ACG/Thomson DealMaker's Survey Reveals Optimism About Current M&A Environment and 2005 Prospects.

NEW YORK and CHICAGO -- Following an active year for mergers and acquisitions, a recent survey of 1,803 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% in last year's survey. 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%).

According to the survey, only 2% of respondents characterize the current M&A environment as poor, compared to 8% last year. In addition, 87% percent of 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.

"Deals are back in a big way," said Peter Coffey, President of ACG, and attorney with Michael Best & Friedrich LLP in Milwaukee, WI. "Private equity professionals, investment bankers, corporate development officers, lenders, lawyers - everyone involved in putting deals together - have witnessed a major turnaround in the deal environment. What's of particular note is that not only did deals return in 2004, but those closest to them anticipate this will continue unabated in 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, the sectors that will experience the most M&A activity will be technology (29%), manufacturing and distribution (19%), and healthcare and life sciences (19%), according to respondents.

Business executives say the primary goal of a merger or acquisition today is to increase revenues and profitability (51%), followed by grow market share (30%). The company attribute that matters most to an acquirer today is sales and revenue growth (28%, vs. 24% in the 2003 survey), followed by attractive business sector (23% vs. 16% in 2003), profitability (19% vs. 22% in 2003), management strength (17%), and proprietary technology (11%).

"There just aren't enough sellers to satisfy buy-side demand," said T. Patrick Hurley, ACG President-Elect for 2005 and Managing Director of MidMarket Capital Advisors LLC in Philadelphia. "Headlines are reinforcing that it's a great time for sellers to enter the market and everybody wins because more sell-side supply helps buyers too."

Survey respondents say disagreement on valuation (59% vs. 46% in 2003) is the greatest impediment to closing an M&A transaction, followed by lengthy due diligence (13% vs. 7% in 2003), and lack of chemistry between management of target and acquirer (11% vs. 6% in 2003).

The economy is much less of an issue in completing a transaction. While last year 25% of respondents said economic uncertainty is the major impediment, this year only 10% say it is. Likewise, inability to secure financing, which 15% of dealmakers said was the major obstacle last year, was only cited by 7% in this year's survey.

"Capital expenditures are increasing in the industrial test and measurement markets which we serve, particularly in aircraft and aerospace," said James D. Tucker, Chairman of Spectral Dynamics, Inc. in San Jose, CA. and Immediate Past President of ACG.

The overwhelming reason for failure of mergers and acquisitions is lack of post-merger integration, according to 60% of total respondents (66% of corporate respondents, 48% of private equity respondents), followed by overpaying (20% of total, 13% of corporate respondents, 33% of private equity respondents), and poor communications (10% of total vs. 6% in 2003).

Increased Revenues Expected

While 92% (vs. 93% in 2003) of total respondents expect their company's revenues to increase in 2005, private equity respondents lagged, with 84% (vs. 90% in 2003) expecting an increase this year. Investment bankers, on the other hand, are more upbeat, with 96% (vs. 95% in 2003) expecting an increase in revenues in 2005.

Business executives say the single best strategy for growing their own company in 2005 is investment in sales, marketing, and public relations, according to 26% of respondents, followed by M&A (23%), increasing revenues from loyal customers (15%), VC or private equity investment (14%), and strategic alliances or partnerships (14%).

"On the whole, companies are approaching 2005 with optimism," said Catherine M. Shew, ACG Vice President of Corporate Member Affairs and Director of Business Development of Akron, OH-based FirstEnergy Corp. "While there is a clear focus on leveraging core competencies including customer relationships to drive growth, M&A continues to be an important vehicle for expansion."

Executives say customer service is by far the most important factor in building and retaining customer loyalty at their companies (52%), followed by product quality (19%), product differentiation (15%), ease of doing business (8%), and competitive pricing (6%).

Respondents say the sectors that will experience the most organic growth are healthcare and life sciences (34% vs. 39% in 2003), followed by business services (22% vs. 13% in 2003), technology (19% vs. 22% in 2003), and manufacturing and distribution (10% vs. 12% in 2003).

Private Equity Overhang Fuels Competition

Eighty percent of private equity professionals say there is more private equity capital available for investment than there should be, with 44% saying the amount is 'much too high,' and 36% saying it is 'a little higher than it should be.'

The capital overhang helps to explain why more than half of private equity professionals who responded to the survey (54%, vs. 51% in 2003) primarily source transactions of middle-market companies through investment banks. Moreover, private equity professionals said 51% of the deals they're seeing are going through the auction process.

"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?"

Private equity professionals say the primary reasons they win deals are lack of competition (42%), and reputation or brand of their firm (38%), followed by industry sector knowledge (33%), pre-existing relationship with company management (30%), and paying the highest price (21%).

"The good news is that lenders are more aggressive, and deal activity is robust," said Jeri Harman, ACG Vice President of Equity Groups, and Managing Director of Allied Capital in Los Angeles. "The bad news is that multiples are way up for solid middle market companies (obviously good news for sellers), and the need for financial buyers to differentiate themselves from others and/or seek 'proprietary' deals is critical. Given the length of time which this environment has persisted with low prospect for material change in the short to medium term, most financial buyers are no longer sitting on the sidelines."

Other than price, the most common reason a target declines an investment is reluctance to give up ownership (67% vs. 58% in 2003), followed by fear of future direction of the business (15% vs. 17% in 2003), and potential change in management (14%).

Survey Methodology

The survey, conducted in November 2004, was completed by 1,803 members of ACG and Thomson customers. 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%); and service providers, such as lawyers, workout specialists, accountants, consultants (26%). The majority of respondents were from the United States (1,597), 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.

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).