ACG/Thomson DealMaker's Survey Reveals Massachusetts M&A Community Optimistic About Current Deal Environment and 2005 Prospects.

BOSTON -- Following an active year for mergers and acquisitions, a recent survey of 1803 dealmakers by Thomson Financial and the Association for Corporate Growth (ACG) finds them even more bullish about the current climate and future prospects for M&A.

The ACG/Thomson DealMaker's Survey found that the percentage of dealmakers who say the current M&A environment is good or excellent leaped to 72% from 45% last year. In Massachusetts, dealmakers are even more upbeat, with 77% saying the environment is good or excellent, compared to 49% in December 2003, and 72% in April 2004.

Overall, investment bankers are most bullish, with 79% calling the M&A environment good or excellent, followed by private equity professionals (75%), lenders/finance providers (72%), corporate professionals/entrepreneurs (67%), and service providers (67%).

Only 2% of respondents in Massachusetts and overall characterize the current M&A environment as poor, compared to 4% in Massachusetts and 8% overall last year. In addition, 87% percent of overall respondents think the M&A environment will improve in 2005, up from 85% last year. Investment bankers are the most optimistic about the 2005 deal environment, with 92% expecting improvement. In Massachusetts, 86% say the M&A environment will improve in 2005.

"New England dealmakers are feeling optimistic," said Jack Derby, President of ACG Boston, the premier organization for dealmakers worldwide, and President of Derby Management, a Boston-based management coaching firm. "What I'm hearing is more bullish than it's been for a long time. Since last spring, there's been a marked uptick in the number of deals being done among ACG Boston members. Among the established investment bankers, private equity and law firms, I don't know of anyone who isn't busy these days, and they anticipate this will continue through 2005."

Helped by the busiest December ever, domestic M&A deal volume for 2004 was $834 billion, 46% more than in 2003, according to Thomson Financial. The financial sector led the way with 19% of the market. That activity was helped in part by a busy LBO market, where U.S. private equity sponsors completed a record $136 billion of transactions during the year, according to Thomson Financial's Buyouts Magazine.

During 2005, Massachusetts respondents say the sectors that will experience the most M&A activity will be technology (42%, vs. 25% in April 2004, vs. 41% in December 2003); healthcare, life sciences and medical equipment and services (26% vs. 31% in April 2004, vs. 22% in December 2003); manufacturing and distribution (13% vs. 13% in April 2004, vs. 8% in December 2003); and financial services (5% vs. 10% in April 2004, vs. 14% in December 2003).

Massachusetts dealmakers are far more bullish about technology M&A than overall respondents, where 29% said technology (29%) deals would be most active, followed by healthcare and life sciences (19%), and manufacturing and distribution (19%).

Business executives in Massachusetts say the primary goal of a merger or acquisition today is to increase revenues and profitability (48% vs. 24% in April 2004, vs. 34% in December 2003), followed by grow market share (32% vs. 37% in April 2004, vs. 47% in December 2003).

The company attribute that matters most to an acquirer today is sales and revenue growth (27% vs. 28% in April 2004, vs. 24% in December 2003), followed by attractive business sector (23% vs. 23% in April 2004, vs. 16% in December 2003), and profitability (17% vs. 19% in April 2004 vs. 22% in December 2003), management strength (16% vs. 17% in April 2004), and proprietary technology (14% vs. 11% in April 2004).

"Several trends converged in 2004 that led to a strong year for mergers and acquisitions. Strategic buyers re-entered the picture and the long-standing 'valuation gap' between buyers and sellers was increasingly cast aside. When you combine these factors with stable equity markets and a solid lending environment, it is easy to be bullish in 2005," said Elliot Williams, ACG Boston President-elect and President of Mirus Capital Advisors, a Massachusetts-based middle market investment bank.

Massachusetts survey respondents say disagreement on valuation (56% vs. 59% in April 2004, vs. 46% in December 2003) is the greatest impediment to closing an M&A transaction, followed by lengthy due diligence (14% vs. 13% in April 2004, vs. 7% in December 2003). Economic uncertainty, which was cited by 43% in April 2004, was only selected by 14% in the current survey. Likewise, access to capital is easier. Inability to secure financing, which 15% of dealmakers said was the major obstacle last year, was only cited by 8% in this year's survey.

The overwhelming reason for failure of mergers and acquisitions is lack of post-merger integration, according to 63% of Massachusetts respondents, followed by overpaying (18%), and poor communications (11%).

Increased Revenues Expected

Ninety-one percent (vs. 94% in December 2003) of Massachusetts respondents expect their company's revenues to increase in 2005. Respondents say the sectors that will experience the most organic growth are healthcare, life sciences (47% vs. 41% in December 2003), followed by technology (21% vs. 23% in December 2003), business services (12% vs. 12% in December 2003), and manufacturing and distribution (7% vs. 11% in December 2003).

Massachusetts respondents say the best strategy to achieve growth in 2005 is investment in sales, marketing and public relations (30% vs. 40% in December 2003), followed by mergers and acquisitions (20% vs. 28% in December 2003), and strategic alliances or partnerships (17% vs. 14% in December 2003).

Area business executives say customer service is by far the most important factor in building and retaining customer loyalty at their companies (55%), followed by product quality (21%), product differentiation (18%), ease of doing business (4%), and competitive pricing (2%).

Private Equity Overhang Fuels Competition

Eighty-three percent of private equity professionals say there is more private equity capital available for investment than there should be, with 40% saying the amount is 'much too high,' and 43% saying it is 'a little higher than it should be.'

Forty-three percent of Massachusetts private equity professionals who responded to the survey (vs. 54% of all private equity respondents) primarily source transactions of middle-market companies through investment banks. Another 43% source most deals by calling potential targets directly.

"With so much private equity capital available, strategic buyers re-entering the picture and sellers becoming more sophisticated, competition for middle-market deals has never been more competitive," said Adam Reinebach, Publisher of Thomson Financial's Buyouts Magazine. "The big question for 2005 is whether the upward pressure on multiples will continue and, if so, what impact will it have on returns?"

Massachusetts private equity professionals say the primary reasons they win deals are industry sector knowledge (46% vs. 33% of all private equity respondents); reputation or brand of their firm (42% vs. 38% of all private equity respondents); pre-existing relationship with company management (35% vs. 30% of all private equity respondents); lack of competition (31% vs. 42% of all private equity respondents); and paying the highest price (23% vs. 21% of all private equity respondents).

"Competition among Massachusetts-based private equity firms for investments in companies with strong management teams and differentiated business models continues to be fierce," said Bryce Youngren, Principal, Polaris Ventures Partners. "Despite this, firms with sound knowledge of their target industries and a reputation for adding value to their investments are finding a steady stream of exciting investment opportunities."

Other than price, the most common reason a target declines an investment is reluctance to give up ownership (73% vs. 67% of all private equity respondents); followed by fear of future direction of the business (13% vs. 15% of all private equity respondents); and potential change in management (7% vs. 14% of all private equity respondents).

Survey Methodology

The survey, conducted in November 2004, was completed by 1803 members of ACG and Thomson customers, including 143 Massachusetts dealmakers. Respondents were comprised of private equity, venture capital and LBO firm members (20%); investment bankers, intermediaries, brokers (27%); lenders, finance providers (9%); corporate professionals, entrepreneurs (19%); service providers, such as lawyers, workout specialists, accountants, consultants (26%). The majority of respondents were from the United States (1597), where 49 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 more than 8,500 members from corporations, private equity, finance, and professional service firms representing Fortune 500, Fortune1000, FTSE 100, and mid-market companies in 46 chapters in North America and Europe. ACG's Boston Chapter (www.acgboston.org), with more than 800 members, is the organization's largest.

About Thomson Financial

Thomson Financial is a US$1.5 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 leading provider of value-added information, software tools and applications to more than 20 million users in the fields of law, tax, accounting, financial services, higher education, reference information, corporate training and assessment, scientific research and healthcare. With revenues of US$7.44 billion, The Thomson Corporation lists its common shares on the New York and Toronto stock exchanges (NYSE: TOC; TSX: TOC).