What drives the M

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What drives the MA world?

• 25 November 2008
• Igor Mesenský

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2007 a record year in the world, the region and
the Czech Republic

• In absolute terms, the greatest number of IPOs
  and greatest volume of funds obtained through
  IPOs.
• Interesting IPOs on the Prague Stock Exchange (07
  and 08).
• Worldwide record in the number and volume of
  realized MA deals.
• The boom in sales of companies continues in the
  Czech Republic, Slovakia and throughout Central
  and Eastern Europe.
• Low interest rates, GDP growth continuing at a
  rapid pace.
• Decreasing unemployment.
• Construction industry growth and greater number
  of provided mortgages.
• However, in 2Q 2007 the first information starts
  to appears internationally about problematic
  financial instruments (sub-prime).
• In 3Q, world share indexes starts to drop sharply.

Source MergerMarket
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Dow Jones Industrial Average(November 17 2008
8273.58)
October 9, 2007 14,164.53
Source Bloomberg
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Dow Jones Industrial Average (November 17 2008
8273.58)
October 9, 2007 14,164.53
July 8, 1932 41.22
January 14, 2000 11,722.98
September 3, 1929 381.17
November 11, 1954 387.78
Crash of 1987 On October 19 Black Monday, the
Dow Jones Industrial Average experiences its
largest one-day percentage drop in history, 508
points or 22.61 .
Black Tuesday On October 29, Black Tuesday a
record volume of nearly 16 million shares is
traded. The Dow Jones Industrial Average falls
more than 11 percent. The Dow finally reaches
bottom in July 1932, down 89 percent from its
1929 peak
Dow's Biggest Point Slide Dow's Biggest Point
Slide on September 17 2001. The DJIA plummets
684.81 points, closing at 8,920.70 - its steepest
point decline in a single day. Following the dot
com bubble burst, Sarbanes-Oxley Act plunders
the market
Lehman Brothers bankrupt In New York, September
15 2008, shortly before 1 a.m., Lehman Brothers
Holdings announced it would file for Chapter 11
bankruptcy protection
Source Bloomberg
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PX (Prague Stock Exchange)(November 18 2008
770.4)
October 10, 2007 1936.1
September 17, 2001 319.6
February 27, 2006 1584.4
March 24, 2000 691
Source Bloomberg
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Realized bank losses, August 2008
Writedowns, losses, and capital raises to date
Source Econompicdata
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What happened?

• Lack of liquidity on markets.
• Most affected are PE investors lacking access to
  loan sources, though in 2007 they obtained some
  EUR 320 billion (a historical record).
• Some of this money will have to be invested in
  the coming months or years.
• Many announced deals were called off or
  cancelled.
• Strong MA activity continues in the Czech
  Republic through 2H 2008, chiefly on the part of
  strategic investors (even smaller ones, most of
  whom emerged in the last two years).
• Several important PE deals occurred in the Czech
  Republic (Hamé, Cedok, Travel Servis, Centrum,
  Atlas).

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MA deals worldwideNumber of announced deals
Including all deals with a value exceeding USD 5
million or EUR 5 million for European deals.
Source MergerMarket
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European MA dealsVolume
Based on announced deals, excluding those that
were called off or cancelled, where the dominant
location of the target was in Europe.
Source MergerMarket
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European MA dealsNumber of deals
Based on announced deals, excluding those that
were called off or cancelled, where the dominant
location of the target was in Europe.
Source MergerMarket
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CC and CIS MA quarterly trend Volume
Source MergerMarket
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CEE and CIS MA quarterly trend Number of deals
Source MergerMarket
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European Private EquityBuyouts Volume and Value
Source Private Equity review 2008
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European Private EquityExits Volume and Value
Source Private Equity review 2008
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European MAsSector breakdown Volume H1 2008
Based on announced deals, excluding those that
lapsed or were withdrawn, where the dominant
location of the target is in Europe. Industry
sector is based on the dominant industry of the
target. Source MergerMarket
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Czech Republic MA quarterly trend Number of
deals
Source MergerMarket
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What drives the deal market in 2008?
IPO activity development
Source Renaissance Capital
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Whats going on in the world? The speed of
deals, premiums, valuations

• Deals are closed far more quickly average deal
  duration has dropped from 142 days in 2007 to 80
  days in 1Q 3Q 2008 (Source Mergermarket).
• 297 deals were cancelled in 3Q 2008, the highest
  number since 1995, when data first became
  available (Source Dealogic).
• Although the volume and number of deals are
  dropping, the one-month premium for listed shares
  increased to an average of 31 in October,
  compared to 26 in September and 29 in August
  (Source Dealogic).
• It seems only the healthiest will survive. Those
  with capital will look for cheap prey for
  money-making opportunities under current
  conditions.
• Japanese investors, with their highly
  conservative approach to acquisitions, are one
  example. In 1Q - 3Q, they made 379 acquisitions
  at EUR 57.5 billion, compared to 398 deals at EUR
  43.4 billion for all of 2007.

Source Financial News, The Press and Journal
Limited
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Whats going on in the Czech Republic?

• Although many deals were called off or postponed
  until better days, both strategic and financial
  investors are still interested in the Czech
  market.
• PEs have enough of their own funds that they need
  to invest, but loan sources are out of reach.
• Banks are not lending (even to one another),
  acquisition financing is becoming inaccessible.
• The first insolvencies are appearing, a wave of
  restructuring and forced sales is anticipated.
• Interest rates are growing the flat curve is
  ceasing to be flat.
• Unemployment growth will follow with a certain
  delay.
• Further Czech currency devaluation is anticipated.

All these factors lead to lower valuation.
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What to do?

• IPO? unrealistic under current circumstances.
• Loan financing? currently difficult.
• Strategic partner? yes, even with the current
  lower valuation, no one knows how long this
  situation will continue.
• Whats motivating current MA activity?
• Attempts to take advantage of current low prices
  for acquisitions.
• Companies buying distressed suppliers either to
  secure supply or as an opportunity for vertical
  integration (could be both local and
  cross-border).
• Companies buying distressed distributors of their
  companies in other countries Mostly to get
  closer to receivables and to maintain sales
  channel).
• Companies selling their subsidiaries in emerging
  markets to concentrate on core markets or
  activities.

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How to sell a company
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Mergers and acquisitions rough timetable
2-3 weeks
1-2 months
1-2 months
1-2 months
Months - years
Pre-sale preparation and marketing
Indicative bids
Binding bids and negotiations
Post-deal settlement
Sale strategy definition

• Decision on sale
• Definition of sale targets
• Decision on the circle of contacted investors

• Earn-out schemes in the event of purchase price
  payment based on achieved company results
• Adjustments of purchase price after deal
  negotiation

• Contacting prospective investors
• Getting indicative bids based on information
  memorandum

• Due diligence of target company risk
  quantification
• Receiving binding bids
• Signing purchase agreement

• Preparation of information leaflet
• Communication of information on the forthcoming
  sale

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The most critical issues

• Method of purchase price determination and
  adjustment, settlement method.
• Normalized EBITDA (actual EBITDA).
• Net debt amount after reflecting any risks.
• Transitional period / continuity management.

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How to leave a good impression

• Do not underestimate the "psychology of the
  deal.
• Absence of any significant risks or revelations
  of unpleasant / unexpected surprises during the
  due diligence.
• Transparent ownership structure.
• Strong management team.
• Quality information system / reliable financial
  information, including regular preparation of
  detailed analyses of results of operation and
  profitability.
• Regularly prepared, updated and evaluated budgets
  and business / financial plans.
• Ability to explain historical, current and
  planned company results of operations.
• Sound preparation for the due diligence process.
• Be aware of the link between the purchase price
  and the terms and conditions set forth in the
  purchase contract.
• Be prepared for further functional presence
  within the company.

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Contact
Igor Mesenský Manager Ernst Young Tel 420
225 335 270 Fax [phone] E-mail
igor.mesensky_at_cz.ey.com
Information in this presentation is intended to
provide only a general outline of the subjects
covered. It should neither be regarded as
comprehensive nor sufficient for making
decisions, nor should it be used in place of
professional advice. Ernst Young, s.r.o.,
accepts no responsibility for loss arising from
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