Dealmakers Forecast an Increase in M&A Activity in 2003; Association for Corporate Growth -ACG- Boston Survey Finds Bullishness On Healthcare, Biotech; Profitability is Paramount.

Business Editors

BOSTON--(BUSINESS WIRE)--March 17, 2003

A recent survey of New England dealmakers has found that they believe the worst is over for the M&A market and are cautiously optimistic for 2003. Fifty-eight percent expect an improved environment for deals in 2003 and 41 percent expect things to be about the same. Most dealmakers (68 percent) expect an increase in the number of M&A transactions in 2003, with Healthcare and Biotech leading the way. However, many dealmakers are wary about the economy, and most believe that valuations of companies will stay the same (63 percent).

The member survey was conducted in February 2003 by the Boston Chapter of the Association for Corporate Growth (ACG), the premier professional organization focused on corporate growth, corporate development, and mergers and acquisitions.

Profitability is Paramount

Dealmakers say the primary goal of a merger or acquisition today is to increase profitability (29 percent) or grow market share (28 percent), followed by increase revenues (13 percent) and stay alive (13 percent). Profitability (42 percent) is by far the company attribute that matters most to an acquirer today, eclipsing management strength (16 percent), sales and revenue growth (16 percent), and attractive business sector (14 percent).

When asked what type of company will be the most likely seller in 2003, dealmakers said corporate spin-offs (40 percent), followed by entrepreneurial or family businesses (21 percent), and venture backed companies (19 percent). The greatest impediment to closing a given M&A transaction in 2003 is disagreement on valuation (40 percent) and economic uncertainty (31 percent).

"The ACG survey reflects an attitude of guarded optimism among dealmakers," said Elliot Williams, Chairman of the ACG Boston Communications Committee and President of RCW Mirus, a Boston-based middle market investment bank. "New England dealmakers see opportunity for M&A from corporate spin-offs as they focus on their core businesses, and they are bullish on particular sectors such as healthcare and biotech. They also recognize that valuation disagreements and economic uncertainty remain, and they value profitability over all else."

Dealmakers Most Bullish on Healthcare

New England dealmakers are most bullish on M&A in the Healthcare, Life Sciences and Medical Equipment and Services sector, with 79 percent of respondents expecting the number of M&A transactions to increase, 18 percent say it will stay the same, and only 3 percent expect it to decrease. Dealmakers are also moderately bullish on the Manufacturing and Distribution sector, with 64 percent predicting an increase in the number of M&A transactions, as well as Business Services, in which 59 percent expect an increase in the number of deals, and Consumer Products and Services, where 58 percent anticipate a rise in the number of transactions.

Dealmakers expressed the least optimism about the Retail sector, with 32 percent predicting an increase in M&A transactions, 42 percent saying the level will remain the same, and 26 percent anticipating a decrease. Likewise, in the Financial Services sector, 39 percent of dealmakers predict a rise in the number of deals, while 46 percent say it will remain the same, and 15 percent expect a decrease in dealmaking activity.

Biotech to Lead Technology M&A

The number of M&A transactions in the Technology sector is expected to increase, with 54 percent of New England dealmakers seeing a rise, while 36 percent expect the number of tech deals to stay the same, and 10 percent expect them to decrease in 2003. Dealmakers are most bullish on the Biotechnology sector, where 71 percent expect the number of M&A transactions to increase, 24 percent to stay the same, and 5 percent to decrease. The number of deals in the Software sector is also expected to increase this year, with 62 percent forecasting growth in deal volume, 32 percent expecting it to remain the same, and 6 percent anticipating a decrease.

"Tech dealmakers see further consolidation in the industry as both biotech and software firms combine to gain scale and greater profitability, and investors balk at providing additional funding," said Bob Cronin, Senior Managing Director of Stonebridge Technology Associates, a Boston-based investment banking firm. "The biotech sector is ripe for consolidation with many of the public biotech companies trading below their cash value. In the software sector, both smaller private software companies and orphaned public companies are struggling to compete with the enterprise giants. Some will be snapped up by the big public companies, others will struggle to find appropriate merger partners in an attempt to build critical mass."

Within the Technology sector, dealmakers are least optimistic about Networking Hardware, in which 39 percent expect a pickup in dealmaking activity, 36 percent expect it to stay the same, and 25 percent predict fewer deals in 2003. Likewise, 42 percent of dealmakers forecast an increase in transactions in the Internet Infrastructure sector, while 34 percent predict the number of transactions will remain the same, and 23 percent predict a decrease. Fifty-two percent of dealmakers expect an increase in the number of M&A transactions in the Wireless and Telecom sector, while 32 percent expect the category to stay the same, and 17 percent anticipate a decrease.

Role of Private Equity

The financing vehicle that will account for the majority of M&A transactions in 2003 is private equity (26 percent), followed by bank debt (17 percent) and operating capital (15 percent). Sixty-five percent of dealmakers say the dollar amount of newly invested private equity and venture capital investments in 2003 will increase, 19 percent say it will stay the same, and 16 percent expect it to decrease.

"Profitable and growing companies that have made it this far have proven that they can succeed even in very challenging times" said Stuart Mathews, a Board member and Past President of ACG Boston, and Senior Vice President at Metapoint Partners, a Boston-based private equity firm. "These businesses will be attractive to private equity investors looking for stability and upside after a difficult few years, and they will command very high prices. A great deal of private equity is waiting to be invested, and for these high quality companies, investors will pay the high prices and commit the equity required to capitalize the deals, even if it means accepting lower returns."

Dealmakers say that for most companies, the single best strategy for corporate growth in 2003 is investment in sales and marketing (31 percent), followed by strategic alliances (22 percent), and M&A (21 percent).

"As the Association for Corporate Growth's largest chapter, with more than 670 members, ACG Boston is uniquely qualified to provide insight into New England's dealmaking climate," said Jack Derby, President of ACG Boston and President of Derby Management, a management consulting firm specializing in venture capital. "This survey complements our other activities aimed at providing educational and networking opportunities to the New England dealmaking community. We will continue to provide this kind of proprietary content to our members and others interested in corporate growth and M&A on a regular basis."

Survey Methodology

The online survey was conducted by ACG Boston in February 2003. The survey results reflect the answers from 101 ACG Boston members directly involved in dealmaking activity.

About ACG

Founded in 1954, the Association for Corporate Growth (www.acg.org) is the premier association for and about professionals involved in middle market corporate growth, corporate development, and mergers and acquisitions. ACG promotes the professional interests of its members, who have assumed leadership roles in strategic corporate growth, by offering a forum for quality programs, education and networking. ACG has nearly 6,000 members representing approximately 2,500 companies in 41 chapters throughout the United States, Canada, the UK and Mexico. ACG's Boston Chapter (www.acgboston.org), with more than 670 members, is the organization's largest.

ACG Boston 9th Annual Conference

On Thursday, May 8, 2003, the Association for Corporate Growth's Boston Chapter will host its 9th Annual Conference, "Defining Success: A Focus of Fundamentals." The event will take place at the Sheraton Boston Hotel, from 8:30 a.m. - 4:30 p.m. Up to 1,000 dealmakers are expected to attend to hear the strategies, tactics, and lessons that can help companies grow.

Speakers include a keynote address by Citizens Bank CEO Larry Fish; A Business of Sports Panel with Jonathan Kraft, Vice Chairman, The New England Patriots, Larry Lucchino, President and CEO, Boston Red Sox, Stephen Pagliuca, Co-owner, Boston Celtics and Managing Director, Bain Capital; and a CEO panel with Linda Mason Chairman of Bright Horizons, Richard Reese, Chairman and CEO of Iron Mountain, Richard Syron, Chairman of ThermoElectron. For more information, please visit the ACG Boston Web site at: http://www.acgboston.org/