Latest M&A Outlook & Accounting for Acquisitions

Presented by:

Anthony Giordano

BKD Corporate Finance

Matthew List, CPA

BKD, LLP

32 offices in 12 states Approximately 250 partners More than 2,000 employees Six industry niche groups Clients in all 50 states and

internationally End-to-end client service proposition

BKD, LLP Overview

Audit & Tax BKD Corporate Finance BKD Technologies BKD Wealth Advisors

Forensics & Valuation Services Risk Management Special Tax Services

Subsidiary of BKD, LLPFINRA broker dealer

Investment bankers Financial analysts

Corporate finance services Mergers, acquisitions, divestitures, management

buyouts, recapitalizations Debt & equity financing Strategic options analysis

BKD Corporate Finance Overview

Current Market Conditions

Strategy to Achieve Your Goals

U.S. Middle Market M&A Activity

* Disclosed middle market transactions

U.S. Middle Market Deal Statistics – Q4 2009

Middle market disclosed transactions (enterprise value between $10 and $500 million)

Source: Capital IQ, W.Y. Campbell

EV/EBITDA Valuation Multiples

EV/EBITDA Valuation Multiples

EBITDA Multiples – GF Data Resources

U.S. PEG Middle Market Deal Statistics

5.7 5.75.4 5.3

4.9

6.1 6.1 6.25.9 6.06.1

6.5 6.5 6.6

6.1

7.4

6.3

7.5

6.96.5

5.75.86.06.06.0

4

4.5

5

5.5

6

6.5

7

7.5

8

2005 2006 2007 2008 2009

$10 - 25 MM $25 - 50 MM $50 - 100 MM $100 - 250 MM Total

Credit Markets

Strategy to Achieve Your Goals

Credit Markets

Credit Markets – PE DealsHistorical Leverage Multiples

0.0

1.0

2.0

3.0

4.0

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

Q32009

Q42009

Senior Debt/EBITDA Sub Debt/EBITDA

2.5x

1.0x

3.5x

2.3x

1.0x

3.3x

2.5x

0.8x

3.3x

1.6x

0.9x

2.5x

1.5x

1.2x

2.7x

2.0x

2.0x

1.6x

0.9x

2.5x

1.8x

0.7x

2.5x

Credit Markets – PE DealsEquity & Debt Contributions

40% 43% 45% 38%29%

16% 13%14%

12%

46% 42% 42% 49%59%

14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009

Senior Debt Sub Debt Equity

Private Equity Group Fundraising

$ billions

$90

$153

$201

$300$314

$140

$-

$50

$100

$150

$200

$250

$300

$350

2004 2005 2006 2007 2008 2009

Several ways financing is being arranged Debt financing (still tight, but loosening) PE investments Earnouts Seller notes Royalties

Financing Structures

Mold a strong management team

Business planFinancial statements Invest in the future Improve margins &

profitability

Customer concentration

Balance sheetControlled ownershipPre-due diligence Timing

Tools for Building Value – Plans to Accelerate Value

Accounting for Acquisitions

FAS 141Self-sustaining set

of activities & assets conducted for purpose of providing return to investors

FAS 141R Integrated set of activities

& assets capable of being conducted & managed for purpose of providing return in form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants

Definition of a Business

FAS 141Occurs if entity

obtains control of business through acquisition of equity interests or net assets

FAS 141RTransaction or other

event in which acquirer obtains control of one or more businesses

Definition of a Business Combination

Company A owns equity investment in investee

Investee repurchases its own shares from other parties

Proportional interest of Company A increases, causing Company A to obtain control

Example: Share Repurchase

Company C & Company D enter into contractual agreement to combine their businesses

Company C will control all operations

Example: Contract

FAS 141Most considered part of

cost of business combination

FAS 141RRecognized

separately from business combination & generally expensed as incurred

Acquisition & Restructuring Costs

Lower earningsLess goodwill

Impact

FAS 141Recognized using cost

accumulation approach. Any outstanding minority interest is recorded at its carrying amount

FAS 141RRecognized at fair

value, with limited exceptions

Acquired Assets & Liabilities – Partial Acquisition

Acquirer purchases 75% of Target’s common stock for $250M in cashFacts FV of NCI is $75M FV of 100% of identifiable assets & liabilities is

$100M Carrying value of Target’s net assets is $50M

Example – Partial Acquisition

Analysis FV of consideration

transferredFV of NCIFV of consideration & NCIFV of 100% of assets/liabilitiesGoodwill

$250M75M

325M

(100M)$225M

Example – Partial Acquisition

141 141RFinancial Statement adjustmentsCash $(250M) $(250M)Identifiable net assets (a) $88M $100MGoodwill $175M $225MNCI (b) $(13) $(75M)

(a) FAS 141 – ($100*75%) + ($50*25%)(b) FAS 141 - $50*25%

Partial Acquisition

Acquirer has 30% previously held equity interest with carrying value of $150M

Acquirer purchases additional 50% interest for $300M & obtains control FV of previously held equity interest is $200M FV of NCI is $100M FV of net assets is $500M Carrying value of net assets is $400M

Example – Step Acquisition

141 141RFinancial Statement adjustmentsCash $(300M) $(300M)NCI (a) $(80M) $(100M)Previously held equity interest $(150M) $(150M)Identifiable net assets (b) $480M $500MGoodwill $50 $100MIncome (c) 0 $(50M)(a) FAS 141 – $400*20%(b) FAS 141 – ($500*50%) + $150 + ($400*20%)(c) Gain on previously held equity interest ($200 - $150)

Step Acquisition

FAS 141Allocate pro-rata to

first reduce noncurrent assets then to earnings as extraordinary item

FAS 141RRecognized in

earnings

Bargain Purchase

Acquirer pays $200M in cash to acquire 100% of Target

FV of current assets is $100MFV of long-lived assets is $150M

Example – Bargain Purchase

141 141RFinancial Statement adjustmentsCurrent assets $100M $100MLong-lived assets $100M $150MGain on bargain purchase 0 $(50M)

Bargain Purchase

ASC 810, Consolidation (FAS 160 – Noncontrolling Interests)

Before Proportionate

amount acquired recorded at FV

After After control

obtained, subsequent changes in ownership accounted for as capital transactions (i.e., investments by owners)

Step Acquisitions

Before Issuance of new shares

by sub – gain/ loss recognized in income or directly to parent’s equity

Sale by parent of existing sub shares – gain/loss recorded in income

AfterCapital transaction (i.e.,

distribution to owners)

Decrease in Ownership (Control Maintained)

BeforeDeconsolidate &

recognize gain/loss equal to FV of consideration received less carrying value of interest sold

Any remaining NCI recorded based on historical carrying value

AfterSimilar to before,

except retained NCI revalued to FV & gain/loss recorded

Loss of Control

Company A owns 100% of sub BA sells 60% of B for $360M (control lost)B will be deconsolidated & accounted for

under equity methodFV of sub B is $600MCarrying value of identifiable net assets is

$440M & goodwill of $60M

Example – Control Lost

Before AfterFinancial Statement adjustmentsCash $360M $360MIncrease in equity method inv (a) $200M $240MDecrease in net assets $(440M) $(440M)Decrease in goodwill $(60M) $(60M)Income $(60M) $(100M)

(a) Before – ($440+60)*40%; After - $600*40%

Example – Control Lost

Co. A owns 60% of Co. X; Co. B owns remaining 40%

Co. A purchases 40% from B for $300MFV of X is $750MFV of X’s identifiable net assets is $600MCarrying value of net assets is $520MPreviously recognized GW is $130MCarrying value of NCI is $260M

Example – Control Maintained

Before After Financial Statement adjustments Cash $(300M) $(300M) Increase in net assets (a) $32M 0 Increase in goodwill (b) $60M 0 Elimination of NCI (c) $208M $260M Decrease in APIC 0 $40M

(a) ($600-520)*40%(b) $300 – ($600*40%)(c) Before – $520*40%

Example – Control Maintained

Fiscal years & interim periods beginning on or after December 15, 2008

Early adoption prohibited

Effective Date

Thank You

agiordano@bkd.com

mlist@bkd.com