2011 purchase agreement study

2011 PURCHASE AGREEMENT STUDY Houlihan Lokey's Mergers & Acquisitions Group

Purchase Agreement Study 2011_R1_JCedit2.indd 1 10/21/11 10:14 AM

The 2011 Purchase Agreement Study was prepared by Matt Spencer, Vice President (310.788.5366) and

Sanjuro Kietlinski, Associate (310.789-5745) of Houlihan Lokey’s Corporate Finance business.

If you have questions or comments, please contact them directly or a member of

Houlihan Lokey’s M&A Group at 310.553.8871.


The 2011 Purchase Agreement Study (the Study) summarizes selected terms of middle-market change-of-control transactions

in which Houlihan Lokey served as the financial advisor to either the buyer or the seller.(1) The Study is based on both public

and private transactions that vary by industry and size. The Study analyzes the terms of the indemnification provisions with

respect to the representations (reps), warranties and covenants contained in their respective purchase agreements. These

terms are negotiated by attorneys and investment bankers. There is no consensus on what constitutes “fair and normal” or

“market,” as terms vary based on the specific facts and circumstances of a transaction. However, as illustrated by the data

in the Study, certain patterns emerge.

The Study also presents the mean, median, maximum and minimum values of the corresponding terms of each subject

transaction. The magnitude of the numerical values is measured as a percentage of purchase price. Although it is difficult

to capture all of the nuances of the broader market, the Study is intended to provide valuable benchmarks within the middle

market to buyers and sellers, and their shareholders, boards, management, attorneys and other advisors. Since the Study is

limited to middle-market transactions with purchase prices ranging from approximately $10 million to more than $1 billion,

the indemnification terms may exhibit greater variation than those of larger transactions.

Houlihan Lokey has prepared the Study on an annual basis since 2002. Consistent with previous years’ studies, the Study

illustrates data for 2010 relative to prior years.

(1) The Study includes transactions closed in 2002 – 2010; many of the transactions were private, so there is limited publicly disclosed information about them.

1

2011 PURCHASE AGREEMENT STUDY


DEAL STATISTICS

• Houlihan Lokey has analyzed a large universe of transactions that closed between 2002 and 2010.

• The data on the following pages is presented on an annual basis to understand patterns that might exist over time. In certain cases the data is presented for all years in the aggregate.

• The subject transactions provide a mix of strategic and financial buyers, as well as a mix of stock and asset sales.

• In every year of the Study, the majority of the target companies have been sold to strategic buyers.

•Strategic buyers acquired 61% of the target companies in all of the subject transactions between 2002 and 2010, while financial buyers acquired 39%.

•Of the financial buyer transactions, a total of 87% were platform acquisitions and 13% were add-on acquisitions.

2

Year Strategic Financial Platform Add-On

2002 67% 33% 88% 13%

2003 68% 32% 63% 38%

2004 55% 45% 75% 25%

2005 61% 39% 100% 0%

2006 73% 27% 63% 38%

2007 57% 43% 86% 14%

2008 62% 38% 93% 7%

2009 67% 33% 100% 0% 2010 52% 48% 94% 6%

All Years 61% 39% 87% 13% 0.612529002 0.387470998 0.872340426 0.127659574

Buyer Mix Financial Buyer Mix (2)

B U YE R S T R U CT U R E

(2) Financial buyer percentages are based only on companies classified as either "platform" or "add-on" acquisitions and do not include companies that were classified as neither.


• The vast majority of all of the subject transactions between 2002 and 2010 were structured as all-cash transactions and purchases of stock.

• Stock was purchased in 83% of the subject transactions.

• The buyer paid all cash in 90% of the subject transactisions.(3)

3

DEAL STATISTICS

Stock Cash & Stock (3)

Year For Stock For Assets Subtotal For Stock For Stock

2002 71% 17% 88% 4% 8%

2003 64% 24% 88% 4% 8%

2004 71% 24% 95% 3% 3%

2005 82% 16% 98% 0% 2%

2006 69% 18% 87% 2% 11%

2007 79% 17% 96% 1% 2%

2008 75% 18% 93% 0% 7%

2009 75% 13% 88% 0% 13%

2010 65% 7% 72% 2% 26%

All Years 74% 17% 90% 1% 8%0.612529002 0.387470998 0.872340426 0.127659574

T R A N S A CT IO N S T R U CT U R E

Cash (3)

(3) In 2010, Houlihan Lokey changed the way it accounted for earn-outs. Prior to 2010, an earn-out did not affect the transaction structure. In the 2010 figures, cash transactions that included an earn-out were classified as "hybrid" transactions.


4

DEAL STATISTICS

Financial Buyer – Platform vs. Add-On (5)

B U YE R S T R U C T U R E (4)

Strategic vs. Financial

Cash vs. Stock and / or Cash

T R A N S A C T IO N S T R U C T U R E (4)

Stock vs. Assets

Strategic61%

Financial39%

(4) Data presented in this section includes all subject transactions that closed in 2002 – 2010.

Platform87%

Add-On13%

(5) Financial buyer percentages are based only on companies classified as either "platform" or "add-on" acquisitions and do not include companies that were classified as neither.

Stock83%

Assets17%

Cash90%

Stock10%


CONTINGENT PAYMENT

• Of all subject transactions, 18% contained earn-outs.

• The percentage of transactions contained earn-outs remained at 21% from 2009 to 2010.

• The median earn-out as a percentage of purchase price was 9% in 2009 and 2010.

• Of all subject transactions, 20% had rollovers.

• The percentage of transactions with rollovers increased to 25% in 2010.

• The median rollover as a percentage of purchase price fell sharply from 15% in 2009 to 4% in 2010.

• Of all subject transactions, 5% had seller notes.

• The percentage of transactions that had seller notes decreased between 2009 and 2010.

• The median seller note, as a percentage of purchase price, decreased from 16% in 2009 to 9% in 2010.

5

OVERVIEW

E A R N -O U T S R O L L O VE R S S E L L E R N O T E SPercentage Included in Subject Transactions

2008 16% 18% 6%

2009 21% 18% 6%

2010 21% 25% 2%

All 18% 20% 5%

Median Percentage of Purchase Price

2008 11% 12% 12%

2009 9% 15% 16%

2010 9% 4% 9%


6

CONTINGENT PAYMENT OVERVIEW

Rollovers

P E R C E N T A G E IN C L U D E D IN S U B J E C T T R A N S A C T IO N S

Earn-Outs Seller Notes

RolloversEarn-Outs

16%

21% 21%

0%

5%

10%

15%

20%

25%

30%

2008 2009 2010

11% 9% 9%

0%

4%

8%

12%

16%

20%

2008 2009 2010

12%

15%

4% 0%

4%

8%

12%

16%

20%

2008 2009 2010

18% 18%

25%

0%

5%

10%

15%

20%

25%

30%

2008 2009 2010

Seller Notes

6% 6%

2%

0%

1%

2%

3%

4%

5%

6%

7%

2008 2009 2010

M E D IA N P E R C E N T A G E O F P U R C H A S E P R IC E

12%

16%

9%

0%

4%

8%

12%

16%

20%

2008 2009 2010


• Despite an uncertain economic environment, market multiples increased in 2010.

• Mean and median EBITDA multiples each increased in 2010, with mean EBITDA multiples returning to 2007 levels.

• The mean EBITDA multiple increased from 7.4x in 2009 to 8.7x in 2010.

• The median EBITDA multiple increased from 6.8x in 2009 to 7.4x in 2010.

• Overall, EBITDA multiples increased in 2010 after decreasing for the previous three years, with 2010 multiples returning to historical means and medians (relative to all subject transactions between 2002 and 2010).

7

VALUATIONS

Year Mean Median Mean Median2002 6.7x 6.8x 1.0x 0.8x2003 6.8x 6.8x 1.0x 0.8x2004 7.7x 7.2x 1.0x 1.1x2005 7.8x 7.7x 1.5x 1.0x2006 9.9x 9.8x 2.2x 1.6x2007 8.8x 8.9x 1.4x 1.1x2008 8.2x 7.2x 1.5x 1.2x2009 7.4x 6.8x 1.2x 1.1x2010 8.7x 7.4x 1.3x 1.0x

All Years 8.2x 7.6x 1.4x 1.2x

E N T E R PR IS E VA L U E / E B IT D A E N T E R PR IS E VA L U E / R E VE N U E

OVERVIEW


8

• Historically, larger deals have traded at higher EV/EBITDA multiples than smaller deals. In all but two of the time periods shown below, deals greater than $100 million traded at higher multiples than those less than $100 million.

VALUATIONS



Less than $100 M Greater than $100 ME N T E R PR IS E VA L U E / E B IT D A

Median = 7.2x Median = 8.6x

6.7x 6.9x 7.4x 7.3x

9.3x8.6x

7.8x 7.8x6.7x7.0x

6.3x

8.6x 8.8x

10.6x

9.1x 9.1x

6.8x

12.1x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

2002 2003 2004 2005 2006 2007 2008 2009 2010

Less than $100 M Greater than $100 M

OVERVIEW


9

• Historically, larger deals have traded at higher EV/Revenue multiples than smaller deals. In all but three of the time periods shown below, deals greater than $100 million traded at higher multiples than those less than $100 million.

VALUATIONS



Less than $100 M Greater than $100 ME N T E R PR IS E VA L U E / R E VE N U E

Median = 1.4xMedian = 1.1x

1.1x1.0x 1.0x

1.2x

2.1x

1.2x1.3x 1.3x

0.8x

0.4x

1.0x1.3x

1.9x

2.3x

1.7x 1.8x

1.3x

2.1x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

2002 2003 2004 2005 2006 2007 2008 2009 2010

Less than $100 M Greater than $100 M

OVERVIEW


10

• Basket: Of the transactions in which the reps and warranties survived the closing, the vast majority had a basket. Deductible baskets accounted for 77% of the baskets and dollar-one baskets accounted for the other 23% of the baskets.

• Cap: Of the transactions in which the reps and warranties survived the closing, 74% had a cap.

• Escrow: Of the transactions in which the reps and warranties survived the closing, 66% had an escrow.

INDEMNIFICATION – ALL YEARS TRANSACTION TERMS

(6) Data presented in this section includes all subject transactions that closed in 2002 – 2010.

Percentage of Transactions with Caps

IN D E M N IFIC A T IO N S T R U C T U R E S

Percentage of Transactions with Baskets Percentage of Transactions with Escrows

With Basket74%

Without Basket26%

With Cap74%

Without Cap26%

With Escrow66%

Without Escrow34%

O VE R A L L IN D E M N IFIC A T IO N A S A P E R C E N T A G E O F P U R C H A S E P R IC E (6)

Mean Median Max MinAll Baskets 0.8% 0.7% 8.2% 0.1% Deductible 0.8% 0.7% 8.2% 0.1% Dollar-One 0.7% 0.6% 2.3% 0.1% Cap 14.8% 10.0% 100.0% 0.5% Survival (months) 19 18 96 9 Escrow 8.0% 7.4% 34.2% 0.0% Escrow (months) 19 18 96 1


11

INDEMNIFICATION – BASKET TRANSACTION TERMS

Deductible vs. Dollar One

B A S K E T D E VE L O P M E N T S

Baskets as a Percentage of Purchase Price

All Years

D IS T R IB U T IO N O F B A S K E T S

2010

Median = 0.75% Median = 0.67%

71% 70% 73% 75%

61%

80%86%

73%81%

0%

20%

40%

60%

80%

100%

2002 2003 2004 2005 2006 2007 2008 2009 2010

Deductible Dollar One

Deductible81%

Dollar One19%

Deductible77%

Dollar One23%

0.7% 0.7%

0.8%

0.7%

0.6%

0.7%

0.8% 0.8% 0.8%0.7% 0.7%

0.8%0.8%

0.6%

0.7%

0.6%

0.8%

0.6%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

2002 2003 2004 2005 2006 2007 2008 2009 2010

Mean Median


12

INDEMNIFICATION – CAP TRANSACTION TERMS

2002 2003 2004 2005 2006 2007 2008 2009 2010Caps as a % of Purchase Price

Mean 35.9% 19.1% 12.1% 9.7% 10.9% 16.9% 14.1% 9.9% 12.3%Median 22.7% 11.7% 10.0% 8.1% 9.8% 10.0% 10.0% 9.6% 9.6%

Survival Period (Months)Mean 21 21 22 17 20 18 20 19 17Median 18 18 18 15 16 18 18 18 18

CA P S T A T IS T ICS

Survival Period (Months)

C A P D E VE L O P M E N T S

Median = 12.3% Median = 10.0% Median = 20 Median = 18

Cap as a Percentage of Purchase Price

36%

19%

12%10% 11%

17%14%

10%12%

23%

12%10%

8% 10%10% 10%

10% 10%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2002 2003 2004 2005 2006 2007 2008 2009 2010

Mean Median

21 21 22

17

20 18

20 19

17 18 18 18

15 16

18 18 18 18

0

5

10

15

20

25

2002 2003 2004 2005 2006 2007 2008 2009 2010

Mean Median


13

INDEMNIFICATION – ESCROW TRANSACTION TERMS

2002 2003 2004 2005 2006 2007 2008 2009 2010Escrow as a % of Purchase Price

Mean 10.6% 8.6% 6.9% 6.1% 7.8% 9.1% 8.5% 7.0% 7.5%Median 9.3% 7.6% 5.7% 5.5% 7.8% 8.4% 7.9% 7.1% 7.3%

Escrow Period (Months)Mean 23 20 18 16 20 17 18 19 20Median 24 18 18 15 18 18 18 18 18

E S CR O W S T A T IS T ICS

Escrow Period (Months)

E S C R O W D E VE L O P M E N T S

Median = 7.8% Median = 7.6% Median = 19 Median = 18

Escrow Value as a Percentage of Purchase Price

11%

9%

7%6%

8%9%

9%

7%7%

9%

8%

6% 5%

8%8% 8% 7% 7%

0%

2%

4%

6%

8%

10%

12%

2002 2003 2004 2005 2006 2007 2008 2009 2010

Mean Median

23

20 18

16

20 17

18 19 20

24

18 18

15

18 18 18 18 18

0

5

10

15

20

25

30

2002 2003 2004 2005 2006 2007 2008 2009 2010

Mean Median


14

ENVIRONMENTAL INDEMNIFICATION PROVISIONS

• Special indemnification provisions for environmental reps and warranties were present in 18% of the subject transactions. Examples of provisions include exclusion of environmental claims from the cap, increasing the cap for environmental claims, changing the basket size, and lengthening the survival period.

• Only 13% of the transactions had larger environmental caps than the general indemnification cap.

• Of the deals with special baskets for environmental indemnification, 62% were deductible baskets (vs. 77% of the general indemnification deductible baskets).

• The median environmental indemnification survival period was 36 months (vs. an 18-month median general indemnification survival period).

(7) Data presented in this section includes all subject transactions that closed in 2002-2010.

TRANSACTION TERMS

O VE R A L L E N VIR O N M E N T A L IN D E M N IFICA T IO N A S A PE R CE N T A G E O F PU R CH A S E PR ICE (7)

Mean Median Max Min

All Baskets 1.0% 0.6% 20.0% 0.0%

Cap 20.8% 11.7% 100.0% 0.1%

Survival (months) 43 36 102 6


15

INDEMNIFICATION – BY YEARAPPENDIX

Mean Median Maximum Minimum

All Baskets 0.8% 0.6% 2.7% 0.3%

Deductible Baskets (81%) 0.8% 0.6% 2.7% 0.3%

Dollar-One Baskets (19%) 0.6% 0.6% 1.0% 0.3%

Cap 12.3% 9.6% 73.6% 2.7%

Survival Period (months) 17 18 25 12

Escrow 7.5% 7.3% 20.0% 0.0% Escrow Period (months) 20 18 36 12


All Baskets 0.8% 0.8% 1.6% 0.3%



Cap 9.9% 9.6% 24.8% 3.0%




All Baskets 0.8% 0.6% 8.2% 0.1%



Cap 14.1% 10.0% 100.0% 0.6%



2 0 1 0 O VE R A L L IN D E M N IFIC A T IO N A S A P E R C E N T A G E O F P U R C H A S E P R IC E




16



All Baskets 0.7% 0.7% 1.5% 0.1%



Cap 16.9% 10.0% 100.0% 1.1%




All Baskets 0.6% 0.6% 1.8% 0.1%



Cap 10.9% 9.8% 26.1% 3.9%




All Baskets 0.7% 0.8% 1.6% 0.1%



Cap 9.7% 8.1% 41.0% 0.5%







17



All Baskets 0.8% 0.8% 1.6% 0.2%



Cap 12.1% 10.0% 36.5% 0.5%




All Baskets 0.7% 0.7% 1.4% 0.2%



Cap 19.1% 11.7% 100.0% 1.0%




All Baskets 0.7% 0.7% 1.5% 0.1%



Cap 35.9% 22.7% 100.0% 4.2%







18

TRANSACTION TERMS AND STRUCTURE

Purchase Price

The total consideration paid to the target company and/or its shareholders by the buyer upon consummation of the transaction. The purchase price amount

includes cash, debt assumed, seller notes and escrowed amounts, and excludes noncompete payments, earn-out payments, royalty payments, revenue

sharing payments and other specified adjustments.

Transaction Type

The method in which the target and the buyer exchange value. The target sells either assets or stock, and the buyer provides consideration primarily in the

form of either cash or stock.

Seller Note

Loan issued by the selling shareholder(s) to the buyer, to finance a portion of the purchase price.

Earn-Outs

Conditional supplementary payments incorporated in the purchase agreement. Because earn-out payments are contingent on the future performance of the

acquired company, they are not included in the purchase price.

Rollover

Indicates an amount of equity retained by the selling shareholder(s) and is measured as a percentage of total equity of the new company and the dollar

value of equity retained.

Financial Buyer

A buyer, such as a private equity firm, that is structured as an investment vehicle rather than a corporate entity.

Platform Acquisition: A financial buyer acquiring a company in a new line of business.

Add-On Acquisition: A financial buyer acquiring a company to merge with a company the buyer owns.

Strategic Buyer

A corporate entity that operates in the same or similar industry as the target company and generally expects to receive strategic benefits from the

acquisition, such as the realization of synergies or improvement in market position.

DEFINITIONS


19

KEY INDEMNIFICATION TERMS

Basket

The dollar amount set forth as the minimum loss that must be suffered by the buyer before the buyer can recover damages under the indemnification provisions.

Deductible Basket: Seller is only responsible for damages exceeding the basket amount (e.g., under a deductible basket of $100, if a claim of $150 is

made then the seller must pay $50).

Dollar-One Basket: Seller is responsible for all damages once damages reach the threshold basket amount (e.g., under a dollar-one basket of $100,

if a claim of $150 is made then the seller must pay $150).

Cap

The maximum amount of damages the buyer can recover from the seller under the indemnification provisions.

Survival Period

The length of time (in months) after the closing date during which the representations and warranties must be true and the seller is responsible for indemnifying

the buyer (e.g., claims by the buyer must be made on or before that date).

Escrow

Purchase consideration consisting of money, securities, or other property or instruments withheld from the seller and deposited into an account at closing to

provide protection to the buyer for the future payment of indemnification claims.

Escrow Period

The length of time (in months) after the closing date that the escrow is held before being released to the seller.

DEFINITIONS


2010 M&A Advisory Rankings 2010 Global Distressed Debt & Bankruptcy Restructuring RankingsU.S. Transactions Under $1 Billion

R ank A dvisor# o f

D ea ls

1 H ou lihan L okey 1 1 7

2 Goldman Sachs & Co. 99

3 Lazard 82

4 Bank of America Merrill Lynch 77

5 JP Morgan 73

Source: Thomson Reuters.

R ank A dvisor# o f

D ea ls

1 H ou lihan L okey 7 4

2 Lazard 58

3 Rothschild 50

4 Moelis & Co. 28

5 Blackstone Group LP 25

Source: Thomson Reuters, January 2011.

M ergers and A cquisi tions

C apita l M arkets

n Sellside & Buyside Transactionsn Leveraged Transactionsn Minority Equity Transactions

n Private Debt and Equity Placementsn PIPEs and Registered Directsn Liability Managementn Equity Capital Marketsn High-Yield Capital Markets

n Chapter 11 Planningn Restructuring Debt and Equityn Debtor-in-Possession (“DIP”) Financingn Exchange Offersn Plans of Reorganizationn Distressed Mergers and Acquisitions

Corporate Finance Financial Restructuring

M&A Fairness Advisory RankingsAnnounced or Completed Deals – 2001 to 2010

R ank A dvisor# o f

D ea ls

1 H ou lihan L okey 6 4 2

2 JP Morgan 516

3 Bank of America Merrill Lynch 368

4 Morgan Stanley 323

5 UBS 304

Source: Thomson Reuters.

n Fairness Opinionsn Solvency Opinionsn Valuation Opinionsn Transaction Advisory Servicesn Tax & Financial Reporting Valuationn Portfolio Valuation & Advisory Servicesn Derivatives Valuation & Advisory Servicesn Dispute Resolution & Financial Expert Opinions

Financial Advisory

Investment Banking Services


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0611

MERGERS & ACQUISITIONS

CAPITAL MARKETS

FINANCIAL RESTRUCTURING

FINANCIAL ADVISORY SERVICES

HL.com

Houlihan Lokey is an international investment bank with expertise in mergers and acquisitions, capital markets,

financial restructuring, and valuation. The firm is ranked globally as the No. 1 restructuring advisor, the No. 1

M&A fairness opinion advisor over the past 10 years, and the No. 1 M&A advisor for U.S. transactions under

$1 billion, according to Thomson Reuters. Houlihan Lokey has 14 offices and more than 800 employees in the United

States, Europe and Asia. The firm serves more than 1,000 clients each year, ranging from closely held companies to

Global 500 corporations. For more information, visit www.HL.com.


2011 purchase agreement study

Economy & Finance

subject transactions

financial buyer transactions

c t io n s t r u c t

market transactions

larger transactions

hybrid transactions

purchase agreement studythe

allcash transactions