) —a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which caused American banks to exit their private equity operations. Since then, the lower middle market has proven to be ripe with opportunity, says Gurgovits—a message echoed by the Small Business Investor Alliance, a lobbying group for dealmakers that has been working with various banks, including FNB, for their SBIC plans. Has the fund been successful since the September launch? Yes. We closed our first transaction, a group of physical therapy centers, where we backed a sponsor’s acquisition with mezzanine and a substantial equity co-investment. We closed two more mezzanine debt transactions in the health care space within the first ten days of November. By the end of November, we will be closing another mezzanine and equity buyout transaction for a distribution business. We are also working on a food-rated business, a buyout we are backing with mezzanine and equity which we hope to close by year end. We remain hopeful that the pipeline will remain strong into early 2014. If this plan comes to fruition, we should have about 25 percent of our fund invested within the first nine months of launching operations. We would be thrilled with that kind of start. We’re looking to invest up to $10 million of equity or mezzanine capital per deal, particularly in companies with more than $2 million of Ebitda. What made the fundraising process such an arduous task? It took a total of two years, from 2011 – when FNB spun out its merchant banking business – to August 2013. But for a first-time fund, it’s not unusual. We caught the Small Business Administration (SBA) at a time of transition where they had internal changes. (SBA administrator Karen Mills announced that she was stepping down in February.) That slowed the process. There was also a seven month period where they had us under an intense due diligence process. We don’t necessarily view that as a bad thing. It does create a barrier for entry but you have to have a vetted team and track record to attain an SBIC license. Why did you keep the FNB name if the fund is independent? The firm actually had that debate and eventually both sides decided to capitalize on FNB’s halo effect. From 2006 to 2011, the FNB merchant banking business invested $65 million into 20 transactions even through the peak of the recession in 2009. That helped when approaching limited partners. We now have $175 million of deployable capital. —Anthony Noto

MERGERS & ACQUISITIONS

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technologies that they figured would be “very valuable in high-growth areas of the intelligence community.” Six3 also sought to take advantage of defense spending trends, as money was “coming out of warbased and troop-based areas and into intelligence- and signal-processing capabilities,” Bondy says. Over the next few years, Six3 made four acquisitions. In 2009, the company bought Harding Security Associates Inc., a provider of identity intelligence, forensics analysis and security services, and Bit Systems Inc., a company that specializes in signal processing systems and data analysis. In 2010, Six3 purchased Novii Design LLC, a provider of large-scale data fusion systems and cyber-security software for the intelligence community. In 2012, Six3 bought Ticom Geomatics, Inc., which specializes in geo-location and signal intelligence. Bringing the four companies together under one roof enables Six3 to work on bigger projects and compete for bigger government contracts. For example, Six3 participated in the National Counterterrorism Center’s investigation of the Boston Marathon bombing, in which investigators pieced together data from video, cell phones and financial systems to try to identify the terrorists. Now is the right time for Six3 to grow within a larger organization, such as CACI, Bondy says. “In a declining defense budget and during a government shutdown, our ability to sell Six3 is really a representation of the strategic significance this asset has in the industry. Six3 is unique in its capabilities and size. There aren’t any pure-play intelligence solutions out there, which is why it was attractive to a number of parties.” The deal is subject to regulatory approval. Bank of America Merrill Lynch (NYSE: BAC) is providing committed debt financing for the transaction. Led by Kevin Brunner and Peter Knickerbocker, the bank also acted as exclusive financial adviser to CACI. Squire Sanders (US) LLP provided legal December 2013

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advice to CACI with a team led by Robert Gregg and including Dan Berick, Carl Draucker, Michael Meissner and Barry Pupkin. Also providing financial legal advice to CACI was Latham & Watkins LLP, led by Scott Forchheimer. Providing legal advice to GTCR was Kirkland & Ellis, led by Mark Fennell. The Chertoff Group and CSP Associates served as strategic advisers to CACI. —Mary Kathleen Flynn

Quiksilver Deal Marks Debut of Extreme Holdings

E

xtreme Holdings Inc., a newly formed acquisition company controlled by San Francisco-based private equity firm Altamont Capital Partners,

Seattle-based Mervin designs and manufactures snowboarding products, including the Gnu and Lib Tech brands. The company will continue to manufacture snowboards for Quiksilver’s Roxy brand under a licensing agreement. Proceeds from the Mervin sale will be used to pay down Quiksilver’s credit facility as well as an expansion effort in emerging markets, the company says in a statement. The divestment is part of Quiksilver’s continuing plan to exit all non-core operations. In May, Quiksilver announced plans to focus solely on its three flagship brands: Quiksilver, Roxy and DC. The Huntington Beach, Calif.-based company intends to use proceeds from selling assets to reduce credit facilities and investment in emerging markets. Adam Filkin, Jim Bertram, Brent Smith, Sean Huss and Michael Doyle from Wil-

als are in agreement that limited partners (LPs) are now looking to put more money in fewer funds. “It’s a problem,” says Joe Burkhart, a managing director at Saratoga Investment Advisors, which oversees the portfolio of business development company Saratoga Investment Corp. (NYSE: SAR). The number of what Burkhart calls “zombie” firms is escalating. Analagous to the flesh-eating creatures who endanger the lives of humans in movies and video games, these PE players are spooking LPs. The reason is because too many firms are sitting on assets and have inactive funds. The “undead” inspired nickname comes from the fact that they still own portfolio companies, but have exhausted most, if not all, of their capital and can’t raise new money, often because of lackluster returns to their investors. With more PE firms generating mediocre returns to LPs and unable to raise new funds, Burkhart says, “there will be fewer private equity firms tomorrow than there are today.” —Anthony Noto

Struggling Salon Tries to Increase Revenue

likes the sporting goods niche. Betting on the prospects of a trusted retail brand and its longstanding cachet, the company picked up snowboard company Mervin Manufacturing Inc. from Quiksilver Inc. (NYSE: ZQK) for $51.5 million. This is the second sporting goods transaction the firm has been involved with in 2013. Altamont, in July, made an agreement with Billabong International Ltd. for a $294 million bridge loan that allowed the surf wear retailer to repay a previous loan.

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liam Blair provided financial advice to Quiksilver for the deal. —Allison Collins

Number of Zombie Firms Haunt PE

T

he challenge of raising a new fund isn’t easing up any time soon, especially if more M&A profession-

S

alon Media Group Inc. joins a long, struggling line of media companies. Salon, which has offices in San Francisco, New York and Washington D.C., operates Salon.com, a website that covers breaking news in politics, culture, technology and entertainment. The company’s accountant indicated doubts about the company’s ability to continue without the threat of liquidation, according to filings with the U.S. Securities and Exchange Commission. The company joins a long list of media groups that have experienced distress, including GateHouse Media Inc., which filed for bankruptcy protection on Sept. 27, and December 2013

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the Journal Register Co., which filed for bankruptcy on Sept. 5, 2012. Salon’s history of significant losses dates back for quite a while. The latest report indicated doubt for the fiscal year ended March 31, Salon says in an SEC filing. Salon has incurred losses since inception, and expects to incur another loss for its fiscal year ending on March 31, 2014. The company had an accumulated deficit of $117,153 as of June 30. The company has been relying on cash infusions from John Warnock, chairman of the board, and William Hambrecht, a director and father of Salon’s interim CFO, Elizabeth Hambrecht. Warnock has contributed $1.28 million through interest-free, unsecured cash advances, during Salon’s current fiscal year to fund operations. Salon also has a borrowing agreement with Deutsche Bank Securities Inc. from May 2007 that allows it to borrow up to $1,000. That line of credit was fully drawn, and $227 in interest had accrued, as of June 30. Deutsche Bank may demand payment at any time,. In March, the company completed a recapitalization, where all of its convertibles notes, related-party advances, certain consulting fees, totaling about $15.7 million, were exchanged for 72.87 million shares of common stock, valued at $0.35 per share. The company has taken some restructuring initiatives, focusing its strategy on the Salon.com website. It also laid off the staff of “The Well” — a group that focused on the company’s online discussion forum

Distressed Company Watch List

S

ee which companies have recently indicated doubt about continuing as going concerns in SEC filings:

• 30DC Inc., a New York-based 30DC Inc. provides digital marketing services • All American Pet Co. Inc., a Los Angeles retailer of pet products • Bodisen Biotech Inc., a Chinese fertilizer company • Frederick’s of Hollywood Group Inc., headquartered in New York, sells women’s apparel and lingerie • Fusion Telecommunications International Inc., New York-based telecommunications company • Izea Inc., an Orlando, Fla.-based native advertising company • MobileBits Holding Corp., a Sarasota, Fla., manages mobile, social, video and web content • Plug Power Inc., a Latham, N.Y.-based developer of alternative energy batteries • Univeristy General Health System Inc., a Houston-based health care provider • Urban AG. Corp., a North Andover, Mass.-based environmental remediation company

Editor’s Note: A company that appears on Mergers & Acquisitions Distressed Company Watch List has indicated in a filing with the U.S. Securities and Exchange Commission doubt about its ability to continue as a going concern. A company can be removed from the list if it is acquired, if it files for bankruptcy protection or if it indicates a change in status.

company has taken some steps to improve engagement on the website, including enabling a comments section “to increase usability, engagement and return visits.” It also launched Android mobile applications in April. For the three months ended June 30, the company’s revenue was $1.2 million, up 43 percent from the same period in 2012. The company pulled in $1.1 million in ad rev— in September. Salon plans to focus its efenues for the quarter, up 57 percent from forts on growing revenue by expanding its the same period of 2012. Salon attributes product reach, it says in SEC filings. The the growth to a boost in its traffic, which increased 38 percent to 10.3 million monthly users compared to the same time period the previous year. POLITE CONVERSATION Most of Salon’s revenue comes from ad sales on its website. Paid subscrip“Six years ago it was all about the megafunds and you tions, however, peaked in December 2004 at 89,100, and have decreased had luminaries as partners. It was hard to go to a pitch to fewer than 8,000 as of June 30. The when Bono was walking out.” company plans to wind down its sub—Elizabeth Granville-Smith, managing partner, BV Investment Partners, on scription service by the end of March. how fundraising has changed —Allison Collins

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December 2013

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11/4/2013 4:53:08 PM

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The M&A Scene Attendance at the 2013 Midwest ACG Capital Connection at McCormick Place in Chicago spiked up to about 1,150 people. Among the speakers at the event were former Chicago Blackhawks Reginald John Kerr, Cliff Koroll and Grant Michael Mulvey.

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December 2013

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Columns

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ine offers “constant proof that God loves us and loves to see us happy,� said Benjamin Franklin. Wine is “one of the most civilized things in the world,� said Ernest

Hemingway. But it was the 18th century writer John Gay who may have said it best when he wrote, “from wine what sudden friendship springs.� No wonder Association for Corporate Growth (ACG) chapters are hosting so many wine tastings! The New York chapter was one of the earliest to embrace wine tasting as a networking activity. On Nov. 20, ACG New York celebrates its 11th Annual Private Equity Wine Tasting Gala, held at Gotham Hall, the classic former headquarters of Greenwich Savings Bank. “Wine has always been a social lubricant,� says Clifton Yen, director, AlixPartners, and chair of the event. “Sharing a bottle of wine or champagne is a traditional way to celebrate the closing of a deal,� says Yen. “Wine fits the historical Wall Street culture.� Yen points out that many of the private equity partners who attend the gathering take great pride in the wines they present. The spirit of friendly competition is in the air. “The private equity firms try to present the best wines possible,� explains Yen. Memorable wines served at past ACG New York galas include Chateaux Margaux 1989, poured by Patrick McAuliffe and Mark du Four of NewStar Financial Inc. (Nasdaq: NEWS), and Valdicava Brunello di Montalcino 1999, presented by Bonnie Harland of Pouschine Cook Capital Management LLC. The wine tasting is “part networking, part fun and a bit of a holiday celebration,� says Yen. It is the most well-attended event hosted by ACG New York December 2013

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all year. The 2012 gala, which had been rescheduled due to Hurricane Sandy, drew 970 dealmakers. The feedback Yen received from attendees was to trim it. The 2013 gala will be capped at 850 guests. “Currently 26 of our 56 chapters host a wine or beer tasting,� reports Leslie Whittet, vice president, chapter operations, ACG Global. Southern California dealmakers ring in the new

Patrick McAuliffe, Mark du Four

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year with samplings of world-class wines on Jan.14, when ACG Orange County presents the 12th Annual Private Equity Event, at the swanky St. Regis Resort in Monarch Beach, Calif. In vino veritas! MERGERS & ACQUISITIONS

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Columns

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ven the most niche areas of an industry can experience their fair share of M&A. In the case of electronic dance music, or EDM, one company in particular has managed to

wield dealmaking as a way of solidifying a position in the media sector. SFX Entertainment Inc. (Nasdaq: SFXE) recently unveiled five purchases, the largest being the $130 million acquisition of ID&T, and shows no sign of stopping.

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A young company banking on the continued popularity of dance festivals like TomorrowWorld and Electric Zoo, SFX began its buying spree just as the New York company raised $260 million in an initial public offering in early October. SFX soon opted to buy ID&T, an Amsterdam-based producer of dance music festivals and events in Europe and around the world, including Sensation, Mysteryland, Q-Dance and TomorrowLand. ID&T produced the most recent Sensation event at Brooklyn’s Barclays Center in October. Later in the month, SFX took over Totem OneLove Group Pty Ltd., a producer of Australian electronic music festivals. Both deals spotlight the company’s mission to tap an overseas market, according to SFX CEO Robert F.X. Sillerman. Sillerman, who founded the company in 2011, is the former chief of CKX Inc., which was sold to Apollo Global Management LLC (NYSE: APO) in 2011. In 2000, he sold his first business, a conglomerate of regional rock promoters, to Clear Channel for $4.4 billion. That deal ultimately formed Live Nation. Sillerman now aims to compete against Live Nation in the land grab for EDM production companies. SFX has reached beyond promoters and nightclubs to digital media platformes as well, beginning with the February purchase of Beatport, a Denver-based provider of dance music downloads and industry news, for about $50 million.

Between the ID&T and Totem deals, SFX managed to sprinkle three other acquisitions: New Yorkbased Arc90, a product design and development agency; Philadelphia-based Fame House, a digital marketing agency that specializes in the music and entertainment industry; and Tunezy, a Toronto-based service that connects content creators to fans. Terms of each deal are undisclosed, but SFX noted that $150 million from the IPO would be used for M&A. With these deals, SFX will operate 52 festivals worldwide, but whether EDM is a fad or a bankable sub-genre remains to be seen. The global dance market, which includes record sales, live performances and sponsorships, reportedly generates $4.5 billion annually. Supporting that theory is SFX and the hype surrounding the company’s IPO. So far, SFX has sold roughly 20 million shares, 17 percent more than the 16.7 million it initially planned. Counting those deals, SFX would have recorded $239 million in revenue last year, with losses totaling $68 million. December 2013

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Columns

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olar and alternative energy companies have altered their loan agreements as they struggle with price competition. Both LDK Solar Co. Ltd., maker of multicrystalline wafers

for solar panels, and Envision Solar International Inc., have recently amended their loans. Xinyu City, China-based LDK Solar announced in a filing with the U.S. Securities and Exchange Commission that it came to a 30-day forbearance agreement on its notes.

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The company had an interest payment due on the notes in August, which it did not make. Previously, the company announced a forbearance period in September. The manufacturer also has offices in Sunnyvale, Calif. Envision Solar has extended the maturity dates on its loans several times, most recently through the end of 2013. In a 10-Q filing from Aug. 14, the company says that it intends to raise additional working capital and renegotiate the loans again. Envision, which makes solar panels for parking garages, said in SEC filings that it was struggling because potential customers couldn’t get financing for large infrastructure purchases due to macroeconomic conditions. Both companies cited very competitive pricing as a cause of their financial problems. “The [photovoltaic] market is highly competitive and volatile,� LDK said in a May 15 SEC filing. “Currently, China’s major solar manufacturers, including us, substantially rely on both exports of solar products to Europe and the United States and domestic demand. The reduced market demand for PV products in these markets has resulted in substantial oversupply. In addition, we and many of our competitors engaged in aggressive expansion programs during the past several years.� “As a result, competition has increased and the industry has experienced price reductions, which have materially and adversely affected our business opera-

tions and financial condition,� the LDK filing states. Envision notes in documents that it has high installation costs and that competitor prices may be lower. Both LDK and Envision are on the Mergers & Acquisitions Distressed Company Watch List after raising doubts about their abilities to continue without the threat of liquidation. LDK and Envision join several other solar panel companies that have struggled, including Wuxi Suntech Power Holdings Co. Ltd., the China-based sub-

sidiary of Suntech Power Holdings Co. Ltd. Wuxi went into bankruptcy in March. In 2011, manufacturers Solyndra LLC, SpectraWatt and Evergreen Solar sought bankruptcy due to product oversupply. December 2013

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11/1/13 10:03 AM 11/4/2013 4:56:49 PM

MarketingSolutions AdAm ReinebAch, eVP, mARketing SolutionS — 212-803-6555

by AdAm reineb Ach

Customers Reign Marketers should work with customers during the product-development process You’re sitting in a dimlY lit conference room. The meeting is 15 minutes in but it feels like an hour has passed. Having missed your daily Starbucks, your eyelids begin to flutter. Your boss, back from a business trip, talks about becoming a customer-centric organization. He has charts that show improving customer satisfaction levels based on a survey, and the overused cliché count is now in the double digits. The meeting adjourns, people scatter and customer centricity spreads like wildfire! If having a customer-centric approach was easy, there wouldn’t be hundreds of books on the topic, nor would there be a need for awards like Bearing Point’s Customer Centric DNA Awards, which poll consumONE WAY WE’RE HELPING CLIENTS IS BY BUILDING PROGRAMS THAT OFFER GREATER INSIGHT INTO THEIR TARGET AUDIENCE

ers in 11 different categories to determine which companies are best at “making the customer central in all their customer contact.” The goal of being customer-centric — in your sales, marketing, product development and customer service activities — is undeniably a good one. Being customer-centric is analogous to eating right and exercising. But we need first to define what the term really means. The Financial Times says, “Customer-centric innovation revolves around customers and their needs. The process starts with insights on customer needs with the goal of designing a new product or service that delivers on these needs in a way that is intuitive and accessible to customers.” Key phrase: “finding solutions that are intuitive and accessible.” Marketing guru Don Peppers defines it as a necessary complement to product centricity. “Customer-centric competition starts with an individual customer and tries to meet as many of that customer’s needs as possible – across all the company’s divisions and business units, and through time (i.e., meeting a customer’s needs week after week, month after month).” He goes on to say that “when you think about your ‘share of customer’ don’t just think about it in terms of wallet share. Instead, ask what share of this customer’s needs are you actually meeting?” When Peppers wrote this, my guess is he wasn’t doing a commercial

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for mammoth banks that offer everything from 401ks to auto loans. The greater insight here is that as you develop products and services, it’s imperative to keep customer needs front of mind, but you can’t determine those needs unless you understand their work flow, obstacles and objectives. That means gaining as deep an understanding as you can. One way we’re helping clients is by building programs that offer greater insight into their target audience. For example, if a client is looking to engage with a specific audience, we create content that would appeal to that audience — white papers, web seminars, e-newsletters — and then leverage in-house capabilities to determine content consumption habits. This allows us to categorize leads and provide information back to the client. Here are some other ways to improve customer centricity: • Identify your most valuable customers and prospects. If you have a good network, this is an easy one to discount, but it’s a good exercise to analyze your customers based on both hard numbers as well as subjective factors, such as past history and/or relationships. • Invest in tools and campaigns that provide customer insights. Think about how you can leverage our lead scoring and targeting abilities to gain insights into your target audience. Depending on your web strategy, you may consider investing in software to identify and nurture leads. • Involve customers as you develop products and solutions. Don’t simply organize a focus group after you are 80 percent of the way there on your new product. Talk to your customers as you’re progressing. Make it worth their while to function as guinea pigs and provide feedback. Also, remember that being customer-centric isn’t a switch that gets turned on after a really good offsite discussion. It’s an ongoing process, and only those companies with a true commitment to it will get it right.

AdAm reineb Ach eVP, mArketing Solution S SourcemediA To send feedback to Adam, or for more information on SourceMedia’s Marketing Solutions group, please contact him at adam.reinebach@ sourcemedia.com

December 2013

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Cover Story

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To protect themselves from fickle consumers and uncertain economic times, retailers are using acquisitions of specialty shops as a form of insurance. Deals such as Gap Inc.’s (NYSE: GAP) $130 million purchase of retail chain Intermix Holdco Inc. in January allow middle-market companies to break into new segments of the market. Through September, 2013 has been a big year for department

store deals, with about $9 billion in deal value according to data from Dealogic and provided by investment bank Robert W. Baird & Co. The year through September has seen nearly $21 billion in total retail M&A activity, which includes department store deals.

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Photograph by Matt Greenslade / photo-nyc.com

Against the backdrop of department store consolidation, retailers and investors seek specialty shops Allison Collins

11/6/2013 11:22:40 AM

Cover Story

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The third quarter was especially strong for U.S. retail and consumer transactions, rising 112 percent from the same quarter in the previous year, according to PwC. “I see more opportunities in the specialty retail space than I do in the department store space,� says Al Ferrara, a partner at BDO USA LLP. Deals are coming from private equity firms that bought a retailer three to five years ago and are looking to exit, or the stores themselves, which may be looking to move into a specialty niche through acquisition, Ferrara says. Gap’s Intermix purchase underscores that idea. By buying Intermix, a group of clothing stores that sell women’s luxury apparel, the company enters an entirely new space. When Gap made the acquisition, Intermix operated 32 boutiques across North America. Gap says it is seeking to expand the brand’s network of stores and enhance the company’s website. Stores are scheduled to open soon in Chestnut Hill, Mass., Brooklyn, N.Y., and Bellevue, Wash. “Smart companies are trying to bulletproof themselves by having concepts at different price points and target audiences; therefore, if one should face headwinds, you have the others,� says Jane Hali, vice president of custom research for London-based trend forecasting agency WGSN Group Inc., about the Intermix deal. Gap has businesses at all ends of the market. It has Old Navy at the low end; Gap in the middle; Banana Republic Jane Hali in the middle but above Gap; Athleta, which gives them a specialization in a specific market; and Piperlime, a pure e-commerce business. The acquisition of Intermix adds a specialty store, with a

very select assortment of clothes, to Gap’s holdings. The deal was Gap’s first since 2008, when it paid $150 million for Athleta, which sells exercise clothes. The company bought Banana Republic in 1983. In October, rumors swirled that suit chain Men’s

Wearhouse Inc. (NYSE: MW) may bid for shoemaker Allen Edmonds Corp. in a move that could strengthen the chain. That news came around the same time that Houston-based Men’s Wearhouse rejected a $2.3 billion takeover offer from Jos. A. Bank Clothiers Inc., which also operates a chain of retail stores. If that deal had not been rejected it would have expanded Jos. A. Bank’s product offerings into tuxedo rental and casual wear. In July 2012, Men’s Wearhouse acquired men’s clothier Joseph Abboud through a $97.5 million deal for its owner, JA Holding Inc. Specialty retailers have also attracted the interest of private equity firms.

Private Equity Involvement In October, London-based private equity firm Permira Funds agreed to buy the parent company of Dr Martens, R Griggs Group Ltd., for about $486 million. Dr Martens makes apparel, shoes and accessories sold in 63 countries. Permira has also invested in Hugo Boss AG and Valentino. Private equity firm Apax Partners closed a $1.1 billion deal for apparel chain Rue21 Inc. in a take-private transaction in October. Apax, headquartered in New York and London, has a history of investing in retail companies. In November 2012, the firm paid $570 million to buy Cole Haan December 2013

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from Nike Inc. (NYSE: NKE). Before that, the firm invested in Takko, a value fashion retailer in Europe in 2011, and Spyder Active Sports Inc., which makes performance wear, in 2004. Apax also invested in Phillips-Van Heusen Corp. in 2003 and Tommy Hilfiger Corp. in 2006, and has exited both investments. In April, New York private equity firm Kohlberg Kravis Roberts & Co. LP (NYSE: KKR) announced the purchase of a majority stake in Paris-based SMCP Group, a clothing retailer. SMCP’s brands include Sandro, Sandro Men, Maje and Claudie Pierlot. SMCP had opened 69 stores in North America during the 18 months before that sale was announced. New York private equity firm Sycamore Partners said it would buy Hot Topic Inc. for about $600 million in March. Hot Topic is a mall and web-based retailer that sells music and pop-culture influenced apparel, accessories, music and gifts. The company also owns Torrid, which sells clothing for women size 12 and up, and Blackheart, which sells lingerie and beauty products. Sycamore is also invested in apparel chain Talbots. In January, Boston private equity firm TA Associ-

ates completed a majority investment in Dutch LLC, which is the parent company for fashion lines Joie, Equipment and Current/Elliot. Those brands are sold in high-end department stores, including Saks, Nordstrom, Neiman Marcus and Barney’s. TA, which acquired a 60 percent stake in the comDecember 2013

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pany, plans to focus on building out retail locations for the companies and developing an e-commerce site for Current/Elliot, TA Associates principal James Hart tells Mergers & Acquisitions in an interview. In December 2012, Los Angeles private equity firm Leonard Green & Partners LP bought a 25 percent stake in the Topshop apparel chain from British billionaire Philip Green for $805 million. Leonard Green also co-owns J. Crew. The firm had previously invested in David’s Bridal, but sold the chain to Clayton Dubilier & Rice in October 2012 for $1.05 billion. “Specialty retailers Cynthia Cohen are able to appeal to a very specific segment of the market that broader generalists are finding it more difficult to appeal to,� says Maud Brown, a managing director at Bahrain private equity firm Investcorp, which owns retailers Sur La Table and Paper Source. Investcorp also owns SourceMedia, Mergers & Acquisitions’ publisher. “The department store model has been challenged for many years. Various department stores have tried to reinvent themselves, but the brands – be they specialty retailers or brands themselves – are trying to get a direct relationship with their end customer,� Brown says. Many brands that are sold through department stores have opened brick-and-mortar locations. A significant portion of those companies have both wholesale and retail models, so they still work with and sell their products in department stores, as well as in their own locations, Hali says. “The only way for the manufacturers to have full distribution is really to open their own stores, and that is what many of them are doing,� Hali says. Peter Millar, a high-end men’s apparel line, has opened two stores and has plans for more.

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The company, which aims to outfit 35- to 50-year old men for the office, weekend, golf course and tailgate, recently opened a store in South Hampton, N.Y., and another location in Palm Beach, Fla. Peter Millar is sold in Neiman Marcus and Nordstrom stores, as well as through smaller retailers. “I suspect in the next 18 months we’ll have four more locations,� says CEO Scott Mahoney. For Peter Millar, the retail locations are a chance to express and market the essence of the brand. The company is considering locations in New York, Chicago, Charleston, Austin, Dallas and other places, but “it’s not going to be a 50-store play,� Mahoney says. This is not the first time we have seen this phenomenon. In the 1990s, when the outdoor apparel space exploded, North Face, which makes outdoor performance-wear, began opening stores, says Robert W. Baird & Co. managing director Joe Pellegrini. “They can control their own destiny better when they have their own store,� says James Cassel, chairman of Miami investment bank Cassel Salpeter & Co., but that does not mean they will pull out of the larger stores. E-commerce gives brands another way to increase customer awareness, which can generally help sales. “Department stores like the idea that their brands have full online businesses -- it makes the brands more important to the customer and top-of-mind,� says Hali. Brands are seeing a higher percentage of revenue that comes from more than just department store sales, according to Pellegrini. “Having a well-positioned website only raises the awareness level of the brands,� Pellegrini says. “They’re seeing a higher percentage of their revenues being derived from an omnichannel approach, which includes direct sales and online.� For middle market brands, experts agree that increased size could help companies work more easily

with large department store conglomerates. In October, Hanes Brands Inc. acquired Iselin, N.J.-based Maidenform Brands Inc. for $583 million. The deal gave Hanes ownership of Maidenform, Flexees, Lilyette, Self Expressions and Sweet Nothings, adding to the brands it already owned: Playtex, Bali, Just My Size, Hanes, Barely There, Wonderbra, Champion and L’eggs. “They have more leverage� with department stores, Hali says, since they are larger as a combined company. That deal also resulted in production synergies, as Hanes owns many manufacturing facilities. Before the deal, Maidenform had been using a third-party manufacturer. PVH Corp. (NYSE: PVH) also gained leverage with stores when it bought Warnaco Group Inc. In that deal, which closed in February, the company picked up the rest of the jeans and underwear portions of Calvin Klein (it already owned the rest), as well as Speedo, Body Nancy Ganz/Bodyslimmers, Warner’s and Olga. PVH also owns the Tommy Hilfiger, Van Heusen, Izod and Arrow lines. Aside from PVH, several brand owners have scooped up more companies to increase their portfolios. In September, Paris-based clothing and accessories company Kering bought a minority stake in luxury brand Altuzarra, which is sold at Barney’s, on Neta-Porter.com, Bergdorf Goodman and other stores. Kering develops apparel and accessories for luxury and lifestyle brands, including Gucci, Bottega Veneta, Saint Laurent, AlJoe Pellegrini exander McQueen, McQ, Balenciaga, Brioni, Christopher Kane, Stella McCartney, Sergio Rossi, Boucheron, Girard-Perregaux, JeanRichard, December 2013

11/6/2013 11:23:14 AM

Qeelin, Puma, Volcom, Cobra, Electric and Tretorn. The company was known as Pinault-Printemps-Redoute or PPR until June, when it changed its name to Kering. In August, Authentic Brands Group LLP, which is backed by private equity firm Leonard Green, picked up Spyder Active Sports Inc. for an undisclosed amount. The Boulder, Colo.-based ski and snow outfitter sells jackets, snow pants and cold-weather accessories. Spyder was added to Authentic Brands’ portfolio, which already included brands Judith Leiber, Andrienne Vittadini and Viking. In July, LVMH Moet Hennessey Louis Vuitton SA said it would buy Italian cashmere company Loro Piana SpA for about $2.6 billion, following the company’s 2011 deal for Bulgari SpA. The Loro Piana purchase expands LVMH’s depth in the luxury goods segment, where it already owned Louis Vuitton, Celine, Kenzo, Marc Jacobs, Emilio Pucci, Thomas Pink and others. In February, Iconix Brand Group Inc. (Nasdaq: ICON), which owns Ed Hardy, Rocawear and Candie’s, bought London denim label Lee Cooper for $72 million. Also that month, Iconix said it would buy sportswear and denim label Buffalo David Bitton from Buffalo International LLC for $76.5 million in cash. Those deals follow a November 2012 acquisition of soccer-related product manufacturer Umbro, which Iconix bought from Nike Inc. (NYSE: NKE) for $225 million. New York-based Iconix licenses clothing brands to retailers and manufacturers. Vida Shoes International Inc., a New York footwear brand owner, acquired Andre Assous Co., an Oceanside, N.Y.-based footwear company known for espadrilles in January. Vida licenses shoes for Baby Phat, Carter’s, Osh Kosh, Esprit, Sag Harbor South Pole and Unionbay and other companies.

Department Store Consolidation Middle market companies and brands face increased pressure from department stores as consolidation continues. In November, Hudson’s Bay Co. closed a $2.9 billion deal for Saks Inc. That deal brought together Hudson’s Bay’s namesake stores in Canada, Home Outfitters, which is a home goods store; Lord & Taylor, a department store that sells apparel, home good and small appliances; and Saks and Saks Off 5th, the chain’s group of outlet stores. “There is going to be more pressure from the larger retail conglomerates for there are fewer stores for the brands to sell to,” says Hali. In addition to the Saks deal, Neiman Marcus Inc. changed hands. Ares Management LLC and Canada Pension Plan Investment Board bought luxury retailer Neiman Marcus for about $6 billion in October. Neiman owns high-end retailer Bergdorf Goodman. Neiman, a Dallas-based chain, was last purchased by TPG CapiDecember 2013

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tal and Warburg Pincus in a 2005 leveraged buyout. The private equity firms filed paperwork with the U.S. Securities and Exchange Commission for an initial public offering in June, but ultimately decided to sell instead. TPG and Warburg Pincus reportedly paid about $1.2 billion for the department store in 2005. In a previous wave of department store mergers, we saw Macy’s Inc. (NYSE: M), then known as Federated Department Stores (after R.H. Macy & Co. agreed to a merger in 1994), merge in 2005 with the May Department Stores Co., owner of Filene’s, the Jones Store, Kaufmann’s and other stores, to create a combined company with more than 1,000 stores. In 2006, the company sold Lord & Taylor to Purchase, N.Y.-based private equity firm NRDC Equity Partners LLC, which owned Hudson’s Bay. Macy’s owns luxury retailer Bloomingdales. With so few department stores, it is unlikely that we will see further consolidation in the space, experts say, but potential targets could include Dillard’s, and possibly J.C. Penney Co. Inc. (NYSE: JCP). Large department store deals can James Cassel make it difficult for smaller brands to get into the stores, according to Baird’s Pellegrini. “They are going to be far pickier and demanding of the vendors,” Pellegrini says of large department stores. As retailers grow larger and more sophisticated, they tend to want to work with fewer vendors, and with those that have a similar level of infrastructure sophistication. “There are a lot of young up-andcoming companies with great brands and products, but to service a large base of department stores, making sure the right inventory is on the shelf is difficult,” says Pellegrini. What happens first when you integrate an acquisition is vendor rationalization: “The more you buy from certain vendors, the higher the discount,” says Cynthia Cohen, CEO of Strategic Mindshare, a consulting firm for retailers. Cohen is also on the board of directors at apparel chain Bebe. If department stores consolidated buying, it could lead to some of the clothing lines being dropped, Cohen says. “If they consolidated buying, that gives the stores more power, but department stores and good brands understand they are partners and they both need to be in business. One can’t put the other out of business. It’s sort of like shooting themselves in the head,” says Cassel. MERGERS & ACQUISITIONS

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R The law is prompting some physician groups to consider mergers to become part of larger health care organizations Allison Collins

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11/6/2013 10:50:25 AM

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train from the patient increases and reimbursement delays expected from the Affordable Care Act (ACA) are causing some health care providers to turn to

M&A. The ACA, which was passed in 2010 and began open enrollment in October, is having significant effects on the health care industry, and many middle-market physician groups are using M&A to cope with the more taxing consequences of the new rules. The increased rate of physician group mergers began before the implementation of the ACA, but experts agree that the new law has amplified the trend. “Consolidation activity has been accelerating for years now, driven by changes in reimbursement and changes in the rate of the insured,” says Joe Russo, director at Siemens Financial Services Inc. “Now, the ACA is a factor influencing beDecember 2013

031_MAJDec13 2

havior by hospitals and physicians.” Under the new rules, companies are joining together to create accountable care organizations, or ACOs. ACOs are networks formed by groups of coordinated health care providers that care for a group of patients, including a minimum number of Medicare patients, that allows them to receive bonuses for keeping costs down. An ACO is accountable to the patients and third-party payers for the quality, appropriateness and efficiency of the care it provides. “One of the things that you’re seeing in the marketplace is the movement towards integrated health delivery systems,” says Russo. “A hospital or physician organization may be trying to take care of a patient for the entire lifecycle, and I think that is part of what is driving some of these hospital entities and physician entities together.” Companies are trying to create efficiencies; MERGERS & ACQUISITIONS

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take costs out of the system and make health care more affordable, according to Anthony Casciano, senior vice president at Siemens. “We’ve seen both hospitals and managed care plans make initial forays into acquiring physician groups or physician management groups in an attempt to create, in the case of the hospital, what is called an integrated delivery network, and for managed care trying to create effectively the same type of thing,� says Jeff Swearingen, managing director at health care focused investment bank Edgemont Capital Partners LP, Anthony Casciano headquartered in New York. “It’s not a surprise that physician practices are at the leading edge of this consolidation trend,� says Daniel Lepanto, a vice president at health care focused investment bank Leerink Swann & Co. in New York. “They were the early movers in this trend.� Sunrise, Fla.-based Mednax Inc. (NYSE: MD) has been picking up anesthesia and pediatric physician groups for years. In 2013, the company announced more than 10 deals for neonatal and anesthesia-services groups. Those transactions include the health care company’s acquisition of Dayton Newborn Care Specialists Inc. in October, Northern Westchester Anesthesia Services PC in September, Sanjay P. Patel MD PA in July, and Anesthesia Group of Onondaga PC in June. “A lot of what you have seen with the strategic buyers is more of the local dynamic playing out,� says Swearingen. Of Mednax’s 2013 acquisitions, for example, two were in New York, four were in Texas and two were in Tennessee. The company also made one acquisition in Georgia, adding on to the two Mednax acquisitions in the state in 2012. In October, Heartland Dental Care LLC expanded by buying My Dentist Holdings LLC. The Oklahoma City-based target has 55 dental affiliates in Oklahoma, Missouri, Texas, Kansas and Arkansas that provide dental services, orthodontics and oral surgery. Also in October, U.S. HealthWorks acquired the

Urgent Medical Care center in Pompano Beach, Fla., which gave the buyer 14 care centers in Florida. In September, Kindred Healthcare Inc., a Louisville, Ky. -based health care company, sold 16 health care facilities that were outside of its designated 21 integrated-care markets. The locations were picked up by Vibra Healthcare LLC, and they include 14 transitional care hospitals, one inpatient rehabilitation facility and one skilled nursing facility. Building a presence in a geographic area is common for health care groups. “I do think we’ll see the acquisition of different primary care groups to gain scale and mass and have the depth of presence within a region to offer the capabilities that are required under the accountable-care rules,� Swearingen says. “It’s going to be interesting to see if there’s a role for private equity in that.� In October, ATI Physician Therapy bought North River Physical Therapy, a Chattanooga, Tenn.-based company with eight clinic practices. ATI provides orthopedic rehabilitation services through more than 250 clinics in Illinois, Indiana, Wisconsin, Michigan, Ohio, Maryland, Pennsylvania, Delaware, Georgia and Tennessee. ATI is backed by Denver investment firm KRG Capital Partners. Private equity groups typically focus on picking up hospital-based specialties, such as anesthesia, emergency room and radiology practices, Swearingen says. “Their intent there is Curtis Lane really to make a platform investment and then add on to that organically and through add-on acquisitions; to assemble a regional or national presence, with the intent to sell to a strategic or to a larger private equity firm.� New York private equity firm Bregal Partners acquired US Community Behavioral LLC, a community-based behavioral health organization, in September as a starting point in the community-based behavioral health sector. In October, Bregal acquired ReMed Recovery Care Centers LLC as the first add- on acquisition for US Community Behavioral. December 2013

11/5/2013 8:35:59 PM

Community behavioral health has gotten private equity interested, says Bregal managing director Robert Bergman: “I think that is largely a function of increasing demand and reasonably stable reimbursement.” For the targets, private equity investment can mean the capital to update technology. “With the ACA there are a lot of new requirements for IT investment and data capture through electronic records. That requires capital, and private equity is there and has the ability to provide,” says Russo. Mergers may also give physician groups more leverage. “Physicians are looking to increase their size to gain efficiencies of scale and negotiating power with the payers,” Russo says. “Physicians are smack in the middle of patients and providers,” says Curtis Lane from MTS Health Investors LLC, a health care focused private equity practice headquartered in New York. Lane attributes the deals to an evolution of the market and says that the ACA helps define how companies might combine. MTS’ portfolio includes AeroCare Holdings Inc., an Orlando, Fla.-based company that provides respiratory therapies; Alliance Healthcare Services, which provides diagnostic imaging services; and Fairfield, Ohio-based testing laboratory DNA Diagnostics Center. In December, the firm made an investment in Edison, N.J.-based Vital Decisions LLC, a provider of counseling programs to patients with advanced illnesses. In April 2012, MTS recapitalized Florida Gulf-to-Bay Anesthesiology Associates LLC, a Tampa-based anesthesia service in Florida and Indiana. Sheridan Healthcare Inc., a Sunrise, Fla.-based physician-services company, announced affiliations with three anesthesia practices in Dan Lepanto February: Rahway Anesthesiologists PA, Select Anesthesia and Pain Management Group PA, and Tri-County Pain Management PA. In October 2012, the company acquired Imaging Consultants of South Florida, a radiology service for Florida hospitals. M&A is also coming from the hospital side, as hospitals use deals to create hospital systems for cost synergies and try to make sure they have enough physicians to meet increased demand, experts say. “There are cost synergies for a system versus an independent hospital,” Casciano says. “Margins pressures will force hospitals to make strategic decisions, of which mergers and acquisitions are a consideration. Trends seem to suggest that this will be happening.” Hospitals also need to make sure they are aligned with enough physicians to meet an increase in patient demand, Russo says. Ryan Tate, vice chairman of the Integris Canadian Valley HospiDecember 2013

033_MAJDec13 4

tal in Yukon, Okla., says the hospital has made several deals to bring new care to the network so it can refer its patients to those practices. In November 2011, Integris bought Plaza Medical Group, a cardiovascular specialist practice. “If you’re not merging or acquiring in that area, you’re leaving yourself pretty well open,” says Tate. In September, Prime Healthcare received a $475 million loan from Healthcare Finance Group, a subsidiary of Fifth Street Finance Corp. (Nasdaq: FSC), which it plans to use for acquisitions. The loan includes a $225 million asset-based revolving credit facility and a $250 million senior-secured term loan. Ontario, Calif.-based Prime plans to use the term loan to close deals that it has under asset purchase agreements. Prime Healthcare operates hospitals in California, Kansas, Nevada, Pennsylvania and Texas. The company acquired Providence Medical Center, based in Kansas City, Kan., and Saint John Hospital in Leavenworth, Kan., in April. In June, Tenet Healthcare Corp., Jim Boylan a Dallas health care delivery system that operates through a network of hospitals, made a deal for hospital operator Vanguard Health Systems in Nashville, in an effort to grow into new markets. In July, Community Health Systems Inc., the second largest U.S. hospital chain, agreed to buy Health Management Associates, a community hospital operator, for $3.9 billion. Also in July, Mount Sinai Medical Center and Continuum Health Partners planned to merge to form Mouth Sinai Health System. The deal was intended to increase efficiency and expand access to health care in New York. “There is no question that the future holds many challenges for health care providers here in New York and across the country,” said Steven Hochberg, Continuum’s chairman, in a company statement. “The new entity created by bringing together the clinical and administrative excellence of Mount Sinai and Continuum will help provide us a position of significant strength and resourcefulness to meet these challenges.” Acquisitions allow hospitals to evolve into hospital systems with geographic concentrations, which should make care coordination easier, drive up quality and even out costs, according to James Boylan, senior managing director at Leerink. “If the hospital systems buy out doc groups, you will start to see care being coordinated more effectively,” says Boylan. For hospitals, M&A is really about the ability to negotiate favorable rates with the payers. “If you are bigger, your relationship is different than if you are a small or mid-market hospital,” says Casciano. MERGERS & ACQUISITIONS

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11/5/2013 8:36:04 PM

Data

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ealmakers polled in October report a modest pickup in activity from the previous month, based on the Mid-Market M&A Conditions Index (MACI), a new barometer created by Mergers & Acquisitions and published in partnership with PwC. The MACI is a diffusion index. Readings above 50 indicate an expansion in M&A activity and readings below 50 indicate a contraction. A reading of 50 indicates there was no change month-to-month. The further from 50 a reading is, the stronger the indicated change. The composite index is a weighted average of readings on a range of indicators based on responses to survey questions about topics that include the number of companies a firm has put up for sale, number of deals completed, ease of obtaining financing, number of bidders, and actionable leads. Respondents are also asked about staffing levels. Great care is taken to guarantee that the breakdown of responses are in line with the industry at large. Values for each component of the index are equal to the percentage of responses indicating in-

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creased activity, plus half of those indicating “no change.” Weighted component scores are then averaged to arrive at the composite score. When calculating the composite, contrary indicators are scored inversely – the component score is subtracted from 100. The October MACI yielded a composite score of 57.7, based on 286 responses. Factors that had the largest impact included Leads, with a reading of 74.4, and Signed Letters (of Engagement and Intent), with a reading of 70.7. Since those components represent the early stages of dealmaking activity, the readings may bode well for the next month’s activity. However, offsetting those was a weak reading for Divestitures, at 38.9, suggesting that private equity firms are still waiting for more stable economic conditions to sell portfolio companies. Monthly readings will be presented as a longitudinal series that can be used to monitor the prevailing rate and direction of change in M&A, and eventually to benchmark whether an institution is operating in line with overall industry trends. –Mary Kathleen Flynn December 2013

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New products and services aim to streamline the M&A process

Buyer’s Guide DANIELLE FUGAZY

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he mergers and acquisitions business can be very complicated, and dealmakers are constantly looking for ways to be efficient while maximizing returns. Products and services that make it easier to bring deals to completion will go a long way. However, in today’s fast-moving market it’s hard for dealmakers to quickly pinpoint the products that could be most helpful. M&A decided to take this opportunity to learn about some of the best new products and services. Not 36

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December 2013

11/6/2013 7:45:53 PM

all of the vendors we talked to are new to the marketplace, but they are all offering new products and services or have changed their strategy recently.

Automatic Data Processing Inc.

Everyone in business has heard of the payroll service company ADP (Nasdaq: ADP). Ironically, while providing payroll services is what the Roseland, N.J.-based company has become known for, it’s really only one part of its business model. ADP often analyzes labor costs and operational expenses, as well as showing companies meaningful ways to directly affect the profit and loss of a portfolio through both earnings before interest, taxes, depreciation and amortization (Ebitda) and operational effectiveness. “We can find ways to save companies 3 percent when they streamline human capital or find companies ways to differentiate themselves in the marketplace,� says Chris Capko, senior director of strategy—private equity. “We have 97 services outside of payroll, from human resource help to 401k administration.� The company has revamped its offering and is now focused on middle-market dealmakers. Typically, ADP’s services were bought at the portfolio level by companies, but now the firm is looking to penetrate companies at the private equity level. “We are making the change because we found that decisions are made at the PE level,� says Capko. “It makes sense to talk with the PE people that own the company to align the strategy.� “There is a lot of buying and holding, and PE firms want to increase their effectiveness. That’s what prompted them to consolidate their buying processes. They want standardization across the portfolio and we can offer that with this new strategy,� he says. Additionally, today ADP often performs diagnostics on a company before it is sold by a larger company, and it will make recommendations on what type of infrastructure the company should have going forward. “In the last year we have focused our energy on the middle market. We honed our strategy with the larger December 2013

037_MAJDec13 2

market and are now focused on the middle market. We designed the strategy by talking to private equity firms and realized we can really impact the spend for middle-market private equity firms. That’s why this new strategy was born,� says Capko. –––––––––––––––––––––––

Dealdrive Inc.

New York-based Dealdrive Inc. is a business intelligence platform that helps investment executives organize and manage their firms more efficiently. The company was founded in August 2012 and launched its platform during the second half of 2013. The cloud-based product can be used on any computer, tablet or mobile device, and it is typically used by private equity professionals, lenders and corporate development executives. Dealdrive uses a software as a service (SaaS) model with a monthly user fee. “A big problem for people is data overload. Dealdrive compiles everything in one centralized place that’s easy to access,� says Daniel Nenadovic, cofounder of Dealdrive Inc. “Users can see everything from how individual portfolio companies are performing to what’s in their deal pipeline. Everything is centralized, and data is tracked in real time.� The application gives users access to their entire deal pipeline, all of their due diligence materials, all portfolio company key performance indicator (KPI) reports and board meeting materials, and all of the related information, including notes, to-do lists, documents, calendars and contacts. “It saves time because there’s no looking for different files or going into different systems. Everything is right there,� says Nenadovic. “It’s very efficient.� Dealdrive Inc. has 12 employees and is “growing like a weed,� with backlogged customer requests, says Nenadovic, adding that Dealdrive’s current clients have more than $20 billion in capital. “The nice thing is that we can be effective for fiveperson shops with one portfolio company or 500-person shops with 100 portfolio companies,� says Nenadovic. “Our solution can work for many different situations.� –––––––––––––––––––––––

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Independent Studios has been making corporate films for Fortune 500 companies for 20 years. Last year someone in the M&A business approached Jerry Riedel and his partner Randy Bobo to create a film about a portfolio company they were looking to sell. From that experience, a new business line was born. Milwaukee-based Independent Studios started producing video tours for companies seeking investors or looking for buyers. Independent Studios usually creates a handful of videos that are about two minutes long for the client. Many sellers of companies are using the videos to compliment the information provided by data rooms. Potential buyers or investors receive a secure link with a password. “We’re filmmakers and someone came to us and said no one is doing this,� says Riedel. “Of course at some point a buyer will want an onsite visit, but this reduces the number of visits that are needed and makes the visits more effective and efficient because the buyer will have a better sense of what they are looking for when they are on site.� The videos are meant to give potential buyers an inside look at facilities, employees and the culture of the firm—things you can’t get from a data room. “There’s a need for this. In the case of one of the last videos we made, the banker on the transaction told us the business sold faster and for more money because of the videos we put together for them,� says Bobo. Adds Riedel: “The video enables the sellers to control the message they want to get out to an unlimited number of investors, regardless of schedules, and it supplements the hard numbers. It gives buyers a glimpse into the company that you can’t get from a spread sheet.� –––––––––––––––––––––––

Intralinks

In September, Intralinks Holdings (NYSE: IL) launched a global deal sourcing network for industry deal makers. To make this a reality, the company bought MergerID and PE-Nexus, two online dealsourcing platforms that cater to the M&A industry. MergerID and PE-Nexus were combined to create the marketplace for qualified M&A professionals— MergerID is based in London and previously owned by the Financial Times Group and PE-Nexus is a pri-

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vately held company based in Miami. The network, now called Intralinks DealNexus, has more than 5,000 firms using it already and has initiated more than 5,000 actionable deal opportunities. Intralinks recently conducted a survey about the growing impact of online deal networks. It found that more than 40 percent of dealmakers currently use an online deal network to support deal sourcing. Of those dealmakers, more than 85 percent of sell-side M&A professionals have marketed at least one deal online in the last 12 months. The survey also found that more than 50 percent of buyside professionals and more than 40 percent on the sell side have closed a deal that was sourced on an online network. Almost 70 percent of dealmakers report that online communities of M&A professionals are making deal-sourcing more efficient, according to the survey. “The platform gives dealmakers the opportunity to communicate,� says Matt Porzio, vice president of strategy and product marketing at Intralinks. “It furthers their reach beyond their own rolodex, and PE firms are always looking for deal flow. There are already success stories of people who have met and executed on deals down the road.� This is just the latest roll out from Intralinks. Over the years, the company has looked for ways to become further ingrained in the M&A industry. While the company started in 1996 by providing due diligence services, in the last 10 years the company has launched many additional products, such as its fundraising platform. “In my 10 years in this industry, a lot of products have come and gone, but we have had a first mover advantage, which is why it made sense to launch products over the years like our fundraising platform and our new networking platform,� says Porzio. “The majority of the largest private equity firms have already used us for due diligence.� Intralinks is hoping the networking platform has as much success as its fundraising platform, which has helped private equity firms raise $94 billion in 2013. “We are happy to report that almost one out of every two dollars raised in 2013 was raised with Intralinks fund platform,� says Andre Boreas, Intralinks’ director of product marketing-alternative investments. ––––––––––––––––––––––– December 2013

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Sageworks

Sageworks was founded in 2004, but in 2012 it rolled out a product to the dealmaking community. The Raleigh, N.C.-based Sageworks is a financial information company that provides private company data and financial analysis solutions to financial professionals. The solution rolled out to dealmakers is Sageworks’ database on privately held companies, which is a proprietary database of privately held company financial statements aggregated by industry. Each day, approximately 1,000 of these financial statements are collected by Sageworks from accounting firms and financial institutions through a cooperative data model with Sageworks’ clients. The data is segmented and can be queried by 1,400 industry codes, 70 financial metrics, company size and geographic location. Sageworks’ product, called Industry Data, can be used in two different ways, says Mike Lubansksy, director of consulting services at Sageworks. “Financial professionals can upload or enter the most recent financial statements of a business they are evaluating and get a comparison of that business to its industry peer group in terms of more than 60 financial metrics, from sales growth to profit margins to

Ebitda, and industry-specific metrics such as sales per square foot,� Lubansky says. “The reports highlight the metrics where the business falls within the top 20 percent or the bottom 20 percent in comparison to industry norms. Users can also generate a report on a specific industry simply by selecting an industry code, revenue range and geographic location, and without entering any client financial data.� Sageworks decided to launch the industry data platform to the M&A market because of the inbound interest they were receiving from dealmakers looking for benchmarking information for the companies they were evaluating. Lubansky says Sageworks has experience about a 75 percent increase work from the M&A industry since the beginning of 2013. “Finding accurate financial information on privately held companies is difficult due to the absence of any public financial reporting requirements for these companies. Financial data comps from publicly traded companies or from previous transactions with private companies only provide part of the picture,� says Lubansky.

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5

he U.S. Court of Appeals for the First Circuit recently ruled that a private equity fund can be held liable for the pension obligations of a portfolio company in its decision in Sun Capital Partners III LP v. New England Teamsters & Trucking Industry Pension Fund. Although this ruling focuses only on who might be responsible for the liabilities of underfunded pension plans, it should be looked to as a potential opportunity to maximize value from portfolio companies while also mitigating future risk. Given the magnitude of retirement liabilities in the U.S. and continued headlines about retirement plan problems, general partners may find themselves under intense scrutiny for their involvement, with potential liability for the employee benefit plans of their portfolio companies.

equity funds that have a good chance of realizing their exit strategy and those that will bear the cost of an expensive, underfunded pension plan. In addition, there is increased regulatory, compliance and due diligence sensitivity about how corporate retirement plans are being handled by ERISA fiduciaries. It is no surprise that allegations of breach are popping up in courts with more frequency. In some cases, the damages are in the millions of dollars. This means that general partners are exposed to potentially huge legal risks when they fail to properly take potential retirement plan liabilities into account when deciding to invest in a firm for the first time or

Reasons to Be Concerned As described by the Private Equity Growth Capital Council, the business model for a typical private equity fund relies on an exit of three to seven years from an initial investment. When a portfolio company has a problem that Susan Mangiero David N. Levine will be expensive to fix, it makes it difficult for the private equity fund owner to sell one portfolio company and realize add to an existing allocation. Private equity general any gains. Whether seeking to take a business to the partners, funds of funds and advisers stand to lose in market for the first time via an initial public offering yet another way as the result of the Sun Capital Part(IPO) or selling a portfolio to a competitor, a private ners decision. If one or more companies in a private equity fund owner must demonstrate that certain fiequity fund portfolio are burdened with an undernancial thresholds have been met. The Sun Capital funded defined benefit plan, federal regulation mandecision paints a potential bright line between private dates that cash must be infused to correct a deficiency. December 2013

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This drag on earnings will make for an uncomfortable discussion with limited partners (LPs), all of whom will want to understand why performance is so bad and whether they are obliged to meet capital calls. This in turn could exacerbate difficulties for private equity funds in need of liquidity. For intermediaries, their revenue will be diminished if LPs look elsewhere.

Pre-Emptive Action Can Save Money and Maximize Investment Value Steps a private equity fund should consider include the following: 1. To the extent that a private equity fund is relying on the position that it is not a “trade of business” and is therefore not subject to liability for a portfolio company’s pension underfunding, it is wise to review the potential economic, fiduciary and legal risks should this position be challenged in court. 2. Review its holdings that are at least 80 percent owned by the private equity fund. Total equity exposure should include common stock, preferred stock and possibly economic rights associated with warrants and/or equity derivatives such as swaps. Although a core focus of any such review should be with respect to holdings subject to jurisdiction in the First Circuit (Maine, Massachusetts, New Hampshire, Puerto Rico, and Rhode Island), a broader review of holdings elsewhere might also be considered. 3. Review underfunded pension plans before and after each acquisition of a portfolio company in order to develop strategies for addressing the Pension Benefit Guaranty Corporation’s aggressive litigation positions that it has been taking lately. Failure to do so could result in unnecessary delays in connection with corporation transactions, including the sale of portfolio companies. Examine the collective bargaining agreements for any or all portfolio companies. Although the Sun Capital Partners case was about liability for pension funding obligations under a multiemployer pension plan (i.e., a pension plan maintained independent of an employer pursuant to collective bargaining), there is some concern that the logic of Sun Capital Partners might be extended to conclude that a private equity fund is conducting a “trade of business” under the Internal Revenue Code through its management and oversight of portfolio companies. A decision concluding that a fund is a trade or business for Internal Revenue Code purposes could impact a fund’s representations of its attempts to minimize its unrelated business income tax liability and/or its acceptance, pursuant to the Internal Revenue Code, as a trade or business. 4. Assess the economic, fiduciary and legal attractiveness of all employee benefit plans that are offered by private equity portfolio companies. This includes traditional defined benefit pension plan, 401(k) plans, and health and welfare arrangement. Individually and collectively, ERISA plans can carry significant liabilities that have the potential to (a) materially reduce overall business profitability (b) increase insurance premiums (c) lead to expensive litigation and/or December 2013

041_MAJDec13 2

regulatory enforcement (d) impede liquidity and (e) hamper capital raising. As a result, a general partner may never be able to realize the growth targets that motivated a particular investment in the first place. Just as significant, a private equity fund may find itself limited in its ability to exit a particular investment. 5. Meet with retirement-focused advisers, actuaries and counsel before investing in a new portfolio company. The due diligence analysis should be comprehensive. This means that a private equity fund will want to assess both the current and projected pension plan liabilities for a portfolio company as well as the riskiness of its investments in its pension and 401(k) plan. If a pension plan’s assets are illiquid or overly conservative, a deficit may occur or grow bigger. It is likewise important to understand whether the assumptions underlying actuarial calculations are overly optimistic. The objective is to understand the seriousness of a given situation in terms of economic, fiduciary and legal vulnerability. 6. Assess the accounting impact for any and all retirement plans. Be prepared to explain performance volatility to LPs as the result of an ERISA problem. 7. As the family of “de-risking” products continues to expand, consider restructuring a portfolio company’s ERISA plan if, by doing so, a private equity fund owner can improve the likelihood of an exit within its target time horizon. However, because ERISA’s fiduciary rules impose a duty of loyalty to participants and beneficiaries, decisions on de-risking should be evaluated under these standards. 8. Determine, in conjunction with ERISA counsel, whether to engage an “independent fiduciary” for purposes of evaluating an array of possible restructuring solutions. Buying annuities to settle pension liabilities or investing in employer securities or other “hard to value” assets are examples. 9. Recognize that the Sun Capital Partners decision could encourage further litigation and regulatory activities. Private equity funds might be well served to consider whether minor tweaks to their structure merit use, including the creation of additional services entities that are commonly used in operating company structures. Clarification of offering documents, careful monitoring of activities and/or comprehensive documentation of its involvement with portfolio companies can go a long way to help insulate a private equity fund from a finding that it is engaged in an Internal Revenue Code trade or business. While this list of steps is long, it need not be overwhelming. Working with experienced financial advisers, as well as knowledgeable ERISA counsel, is a recommended way to efficiently address the future ramifications of Sun Capital Partners and to maximize the value of investments in portfolio companies. David N. Levine is a principal at Groom Law Group; Susan Mangiero is a managing director at Fiduciary Leadership LLC MERGERS & ACQUISITIONS

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Experts Corner

More limited partners are making bigger bets on fewer, smaller funds, says Grove Street’s Chris Yang Anthony Noto

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11/6/2013 11:17:57 AM

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December 2013

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potential shakedown of the private equity industry has dealmakers worried. When it comes to grabbing the attention of limited partners (LPs), the competition among financial sponsors is as heated ever. That’s because, these days, investors are more cautious and less likely to return to large funds a second and third time. “That’s the theory and it makes sense,” says LP Chris Yang, a managing partner of Grove Street Advisors. “The reality is it’s an enormously sticky industry.” As deals begin to percolate in the lower middle market, LPs are beginning to prefer smaller funds, Yang explains. Grove Street is one of those firms. Mergers & Acquisitions spoke with Yang on the trend just ahead of the firm’s announcement that it received $650 million in new commitments that it will invest in private equity funds, especially in the lower middle market. The funds came from four existing clients and one new sovereign wealth fund relationship, and will be invested in diversified private equity, smaller buyouts and venture funds and technology private equity funds. The firm has used funds to invest in Brynwood Partners, a Greenwich, Conn.-based private equity firm, Chris Yang Sightline Partners, a venture firm based in Minneapolis, Harren MERGERS & ACQUISITIONS

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Experts Corner

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Equity Partners, a Charlottesville, Va.-based firm that invests in lower middle market companies, and other firms. The Wellesley, Mass.-based LP has about $5 billion in assets under management.

Are investors less likely to return to large funds a second and third time? The short answer is yes. The market has spoken. A large fund in 2007 and in early 2008 is very different than a large fund in today’s market. Part of it is because of mega firms raising less capital. It is taking folks longer to raise even smaller funds. Firms are now realizing that they can’t put all that capital to work or that people aren’t writing checks that large.

Why do more LPs prefer smaller funds lately? They’re more conservative in their use of leverage over long periods of time. The best of small firms will grossly outperform large funds. Anecdotally, there’s also a greater dispersion of returns, but the quality of

small funds will vary quite a bit. You have to measure their track record by how they source and execute deals, or how they monitor businesses and sell them. The challenge is finding the right small firm and identifying the better managers. Blackstone, Bain and KKR their best funds were the smaller to earlier funds. Those are the funds that they raised and generated the track record to raise larger funds. The expectation of what they’re trying to deliver now is quite different than a middle market fund

Is there going to be a shakedown of the private equity industry? I don’t think you’ll see a drastic shakedown, but I think it’s clear that some changes will be made. Unless something is seriously going wrong at some of these firms, LPs as a collective are limited in their role in terms of what they can do. There are certainly nofault divorce provisions and that’s basically an opportunity for LPs to shut down a fund. But that won’t

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happen unless there’s a reason. If it’s performing poorly, those are sort of nuclear options. I think you’ll see people fade away or gradually disappear than close up shop or do anything radical. People may just not necessarily raise a new fund, or end up managing friend and family assets. But some of the best performers will just raise smaller vehicles.

How has the relationship between LPs and private equity firms changed? I would say over the last few years, there has been a greater understanding of accountability. Most LPs are happy to pay fees and carried interest, but only if there’s a good return. There’s more accountability related to performance and that has led to funds needing to generate liquidity in order raise new funds or vehicles. Given where the public markets are, we’re seeing quite a bit of liquidity through M&A and a few IPOs and dividend recaps. We’re seeing cash back, but in a way, there’s probably more clarity around the groups that have been able to perform and those who haven’t. So there’s a bigger divide between the top performers and the under performers. A lot of lessons were learned from the financial crisis. Different funds

December 2013

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get different grades on how they deployed capital in the intervening years between the financial crisis, how much capital they put to work and more importantly how they managed the businesses they already owned.

Are inactive funds more common? Absolutely. It’s the digestion of what happened five to 10 years ago when many more private equity groups were created and in particular, over-funded during the two years leading up to the financial crisis. Enormous amounts of capital were committed to these funds and in turn, invested at the worst time in the cycle. Many of these funds have troubled investments in their portfolios and have faced real challenges when coming back to LPs about fundraising plans. Some GPs will prudently focus on their portfolios first and try to generate real liquidity for their investors. However, it’s clear that there are a number of GPs that will be unable to raise new funds, which in turn negatively impacts organizational stability. But given the long life of private equity partnerships, this unwinding of inactive funds will continue to work its way through the system over several years.

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People

*OWFTUDPSQ T .BVE #SPXO $SPTTFT 1POE UP /: Maud Brown has been promoted from principal to managing director of the North America and Europe corporate investment team of Investcorp SA, a private equity firm headquartered in Bahrain. To strengthen the firm’s presence in North America, Brown has relocated to New York from the London office, where she has been based since joining the firm in 2001. In 2013, Brown was involved in the sale of IPH Group, a French distributor of industrial supplies, to PAI Partners. In 2012, Brown led Investcorp’s acquisition of Georg Jensen, Denmark’s classic luxury brand. In this role, Brown will continue to focus on deal origination. Prior to joining Investcorp, Brown was an associate at Merrill Lynch and an analyst at Salomon Brothers. She received a degree in business and finance from ESCP Europe (Paris Graduate School of Management), as well as a law degree from Paris Law School. Brown’s “advanced experience paired with her high-level industry knowledge will be instrumental in strategically enhancing value

A&G Realty Partners— The Melville, N.Y., commercial real estate adviser and investment group named Mike Matlat senior managing director. Previously a managing director at DJM Realty, Matlat is expected to help broaden A&G’s expertise outside of its core retail focus and into additional sectors, including hospitality. Prior to his time at DJM, Matlat worked for Keen Realty. Baker & McKenzie— The Chicago law firm hired Jeremy White as a partner. He will be based in the firm’s Tokyo office as a member of the corporate mergers and acquisitions practice group. White previously worked for a London-based law firm but Jeremy White has been working in Tokyo since August 2007. At Baker & McKenzie, he will specialize in cross-border transactions. Balderton Capital— Daniel Waterhouse, formerly at Wellington Partners, was appointed

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for our investors,” says Jonathan Dracos, head of corporate investment, North America and real estate. Investcorp focuses on investing in the middle market and backs companies in four sectors: growth industrials and distribution; business services; consumer and retail; and media and education. The firm’s recent deals include Paper Source Inc. in September and Tyrrells PotaMaud Brown to Crisps in August. The firm invested in upscale kitchenware retailer Sur La Table in 2011. Investcorp acquired SourceMedia, the publisher of Mergers & Acquisitions, in 2004.

general partner. Based at the firm’s London headquarters, Waterhouse will assist in sourcing early-stage investments in the software and Internet sectors. Before Wellington, he was a partner at 3i Group plc (LON: III), where he oversaw private equity investments in the internet sector in North America and Europe. Prior to that, he was at Yahoo! Inc. (Nasdaq: YHOO) from 1999 to 2005 covering strategic development across the European region. Bracewell & Giuliani LLP— The law firm announced a slate of new hires for its San Antonio office. William Avila, Michael Bernard, Blakely Fernandez and Jane Macon are each joining as partners. Avila, previously of counsel at Fulbright & Jaworski LLP from May 2011, focuses on public finance law. Bernard, a San Antonio-based attorJane Macon ney since 2005, was a first assistant district attorney for Bexar County. He specializes in public law, pub-

lic finance, energy and litigation. Fernandez has held a variety of leadership positions, including partner with Tuggey Rosenthal Pauerstein Sandoloski Agather LLP. Other firms include Winstead Sechrest & Minick PC and Akin Gump Strauss Hauer & Feld LLP. Macon, who was city attorney of San Antonio from 1977 to 1983, is currently chairwoman of Siebert Financial Corp. (Nasdaq: SIEB), a holding company that provides various investment banking and broker services to retail investors. At Bracewell & Giuliani, she will advise on public finance deals as well as public and private partnerships, real estate zoning, municipal bonds and economic development. Clayton Dubilier & Rice (CD&R)— Lewis Hay joined the New York private equity firm as an operating adviser. He is slated to take on the role in January 2014. Hay is the former president and CEO of NextEra Energy Inc. (NYSE: NEE). Hay is expected to assist the firm in sourcing deals, evaluating investment opportunities and advising portfolio companies.

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Debevoise & Plimpton LLP— Andy Soh has joined the New York law firm as international counsel. He will be based in Hong Kong. Over the years, Soh has worked in New York and Singapore, beginning with Jones Day from January 2005 to October 2008. From there, he went on to Boies Schiller & Flexner LLP and Kobre & Kim LLP, before his most recent position with General Electric International Inc. as executive counsel for Asia-Pacific litigation. Duff & Phelps Corp.— David Lu joined as managing director and head of the New York firm’s investment banking practice in China. In this position, he will advise clients on mergers, acquisitions, fairness opinions, capital raising transactions and company restructuring. Lu, who will be based David Lu in Shanghai, joins Duff & Phelps from Cowen Group Inc. where he served as head of Asia investment banking. Prior to Cowen, Lu served in senior leadership roles at Piper Jaffray and later Rodman & Renshaw, where he helped launch the firm’s investment banking presence in China. Before that, he worked at DBS Bank, Vickers Financial and Salomon Smith Barney. Gibson Dunn & Crutcher LLP— The Dallas law firm brought in R. Jay Tabor as a partner. Formerly a partner at Weil Gotshal & Manges, he will continue to focus his practice on private equity transactions. Tabor, who specializes in energy, represented Houston-based Kinder Morgan Energy Partners LP (NYSE: KMP) in its $38 billion acquisition of El Paso Corp. Mayer Brown LLP— The New York law firm is adding Mayank Gupta and Trevor Wood as partners for its banking and finance team in London. Gupta, who advised the emerging markets team at Deutsche Bank AG, was previously with White & Case LLP in Hong Kong for two years. Wood has worked with various firms, including Berwin Leighton Paisner LLP, Jones Day and Clifford Chance LLP. Like Gupta, Wood was also based in Hong Kong during his stint December 2013

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with Clifford Chance. OppenheimerFunds Inc.— The investment management firm hired Peter Mintzberg, former co-chairman of BlackRock Inc.’s (NYSE: BLK) regional operating committee, as senior vice president, strategy and market planning. He spent seven years at BlackRock where he was head of marketing and head of strategy, Latin America and Iberia, and was a senior member of its global corporate strategy group. Earlier, Mintzberg advised financial institutions on corporate strategy and acquisition opportunities as a consultant at McKinsey & Co. The firm also announced the hiring of Rupa Athreya and Stephen Tisdalle. Athreya joins as head of product development, coming from Chase Wealth Management where she was head of strategy. Tisdalle joins as a senior vice president, brand marketing from Ogilvy & Mather, where he was a managing director leading strategic marketing services across the agency. Pharos Capital Group LLC— The Dallas private equity firm enlisted Brett Jackson as a senior financial analyst. He will be based in the firm’s Nashville, Tenn., office where he will be responsible for deal review, financial due diligence and financial modeling. Previously, Jackson was an investment banking analyst at Stephens Inc. in Little Rock, Ark. TA Associates— The Boston private equity firm tapped Tony Marsh to be director of capital markets, a newly created role designed to manage TA’s relationships with corporate finance providers. Marsh joins the firm from Credit Suisse Securities (USA) LLC (NYSE: CS), where he served as a director. Before that, he was a controller at Mack Trucks Inc. Thoma Bravo LLC— The Chicago private equity firm advanced both Seth Boro and Holden Spaht to managing partner. Boro’s prior experience includes positions at Summit Partners LP, in Palo Alto, Calif., and with Credit Suisse and First Marathon Securities, both in Toronto. Boro has played a key role in the firm’s acquisition and development of various companies, including Keynote Systems Inc., which Thoma

Bravo acquired in June. Spaht, who joined from Morgan Stanley, has also worked at Thomas H. Lee Partners in Boston. At Thoma Bravo, he has played a key role in the firm’s acquisition of several companies, including the $1.1 billion purchase of Deltek Inc. in October 2012. Both Boro and Spaht joined Thoma Bravo in 2005 as vice presidents in the firm’s San Francisco office, and were promoted to partner in 2011. Waud Capital Partners— The Chicago private equity firm brought in Katie Lyndon as director of marketing and investor relations. In this position, Lyndon will oversee the firm’s business development initiatives related to deal flow generation and capital raising. Prior to joining Waud Captial, she Katie Lyndon worked as a principal for investment firm Westwind Investors in Incline Village, Nev. White & Case LLP— The New York law firm expanded its Europe, Middle East and Africa private equity practice by bringing in two new partners. Ian Bagshaw and Richard Youle, previously co-heads of private equity at Linklaters, joined the White & Case London office. Bagshaw has held positions at various firms, including Clifford Chance LLP, Eversheds LLP and Alston & Bird LLP. Youle, who joined Linklaters in 2001 as a managing associate, was previously an associate at SJ Berwin LLP and Eversheds. Winston & Strawn LLP— The New York law firm brought in Glen Barrentine as a partner in the financial services practice. Barrentine, a broker-dealer regulatory specialist, was previously a special counsel at Cadwalader Wickersham & Taft LLP. Before that, he was chief regulatory officer of the American Stock Exchange. His experience also includes assistant general counsel with Bank of America Corp. (NYSE: BAC), and as an assistant director at the U.S. Securities and Exchange Commission where he served under the commission’s office of compliance inspections and examinations. MERGERS & ACQUISITIONS

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Deal Flow

Key Middle-Market M&A Deals Announced in October 2013 Date

Acquirer

Target

Target Industry

10/01/13 10/11/13 10/15/13 10/23/13 10/01/13 10/16/13 10/17/13 10/13/13

SCOR Global Life Americas Hldg Otsuka Holdings Co Ltd Ivanhoe Cambridge Inc Cubist Pharmaceuticals Inc Hyatt Hotels Corp The Pritzker Organization LLC HGST Inc Thomas Properties Group Inc

Generali US Holdings Inc Astex Pharmaceuticals Inc 1211 Avenue Of The Americas Optimer Pharmaceuticals Inc The Peabody Orlando TMS International Corp Virident Systems Inc TPG/CalSTRS LLC

10/09/13

Revlon Consumer Prod Corp

The Colomer Grp Participations

Insurance Drugs Real Estate; Mortgage Bankers and Brokers Drugs Hotels and Casinos Metal and Metal Products Computer and Office Equipment Investment & Commodity Firms, Dealers, Exchanges Soaps, Cosmetics, and Personal-Care Products Mining Chemicals and Allied Products Food and Kindred Products Oil and Gas; Petroleum Refining Electronic and Electrical Equipment Food and Kindred Products Chemicals and Allied Products Textile and Apparel Products Drugs Drugs Hotels and Casinos Computer and Office Equipment Business Services Health Services Business Services Business Services Air Transportation and Shipping Health Services Measuring, Medical, Photo Equipment; Clocks Construction Firms Rubber and Miscellaneous Plastic Products Printing, Publishing, and Allied Services Chemicals and Allied Products Advertising Services Oil and Gas; Petroleum Refining Real Estate; Mortgage Bankers and Brokers

10/11/13 10/01/13 10/28/13 10/01/13 10/01/13 10/01/13 10/01/13 10/07/13 10/07/13 10/28/13 10/18/13 10/29/13 10/01/13 10/18/13 10/01/13 10/11/13 10/01/13 10/01/13 10/01/13 10/01/13 10/22/13 10/02/13 10/01/13 10/01/13 10/07/13 10/24/13

Capstone Mining Corp Altana AG Darling International Inc Memorial Prodn Partners LP Maxim Integrated Products Inc Pinnacle Foods Inc SK Capital Partners LP Hanesbrands Inc MedImmune Inc Kinetic Concepts Inc MCR Development LLC Cisco Systems Inc Catamaran Corp Gentiva Health Services Inc Apollo Global Management LLC Integrated Mission Solutions ADC & HAS Corp Medical Properties Trust Inc Davol Inc Alexander & Baldwin Inc Silgan Holdings Inc Nash Holdings LLC Jindal Poly Films Ltd Platinum Equity LLC JP Energy Development LP Cornerstone Real Estate Adv

BHP-Pinto Valley,Miami,AZ Rockwood Holdings Inc-Rheology Maple Leaf Foods Inc-Rothsay Memorial Resource Dvlp-Oil,Gas Volterra Semiconductor Corp Unilever-Wish-Bone Salad Clariant AG-Businesses(3) Maidenform Brands Inc Amplimmune Inc Systagenix Wound Care Ltd Westin Hotel Co-Hotel Port(26) Whiptail Inc Restat LLC Harden Healthcare LLC Pitney Bowes Management Svcs Michael Baker Corp Stockholm Skavsta Flygplats AB IASIS Healthcare-Med Ctrs(3) Medafor Inc Grace Pacific Corp Portola Packaging Inc The Washington Post Exxonmobil Chemical Co-BOPP CBS Outdoor Ltd Wildcat Permian Services LLC Nexus Place

Value ($mil)

920.0 886.9 850.0 775.5 717.0 692.3 685.0 678.3 660.0 650.0 635.0 614.3 606.0 602.7 580.0 549.7 543.3 500.0 485.0 430.0 415.0 409.5 408.8 400.0 391.5 374.5 283.3 280.0 277.0 266.0 250.0 235.0 226.7 210.0 207.3

Note: List excludes recapitalizations, self-tenders, exchange offers, repurchases and minority stake purchases 4PVSDF 5IPNTPO 3FVUFST

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December 2013

11/6/2013 10:26:45 AM

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