ACG/Thomson Mid-Year 2005 DealMaker's Survey Finds Merger Professionals Bullish About Current M&A Environment.

NEW YORK & CHICAGO -- These are the best of times for merger and acquisitions professionals, according to a recent survey of 1,590 dealmakers by Thomson Financial and the Association for Corporate Growth (ACG), a 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 the percentage of dealmakers who view the current M&A environment as good or excellent jumped to 85% from 72% at the end of 2004, and 45% at the end of 2003. Investment bankers are the most bullish, with 91% calling the M&A environment good or excellent (compared to 79% at the end of last year), followed by lenders/finance providers (84% vs. 72%), private equity professionals (82% vs. 75%), service providers (85% vs. 67%), and corporate professionals/entrepreneurs (82% vs. 67%). According to the survey, only 1% of respondents characterize the current M&A environment as poor, compared to 2% at year-end 2004, and 8% at year-end 2003.

The percentage of respondents who think the M&A environment will improve further in the second half of 2005 dropped to 68% from 87% at the end of last year. Investment bankers are the most optimistic about the deal environment over the next six months, with 80% expecting improvement (compared to 92% at the end of 2004), followed by corporates (70%), lenders (59%), and private equity professionals (56%).

"Things could hardly be better in the M&A world," said new ACG CEO Daniel A. Varroney. "Dealmakers' tremendous satisfaction with the current M&A environment and slightly tempered view of the next six months reflect a deal market hitting on all cylinders, and the feeling by some that these boom times can't last forever."

"As the new chief executive of ACG, I am pleased that nearly 40% of the ACG respondents indicated that some of their deals and new business came because of their membership in ACG," Varroney continued. "My intent is that the next survey will reveal an even higher score. We are going to leverage the current momentum within ACG to create a more powerful organization that helps all members - wherever they work throughout the world - source business opportunities, achieve corporate growth objectives, and ultimately create stakeholder value."

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.

During the second half of 2005, the sectors that will experience the most M&A activity will be technology (27% vs. 29% at the end of 2004), followed by healthcare and life sciences (19% vs. 19%), and manufacturing and distribution (17% vs. 19%), according to respondents.

Merger professionals say the primary goal of a merger or acquisition today is to increase revenues and profitability (50% vs. 51% at year-end 2004), followed by grow market share (34% vs. 30%). The company attribute that matters most to an acquirer today is sales and revenue growth (30% vs. 28%), followed by attractive business sector (23% vs. 23%), profitability (18% vs. 19%), management strength (18% vs. 17%), and proprietary technology (9% vs. 11%).

"This market is in stride because savvy players know that the time to act is when so many others are hot to do deals," said T. Patrick Hurley, ACG President-Elect and Managing Director of MidMarket Capital Advisors LLC in Philadelphia. "Eager buyers willing to compete in auctions draw sellers confident of premium values. Everybody gets in on the action and ACG members are driving a lot of the action."

Dealmakers say that in mergers today, shareholders' interests (66%) are most critical to CEOs, followed by their own interests (18%), customers (12%), employees (3%), and the community (less than 1%).

Survey respondents say that disagreement on valuation (60% vs. 59% at year-end 2004) is the greatest impediment to closing an M&A transaction, followed by lack of chemistry between management of target and acquirer (13% vs. 11%), and economic uncertainty (11% vs. 10%).

Although lengthy due diligence (7% vs. 13% at year-end 2004) has become less of an issue in closing a transaction, 70% of dealmakers say their due diligence costs have increased over the last year, and 86% of respondents say the cost and transparency required under Sarbanes-Oxley is a concern for taking a company public or remaining public.

Half of respondents say 25% or more of their clients conduct business outside of the United States, and 53% say it is likely they will conduct a transaction between the United States and Europe or Asia this year, with 51% saying cross-border deals are becoming increasingly important to their firms.

"Cross-border deals in the middle market are becoming more frequent and more important as small-to-medium sized companies, as well as private equity funds, look to overseas acquisitions to support their global manufacturing and distribution strategies," said William H. Weirich, ACG Vice President for International Expansion, and Managing Director of Matrix Capital Partners.

Great Deals Begin with the LOI 

The overwhelming reason for failure of mergers and acquisitions is poor integration planning and follow through, according to 60% of total respondents, including 66% of investment bankers, 63% of corporates, 53% of lenders, and 52% of private equity respondents, followed by overpaying (19% vs. 20%), and lack of due diligence (9%).

"We all know that M&A at best succeeds only 50% of the time, but we keep doing deals because it gets us into new markets or offers the opportunity to become a market leader faster," said Peter Coffey, President of ACG, and Partner with the law firm Michael Best & Friedrich. "This survey once again demonstrates that the cause of failure is poor integration. Great dealmakers begin the integration process when the letter of intent is signed and don't stop until they have taken the best of both. Most deals are about talent acquisition and people need to understand and buy into the vision and culture. Integration requires strategy and execution - it's a critical core competency if you want to excel at M&A. Great leaders know integration is everybody's business."

Sales, Marketing, PR to Generate Growth

Dealmakers say the single best strategy for growing their own companies in the second half of 2005 is investment in sales, marketing, and public relations (23% vs. 26% at year-end 2004), followed by increasing revenues from loyal customers (20% vs. 15%), M&A (18% vs. 23%), VC or private equity investment (18% vs. 14%), and strategic alliances or partnerships (12% vs. 14%). The percentage of respondents who expect their company's revenues to increase in the second half of 2005 decreased slightly to 89% from 92% at year-end 2004.

"While companies acknowledge the need to invest in sales, marketing and PR to win new business, they also recognize the opportunity to leverage and expand current client relationships to boost sales," said Catherine M. Shew, ACG Vice President of Corporate Member Affairs and Managing Director, Business Development of Akron, Ohio-based FirstEnergy Corp. "Likewise, M&A, private equity investment, and strategic partnerships continue to rank as key tools at the disposal of executives to fuel growth."

Executives say customer service is by far the most important factor in building and retaining customer loyalty at their companies (49% vs. 52% at year-end 2004), followed by product quality (21% vs. 19%), product differentiation (16% vs. 15%), ease of doing business (7% vs. 8%), and competitive pricing (6% vs. 6%).

Respondents say the sectors that will experience the most organic growth are healthcare and life sciences (32% vs. 34% at year-end 2004), followed by business services (20% vs. 22%), technology (17% vs. 19%), financial services (11% vs. 8%), consumer products and services (10% vs. 7%), and manufacturing and distribution (8% vs. 10%).

Private Equity and Impact of Hedge Funds 

Forty-three percent of private equity professionals complain that hedge funds' involvement in private equity is driving up prices, while another 8% are concerned for other reasons, such as the short-term focus of many hedge funds. Eighteen percent are happy about hedge fund involvement because it creates more options for buyers and sellers, while the remaining 32% of private equity professionals say hedge funds aren't significantly in the business.

The greatest opportunity for private equity investments today is in small buyouts, according to 36% of private equity professionals, followed by middle market private investments and buyouts (30%) and early stage VC (15%).

Seventy-eight percent (vs. 80% at year-end 2004) of 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 44%, while those saying it is 'a little higher than it should be' increased to 53% from 36%.

"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 private equity professionals who primarily source transactions of middle-market companies through investment banks dropped to 48% from 54%, and those who call targets directly to avoid auctioned deals increased to 37% from 32%.

Private equity professionals say the primary reasons they win deals are lack of competition (29%), industry sector knowledge (22%), reputation or brand of their firm (22%), pre-existing relationship with company management (17%), and paying the highest price (10%).

Private equity professionals anticipate more mergers than IPOs for their portfolio companies in the next six months. Fifty-five percent of private equity professionals say mergers for their portfolio companies will increase during the second half of 2005, 4% say mergers will decrease, and 41% say they will stay the same. The number of IPO liquidity events for their portfolio companies will stay the same, say 57% of respondents, compared to 25% who say IPOs will increase, and 18% who say they will decrease.

"Given robust M&A valuations, an IPO market still largely closed, and increased concerns over the costs of being public, mergers continue to be the exit of choice for private equity first looking to cash in on their portfolio company investments," said Jeri Harman, ACG Vice President of Equity Groups, and Managing Director of Allied Capital.

Other than price, the most common reason a target declines an investment is reluctance to give up ownership (69% vs. 67% at year-end 2004), followed by fear of future direction of the business (17% vs. 15%), and potential change in management (9% vs. 14%).

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.

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).