2010 middle-market m&a review and outlook

Middle-Market M&A Review and Outlook

April 2010

Benning Associates LLC101 Federal Street - Suite 1900Boston, MA 02110

www.BenningLLC.com

(617) 261-3999

Confidential

Technology has changed investment banking

•We can do so much more with so much less

•We have more time to understand your business

•More time to listen, to learn your concerns, and to develop a strategy and approach that optimizes your objectives

The result is more for the client•Our goal is better advice•Better advice generates more

shareholder value and less transaction risk

•M&A specialists at leading law firms recommend BA's senior bankers to their clients

Markets, regulations and technology are changing the M&A advisory business

•Differentiated M&A boutique and trusted long-term advisor to our clients

•Provide sound advice, not simply expedient answers

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The financial services industry is changing – we are a new type of M&A advisor for a new economic paradigm. Experienced, efficient and lean.

Who We Are

Leading next-generation boutique investment bank

•Provide corporate finance and M&A advisory services to private and public middle market companies and investors

How We Do It

More experience is better, but more overhead isn't

•We have a different client service model

•We are hands on•We have more use for laptops

and smart phones than fancy offices

What We Do

Our transaction experience is different than most boutiques

•Have closed more deals, and have more:

—Public company experience

—Buy-side experience—Cross-border experience—Special committee

experience

Overview of Benning AssociatesBA Believes in More Technology and Less Mahogany

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Our team is a re-united group of successful investment bankers poised to serve a market requiring close coordination and agility

Overview of Benning AssociatesTeam DNA in Place

The “Team” concept means something more here – having worked together at prior firms focused on middle-market transactions: we know that we can rely on each other at the most critical times

Greg Benning has completed over 150 transactions while with Adams Harkness, Barrington Associates, Salomon Brothers, and Tucker Anthony

Jay Remington has over $22 billion of transaction value experience from Adams Harkness, Barrington Associates, Houlihan Lokey, Merrill Lynch, and Lehman Brothers

Pete Cahill has completed over 75 transactions while with Adams Harkness and First Albany

Senior Banking Team

Execution Professionals

Robert Roose

Vice President

Matt Brochu

Associate

Miles Littlefield

Associate

Greg Benning

Founder

Jay Remington

Founder

Pete Cahill

Managing Director

BA offers an array of services customized to the needs of middle-market clients

Scope of Services

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Overview of Benning AssociatesScope of Services

Acquisition SearchAcquisition Search

Business Sales and DivestituresBusiness Sales and Divestitures

Capital Sourcing Capital Sourcing

Outsourced Corp. Development

Outsourced Corp. Development

Retained AdvisoryRetained Advisory

Specialty Advisory Specialty Advisory

Assignment Description Why Benning Associates? Screen, analyze and approach

potential targets Acquisition of identified target

Sale of 100% of equity Asset and stock sales Complete/partial liquidity

Fund growth or acquisitions Recapitalize or take money off the

table

Special committee assignments Secondary advisor to clients

Ongoing reviews of business plans and interim operating results

Provide regular updates

Analyze and execute corporate development initiatives

1/3 of our experience involves representing acquirors Reputation for market-driven valuation, structuring and

negotiation strategy

Expert sell-side process managers Strong relationships within private equity community and

universe of strategic acquirors

Draw on our bulge bracket, regional and boutique capital markets experiences

Extensive network of financing counterparties

Expert in various forms of opinions and takeover defenses

Managing other investment bankers, lenders or underwriters

Managing for value and positioning clients for future financing or M&A

Key insights into market environment and competitive landscape

Create a long-term working relationship Allow for a better position to pursue corporate

transactions when attractive opportunities present themselves

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No one said middle-market dealmaking today was easy…

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Leading economic indicators improved throughout 2009, but are deals on the horizon in 2010?

Leading Indicators: Conditions Improving? Good Reasons for Optimism in 2010

Leading Economic Indicators

The recent performance of the capital markets as well as other leading indicators have appeared to point to an improving economy and, many have speculated, a rebound in M&A activity

•The S&P 500 Volatility Index has come down significantly off its peak in late 2008

•The Dow Jones Industrial Average has rebounded over the last nine months, surpassing the 10,000 point mark for the first time in over a year

•Leveraged loan spreads have declined sharply from the highs reached in Q4 2008

•After bottoming in Q4 2008, CEO confidence as of Q4 2009 is at it highest level since 2007

• Initial unemployment claims have generally been on the decline over the last nine months

•After declining through 2008, average weekly manufacturing hours have been on the rise since Q1 2009

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^VIX Index Average ̂ VIX

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^VIX Index Average ̂ VIX

2010: Venture capital investors will strongly consider monetizing their investments via the “right” sale opportunity

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Leading Indicators: Conditions Improving?Capital Markets Show Improvement Relative to a Bottom

2004 – 2010YTD S&P 500 Volatility Index

2008 – 2010YTD S&P 500 Volatility Index

Source: Yahoo Finance, data through 3/24/10


Historically, the VIX has settled just below 20, where the VIX currently lies

The VIX began to rise in September of 2008 and did not fall back below 20 until December of 2009

The VIX has retreated to historical levels, indicating a normalizing market

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2010: Venture capital investors will strongly consider monetizing their investments via the “right” sale opportunity

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Leading Indicators: Conditions Improving?Capital Markets Show Improvement Relative to a Bottom

2004 – 2010YTD Dow Jones Industrial Index

2008 – 2010YTD Dow Jones Industrial Index



Between 2004 and 2006, the Dow Jones Industrial Index spent most of its time between 10,000 and 11,000, consistent with current levels

The Dow Jones Industrial Index declined precipitously in September of 2008 dropping below 7,000 by March of 2009; it has since steadily recovered back to September of 2008 levels

The Dow Industrial Index has returned to pre-financial crisis levels

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CEO Sentiment of Economic Conditions

Leading Indicators: Conditions Improving?Forward-Looking Economic Signals Are Less Bad

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Leading economic indicators have improved markedly and brought a greater sense of stability—an important requirement for deals that make sense right

now to transact

Source: The Conference Board, data through 12/31/09

Source: Bureau of Labor Statistics, data through 3/20/10 Source: Bureau of Labor Statistics, data through 2/28/10

Source: Standard & Poor’s, data through 12/31/09

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Despite the fresh start of a new calendar year and upbeat leading economic indicators, uncertainly has still managed to impact the M&A market

2009 Hope vs. Q1 2010 RealityWhat Happened?

Another Shake-Up

In early 2010, decision-makers were again spooked by more instability and deal volume suffered

•Whether it is Scott Brown’s surprise victory for the late Ted Kennedy’s Senate seat, the bitter divisiveness over ObamaCare or Greece's, Portugal's and Spain's deficit troubles, hopes for a rebounding M&A market were interrupted

This interruption has negatively affected all segments of the M&A market

•Mega deals showed a steady increase in volume throughout 2009 until Q1 of 2010; deal value also declined significantly in Q1 of 2010

•Middle-market and lower middle-market deal volume and value, nationally and in Mass, also took a hit in Q1 of 2010

“What a difference six weeks make. It's only taken that long for the green shoots of optimism that had been burgeoning in M&A by the end of last year to be choked off by rising uncertainty and market volatility.” – The Deal Magazine, February 19, 2010

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2009 – 2010 Global M&A Transaction Volume and Value

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2009 Hope vs. Q1 2010 Reality>$5B Global M&A Transactions

Globally, mega deals saw a dramatic drop over the last 90 days

M&A Transaction Volume•Transaction volume in Q1 of

2010 decreased by 23% since Q4 of 2009

•Transaction volume in Q1 of 2010 increased by 25% since Q1 of 2009

M&A Transaction Value•Transaction value in Q1 of


•Transaction value in Q1 of 2010 decreased by 43% since Q1 of 2009

Source: DealogicNote: Transactions with disclosed Deal Value greater than $5 billion, excluding minority deals, financial services, real estate, and insurance transactions

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2009 – 2010 National M&A Transaction Volume and Value

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2009 Hope vs. Q1 2010 Reality<$250MM National M&A Transactions

Nationally, there was a modest drop in deal volume and a greater drop in deal value between Q4 09 and Q1 10






•Transaction value in Q1 of 2010 increased by 31% since Q1 of 2009

Source: DealogicNote: Transactions with disclosed Deal Value less than $250 million, excluding minority deals, financial services, real estate, and insurance transactions

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2009 – 2010 Massachusetts M&A Transaction Volume and Value

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2009 Hope vs. Q1 2010 Reality<$250MM Massachusetts M&A Transactions

In Massachusetts, this quarter-over-quarter decline was significantly more pronounced



•Transaction volume in Q1 of 2010 equaled Q1 of 2009





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2009 – 2010 National M&A Transaction Volume and Value

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2009 Hope vs. Q1 2010 Reality<$100MM National M&A Transactions

Nationally, there was a drop in deal volume and deal value between Q4 09 and Q1 10






•Transaction value in Q1 of 2010 increased by 26% since Q1 of 2009


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2009 – 2010 Massachusetts M&A Transaction Volume and Value

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2009 Hope vs. Q1 2010 Reality<$100MM Massachusetts M&A Transactions

Again, in Massachusetts, this quarter-over-quarter decline was significantly more pronounced



•Transaction volume in Q1 of 2010 equaled Q1 of 2009





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Healthcare and software deals have dominated middle-market M&A in Massachusetts in 2010

2009 Hope vs. Q1 2010 Reality<$250MM Massachusetts M&A Transaction Overview

2010 <$250m Massachusetts M&A Transaction List

1. Source: Dealogic, excludes minority deals, financial services, real estate, and insurance transactions2. Total Enterprise Value sums price paid for equity plus debt or liabilities assumed net of cash

($ in Millions)

AnnounceDate¹ Target Target Business Description Acquiror TEV²

Mar-10 Aurora Systems IncDeveloper of off-the-shelf computer telephony integration "middle-ware" and applications software products

OmniVision Technologies Inc $5.0

Mar-10 Optiant Inc. Supply chain solutions American Software Inc. 3.3

Mar-10 Ariston Pharmaceuticals, Inc. Human therapeutics in the neurology areaManhattan Pharmaceuticals Inc.

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Mar-10 ZafGen Inc. Develops obesity therapeutics Investor Group 8.1

Mar-10 Concuity, Inc.Revenue management software and services to healthcare providers and medical institutions

Advisory Board Co. 34.5

Feb-10 netASPx, Inc. Enterprise resource planning and work force management solutionsVelocity Technology Solutions, LLC

56.0

Feb-10 Hatch Science, LLCManufactures and develops scientific instruments for the pharmaceutical and medical fields

Robotic Technology Systems plc

0.5

Feb-10 Emerging Energy ResearchAdvisory services, market studies, and consulting services for cleantech power generation markets

IHS Inc. 18.0

Feb-10 Convista Consulting LLC Software consulting services Virtusa Corp. 24.8

Jan-10 Fairfield Inn by Marriott LP Economy segment of the lodging industry Apple REIT Nine Inc. 7.9

Jan-10Inverness Medical Nutritionals and IVC Industries

Manufacture, packaging, sale, and distribution of vitamins and nutritional supplements International Vitamin Corp. 63.4

Jan-10 Ahura Scientific Inc. Manufacturer of field-deployed analytical instruments Thermo Fisher Scientific Inc. 145.0

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There are several key areas to look for M&A activity in the lower middle-market in 2010

Lower Middle-Market InsightsWhere will the growth come from?

Key Insights on Sub-$100MM Deals

M&A transactions with deal values of $100MM or less are considered to be the core of the M&A market.

Understanding emerging trends in this market is critical for business leaders and advisors. These are some of the trends we are seeing:

•Divestitures could drive a 2010 rebound in lower middle-market deal activity

• Increased acquisition activity by private strategic acquirors

•Shifting dynamics in the regional mix of cross border acquirors

•The health care sector, driven in large part by life sciences deals, has led the lower middle market in M&A activity as the only sector continuing to show consistent gains

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2000 – Q1 2010 Divestitures as % of US M&A <$100MM

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Lower Middle-Market InsightsDivestitures to Drive Sub-$100MM Deal Activity

Source: Dealogic.Note: Excludes financial services, real estate, and insurance transactions.

Divestitures are typically one-third of the M&A overall market, characterized by product line and divisional sales

Overall M&A tends to lag the stock market by several quarters, but increases in divestitures are an early cycle phenomenon

We foresee a sizeable increase in divestiture volume in 2010 as companies re-focus, sell off non-core businesses and seek funding without additional

borrowing

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Lower Middle-Market InsightsPrivate Acquirors Increasingly Active in the Sub-$100MM M&A Market The % of private acquirors has

grown significantly in the sub-$100 M&A market over the last few years

The drivers have included: •Sponsor-backed company

add-ons•Public buyers are unable to

achieve EPS impact with smaller deals

•Private strategics are willing to pay for synergies and the intrinsic value of smaller targets

With public buyers sitting on cash more and more in recent quarters, it is important to consider the universe of healthy private companies that may be

looking to grow via the right deal

Source: Dealogic.Note: Excludes financial services, real estate, and insurance transactions. Also excludes sponsor-backed transactions.

2000 – Q1 2010 Cross Border Buyers as a % of US M&A <$100MM

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Lower Middle-Market InsightsCross-Border M&A Attractive But Challenging


The geographic shift in buyers is a function of expanding Asian economies, globalization and the decline of the US$ versus other acquisition currencies

While business leaders should take advantage of this growing international interest, key risks must be understood and managed

•Deals take longer to negotiate & close

• International buyers often like to partner before buying

•Post-deal, cultural and business norm differences

•Managing across long distances is challenging

We expect this trend line to continue as foreign buyers exploit currency advantages and the US loses market share in the global economy

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2000 – Q1 2010 Regional Breakdown of Buyers as % of US M&A <$100MM

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Lower Middle-Market InsightsRegional Segments of Cross Border Buyers

While not surprising given the progress made in the Chinese and Indian manufacturing and service sectors, this shift has important implications for

M&A planning, strategy, execution and tactics


There is a clear ascension of China and India

•Europe/Middle East/Africa (EMEA) buyers have lost their majority share

•Asia/Pacific (ASIAP) buyers though have roughly doubled their share

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2000 – Q1 2010 Global Health Care Transactions <$100M

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Lower Middle-Market InsightsHealth Care M&A Has Bucked Negative M&A and Financing Market Trends

Health care M&A will continue its growth into 2010 as acquirors look to add new revenue and financing becomes more accessible

Source: Dealogic.

The health care M&A and financing market has proven to be resilient to the downturn, as the drivers for this industry are unique relative to other sectors

•Continued acquisitive behavior among pharma and device consolidators

•Positive growth drivers in health care IT

•Consolidation among health care services companies to grow market share

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2000 – Q1 2010 Global Life Sciences Transactions <$100M

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Lower Middle-Market InsightsLife Sciences Deals Drive Overall Health Care Transaction Growth

Pharma continues to search for the next blockbuster, leading to available financing and healthy exits for many early- and mid-stage life sciences

companies with promising data

Pharma continues to ravenously pursue assets that add to their shrinking pipelines

High-priority therapeutic categories, novel delivery technologies and promising discovery platforms will continue to drive the interest of cash-rich acquirors and investors

Increased VC financings, strategic investments and structured partnerships demonstrate pharma’s strategy of downside protection

Source: Dealogic.

2010 middle-market m&a review and outlook

Economy & Finance