ACG/Thomson DealMaker's Survey Reveals Boston M&A Community Bullish About Current Deal Environment.

BOSTON -- The good times are rolling for Massachusetts merger and acquisitions professionals, according to a recent survey of 1,590 dealmakers by Thomson Financial and the Association for Corporate Growth (ACG), the global association for professionals involved in corporate growth, corporate development, and mergers and acquisitions.

The mid-year 2005 ACG/Thomson DealMaker's Survey found that 77% of Massachusetts dealmakers view the current M&A environment as good or excellent, the same as year-end 2004, and an increase from 49% at year-end 2003. Nationally, dealmakers are even more bullish, with 85% reporting the current M&A environment good or excellent (vs. 72% at the end of 2004, and 45% at the end of 2003). Only 2% of respondents in Massachusetts and 1% nationally characterize the current M&A environment as poor, compared to 2% at year-end 2004, and 8% at year-end 2003.

The percentage of Massachusetts respondents who think the M&A environment will improve further in the second half of 2005 dropped to 62% from 86% at year-end 2004. Nationally, the percentage fell to 68% from 87% at the end of last year.

"The marketplace conditions are very positive and merger pros in New England are very active," said Jack Derby, President of ACG Boston, and President of Derby Management, a Boston-based management coaching firm. "Private equity professionals, investment bankers, corporate development officers, lenders, lawyers and consultants in Boston and beyond continue to remain bullish. Their feelings are tempered somewhat however by the feeling that the pace of deals can't possibly continue its upward trajectory forever."

Helped by an unusually busy December of dealmaking in 2004, domestic M&A deal volume during the first quarter of 2005 was $264 billion, compared with $241 billion in Q1 2004, according to Thomson Financial. In 2004, there was $834 billion in M&A, 46% more than in 2003, according to Thomson Financial. That activity was helped in part by a busy LBO market, where U.S. private equity sponsors completed a record $136.5 billion of transactions during the year, according to Thomson Financial's Buyouts Magazine.

"We are seeing a significant increase in middle market deal volume - double what we saw a year ago," said Gail Long, ACG Boston Board member, and Group Executive, Citizens Bank of MA, and President, Citizens Capital. "We attribute this to mature funds seeking liquidity events and non-sponsored companies taking advantage of a frothy debt market."

During the second half of 2005, Massachusetts respondents say the sectors that will experience the most M&A activity will be technology (31% vs. 42% at year-end 2004, vs. 27% nationally), healthcare and life sciences (27% vs. 26% at year-end 2004 vs. 19% nationally), business services (13% vs. 6% at year-end 2004 vs. 14% nationally), consumer products and services (10% vs. 6% at year-end 2004 vs. 10% nationally), and manufacturing and distribution (9% vs. 13% at year-end 2004 vs. 17% nationally).

"Increased private equity availability, maturing private equity investments, and greater strategic interest in acquisitions all support what is a very strong middle market M&A environment. All market participants are aware that the ongoing availability of high levels of debt capital with attractive terms has helped to create this strong market," said Jeff Bistrong, ACG Boston Board Member and Managing Director at Harris Williams & Co., a national middle market investment bank which Buyouts magazine recently named 2004 Investment Bank of the Year. "While aggressively pursuing deals, the private equity community is looking warily at the softness in the high yield market and wondering whether that might roll over into the bank market."

Massachusetts merger pros say the primary goal of a merger or acquisition today is to increase revenues and profitability (54% vs. 48% at year-end 2004, vs. 50% nationally), followed by grow market share (29% vs. 32% at year-end 2004 vs. 34% nationally).

Dealmakers in Massachusetts say the company attribute that matters most to an acquirer today is attractive business sector (27% vs. 23% at year-end 2004 vs. 23% nationally), sales and revenue growth (26% vs. 27% at year-end 2004 vs. 30% nationally), profitability (19% vs. 17% at year-end 2004 vs. 18% nationally), management strength (15% vs. 16% at year-end 2004 vs. 18% nationally), and proprietary technology (11% vs. 14% at year-end 2004 vs. 9% nationally).

Massachusetts survey respondents say the greatest impediment to closing an M&A transaction is disagreement on valuation (60% vs. 56% at year-end 2004 vs. 60% nationally), followed by lengthy due diligence (14% vs. 14% at year-end 2004 vs. 7% nationally). Economic uncertainty, which was cited by 43% of Massachusetts dealmakers in April 2004, and by 14% at year-end 2004, was mentioned by only 8% (vs. 11% nationally) in the current survey.

The overwhelming reason for failure of mergers and acquisitions is lack of merger integration, according to 62% of Massachusetts respondents (vs. 63% at year-end 2004 vs. 60% nationally) followed by overpaying (18% vs. 18% at year-end 2004 vs. 19% nationally).

Increased Revenues Expected

Eighty-eight percent of Massachusetts respondents (vs. 91% at year-end 2004 vs. 89% nationally) expect their company's revenues to increase in the second half of 2005. Respondents say the sectors that will experience the most organic growth are healthcare, life sciences (37% vs. 47% at year-end 2004 vs. 32% nationally), followed by technology (17% vs. 21% at year-end 2004 vs. 17% nationally), consumer products and services (16% vs. 7% at year-end 2004 vs. 10% nationally), business services (13% vs. 12% at year-end 2004 vs. 20% nationally), financial services (12% vs. 5% at year-end 2004 vs. 11% nationally), and manufacturing and distribution (3% vs. 7% at year-end 2004 vs. 8% nationally).

Massachusetts respondents say the best strategy to achieve growth in the second half of 2005 is VC or private equity investment (28% vs. 12% at year-end 2004 vs. 18% nationally), increasing revenues from loyal customers (20% vs. 13% at year-end 2004 vs. 20% nationally), mergers and acquisitions (18% vs. 20% at year-end 2004 vs.18% nationally), investment in sales, marketing and public relations (17% vs. 30% at year-end 2004 vs.23% nationally), and strategic alliances or partnerships (10% vs. 17% at year-end 2004 vs.12% nationally).

Massachusetts dealmakers say customer service is by far the most important factor in building and retaining customer loyalty at their companies (49% vs. 49% nationally), followed by product quality (21% vs. 21% nationally), product differentiation (20% vs. 16% nationally), ease of doing business (7% vs. 7% nationally), and competitive pricing (2% vs. 6% nationally).

In Massachusetts, 58% (vs. 70% nationally) of dealmakers say their due diligence costs have increased over the last year, and 87% (vs. 86% nationally) of respondents say the cost and transparency required under Sarbanes-Oxley is a concern for taking a company public or remaining public. The overwhelming reason for failure of mergers and acquisitions is poor integration planning and follow through, according to 62% (vs. 60% nationally) of respondents.

"With the increased complexity and potential liability under SEC and stock exchange rules under Sarbanes-Oxley, buyers are taking their time to make sure they are getting financially sound businesses that will not add to their already high costs of being public companies," said Carol Wolff, ACG Board Member and Partner, Sullivan & Worcester LLP. "Acquisitive companies don't want to be tripped up on their post-deal internal control evaluations or disclosure issues or inherit operations that will cause accounting or governance problems."

Private Equity and Impact of Hedge Funds 

In Massachusetts, 26% of private equity professionals complain that hedge funds' involvement in private equity is driving up prices (vs. 43% nationally), while another 13% (vs. 8% nationally) are concerned for other reasons such as the short-term focus of many hedge funds. Conversely, 24% (vs.18% nationally) are happy about hedge fund involvement because it creates more options for buyers and sellers, while the remaining 37% (vs. 32% nationally) of private equity professionals say hedge funds aren't significantly in the business.

The greatest opportunity for private equity investments today is in early stage venture capital investments (32% vs. 15% nationally), according to Massachusetts private equity pros, followed by small buyouts 26% (vs. 36% nationally), middle market private investments and buyouts (28% vs. 30% nationally).

Eighty percent (vs. 83% at year-end 2004 vs. 78% nationally) of Massachusetts private equity professionals say there is more private equity capital available for investment than there should be. The percentage that say the amount is 'much too high' dropped substantially to 25% from 40% at year-end 2004, while those saying it is 'higher than it should be' increased to 55% from 43% at year-end 2004.

"Concerns about too much money chasing after too few deals are nothing new, and even the most efficient markets can undervalue an asset," says Adam Reinebach, Publisher of Buyouts Magazine. "That said, most buyers acknowledge that the tremendous accessibility of debt, the trend toward auctioned deals, increasing competition overseas and the undeniable need for private equity and hedge funds to deploy capital will eventually cause downward pressure on returns."

With auctions driving up prices, the percent of Massachusetts private equity professionals who primarily source transactions of middle-market companies through investment banks increased to 50% from 43% at year-end 2004, those who call targets directly - so as to avoid auctioned deals--fell to 33% from 43% at year-end 2004, and those who get deals from conferences or networking events decreased to 12% from 14%.

Massachusetts private equity professionals say the primary reasons they win deals are industry sector knowledge (38% vs. 22% nationally), reputation or brand of their firm (20% vs. 22% nationally), pre-existing relationship with company management (16% vs. 17% nationally), and paying the highest price (16% vs. 10% nationally), and lack of competition (11% vs. 22% nationally).

Private equity professionals in Massachusetts anticipate more mergers than IPOs for their portfolio companies in the next six months. Forty-eight percent (vs. 55% nationally) say mergers for their portfolio companies will increase during the second half of 2005, 11% (vs. 4% nationally) say mergers will decrease, and 41% (vs. 41% nationally) say they will stay the same. The number of IPO liquidity events for their portfolio companies will stay the same, say 50% (vs. 57% nationally) of respondents, compared to 27% (vs. 25% nationally) who say IPOs will increase, and 23% (vs. 18% nationally) who say they will decrease.

"It is an excellent time in the cycle right now for both buyers and sellers of businesses" said Tyler Wick, ACG Boston Board Member and General Partner of Ticonderoga Capital. "Although multiples certainly have crept up over the past year, some buyers are comfortable with higher prices due to the availability of debt and faster underlying growth rates of target companies compared to times when prices seemed cheaper. Despite the perception of high prices to sellers, it is not always the highest bidder who wins deals. Our experience in business and healthcare services investments has taught us that sellers increasingly weigh a financial partner's sector knowledge and reputation as much as they weigh price in their decision."

Other than price, the most common reason a target declines an investment is reluctance to give up ownership (77% vs. 73% at year-end 2004, and vs. 69% nationally), followed by fear of future direction of the business (14% vs. 13% at year-end 2004, and vs. 17% nationally), and potential change in management (7% vs. 7% at year-end 2004, and vs. 9% nationally).

Survey Methodology

The survey, conducted in May and June 2005, was completed by 1,590 ACG members and Thomson Financial customers. Respondents were comprised of private equity, venture capital and LBO firm members (24%); investment bankers, intermediaries, brokers (24%); lenders, finance providers (9%); corporate professionals, entrepreneurs (18%); and service providers, such as lawyers, workout specialists, accountants and consultants (25%). The majority of respondents were from the United States (1,386), where 47 states were represented. Internationally, executives from 38 countries completed the survey.

About ACG

Founded in 1954, the Association for Corporate Growth (www.acg.org) is a global association for professionals involved in corporate growth, corporate development, and mergers and acquisitions. Today ACG stands at nearly 10,000 members from corporations, private equity, finance, and professional service firms representing Fortune 500, Fortune1000, FTSE 100, and mid-market companies in 48 chapters in North America and Europe. ACG Boston is ACG's largest chapter with more than 900 members.

About Thomson Financial

Thomson Financial is a US$1.73 billion provider of information and technology solutions to the worldwide financial community. Through the widest range of products and services in the industry, Thomson Financial helps clients in more than 70 countries make better decisions, be more productive and achieve superior results. Thomson Financial is part of The Thomson Corporation (www.thomson.com), a global leader in providing integrated information solutions to more than 20 million business and professional customers in the fields of law, tax, accounting, financial services, higher education, reference information, corporate e-learning and assessment, scientific research and healthcare. With revenues of US$8.10 billion, The Thomson Corporation lists its common shares on the New York and Toronto stock exchanges (NYSE: TOC; TSX: TOC).