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MARKET TRENDS MARKET TRENDS J U L Y 2 0 1 4 | 7 Michael Del Pero is a seasoned investment banker with Focal- Point Partners LLC (Los Angeles, Calif.) who works exclu- sively with advanced materials companies. He advises them on mergers, acquisi- tions, divestitures, raising capital, restructuring and strategic planning. A regular contributor to High- Performance Composites, he has chaired the CompositesWorld Investment Forum on numerous occasions. Del Pero can be reached at +1 (310) 405-7005 or mdelp- ero@focalpointllc.com. H MID-YEAR ASSESSMENT: M&A; ACTIVITY IN THE COMPOSITES INDUSTRY alfway through 2014, many in the fnancial community are literally gasping for air, particularly those of us involved in mergers and acquisitions (M&A;). If we wind the clock back to mid- 2012, we can see why. M&A; activity had stalled due to uncertainty about health- care and other U.S. legislative matters as well as a string of economic crises across Europe and emerging markets. But a rush of transactions at the end of 2012 was fu- eled by the specter of possible increases in capital gains rates. Pent-up demand for deals from strategic acquirers and pri- vate-equity investors increased M&A; mo- mentum throughout 2013. In the down- turn's wake, many U.S. companies were well into cost-cutting initiatives and strategic realignments. The result? Record cash levels on their balance sheets. The fact that the proverbial "fat" had been cut and the economy seemed to have stabilized led com- panies to aggressively pursue M&A; strategies as a means to generate growth and profts. Private-equity investors desperate to fnd a home for record amounts of uninvested capital added fuel to the fre. This led to healthy (if not irrationally exuberant) competition for acquisi- tion targets, which has continued at full steam into 2014. In fact, the total value of announced deals in frst-quarter 2014 was 52 percent higher than during the same period in 2013 — the strongest start to a year since 2011. In February, U.S. companies announced transactions worth roughly $120 billion (USD) in a sin- gle seven-day period — a one-week total that represented nearly 12 percent of 2013's total domestic M&A; activity! Granted, these transaction values were somewhat skewed by a handful of "mega deals," but total volume of deal fow is also up con- siderably so far in 2014. Here of late, we've seen a jump in val- uations in the middle market — transac- tions valued between $25 million and $500 million. Median valuation levels for these transactions (typically measured as a multiple of EBITDA) have soared to as high as 9.5x in recent months, com- pared to an average of 7.6x in 2012. This is specifcally relevant to the composites industry, given that the vast majority of companies in the space are "middle market." We have seen the highest valua- tions paid by acquirers looking either to diversify their customer or end-market base, or to expand their technology and product offerings. It would be easy to assume that this outpouring of favorable economic con- ditions and compelling dealmaking ra- tionale has increased composites M&A; activity. But that would be a regrettable error. As the chart below shows, trans- action activity has actually declined after peaking in 2012 — the inverse of M&A; trends in the broader economy. This decline has two main drivers. First, 2012 marked the end of intense strategic competition among companies jockeying to get qualifed on the Boeing 787 and other new, composites-rich air- craft. This led to a furry of activity as ac- quirers sought to expand their material technology offerings or add to their pro- cessing capabilities. Those key programs have since transitioned from qualifca- tion to production. With few exceptions, materials and processes have been spec- ifed, so we don't see these programs moving M&A; activity forward like they did before. Secondly, there simply hasn't been a wealth of available acquisition targets in the composites space during the past 12 to 24 months. This is not to say the demand isn't there. Strategic acquirers continue ag- gressively to look for ways to strengthen their competitive positions in anticipa- tion of growth in key end-markets, such as automotive. For example, a number of collaborations between OEMs and manufacturers are aimed at bridging car- bon fber technology, cost and capacity gaps as demand grows for better auto fuel effciency. We see an appetite for acquisitions in autocomposites, but the lack of target assets has forced would- be acquirers to explore alternatives. Top manufacturers and suppliers seek, for example, to vertically integrate, to ensure they can offer comprehen- sive solutions to customers. Suffce it to say, the timing and environment couldn't be better for composites companies inter- ested in exploring acquisition or divestiture. There is strong desire on the "buy" side of the equation and, frankly, we don't see the M&A; market getting any hotter than it is today. The only question is how long will the window stay open and how many companies will an- swer the bell? 45 40 35 30 25 20 15 10 5 0 Transaction Volume 2009 2010 2011 2012 2013 1H 2014 11 14 24 41 27 9 0714HPC MarketTrends-OK.indd 7 6/17/2014 10:09:15 AM