Latest M&A Outlook & Accounting for Acquisitions Presented by: Anthony Giordano BKD Corporate Finance Matthew List, CPA BKD, LLP

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Subsidiary of BKD, LLP FINRA broker dealer  Investment bankers  Financial analysts Corporate finance services  Mergers, acquisitions, divestitures, management buyouts, recapitalizations  Debt & equity financing  Strategic options analysis BKD Corporate Finance Overview

Current Market Conditions Strategy to Achieve Your Goals

U.S. Middle Market M&A Activity * Disclosed middle market transactions

U.S. Middle Market Deal Statistics – Q Middle market disclosed transactions (enterprise value between $10 and $500 million) Source: Capital IQ, W.Y. Campbell

EV/EBITDA Valuation Multiples

EBITDA Multiples – GF Data Resources U.S. PEG Middle Market Deal Statistics

Credit Markets Strategy to Achieve Your Goals

Credit Markets

Credit Markets – PE Deals Historical Leverage Multiples 2.5x 1.0x 3.5x 2.3x 1.0x 3.3x 2.5x 0.8x 3.3x 1.6x 0.9x 2.5x 1.5x 1.2x 2.7x 2.0x 1.6x 0.9x 2.5x 1.8x 0.7x 2.5x

Credit Markets – PE Deals Equity & Debt Contributions

Private Equity Group Fundraising $ billions

Several ways financing is being arranged  Debt financing (still tight, but loosening)  PE investments  Earnouts  Seller notes  Royalties Financing Structures

Mold a strong management team Business plan Financial statements Invest in the future Improve margins & profitability Customer concentration Balance sheet Controlled ownership Pre-due diligence Timing Tools for Building Value – Plans to Accelerate Value

Accounting for Acquisitions

FAS 141 Self-sustaining set of activities & assets conducted for purpose of providing return to investors FAS 141R Integrated set of activities & assets capable of being conducted & managed for purpose of providing return in form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants Definition of a Business

FAS 141 Occurs if entity obtains control of business through acquisition of equity interests or net assets FAS 141R Transaction or other event in which acquirer obtains control of one or more businesses Definition of a Business Combination

Company A owns equity investment in investee Investee repurchases its own shares from other parties Proportional interest of Company A increases, causing Company A to obtain control Example: Share Repurchase

Company C & Company D enter into contractual agreement to combine their businesses Company C will control all operations Example: Contract

FAS 141 Most considered part of cost of business combination FAS 141R Recognized separately from business combination & generally expensed as incurred Acquisition & Restructuring Costs

Lower earnings Less goodwill Impact

FAS 141 Recognized using cost accumulation approach. Any outstanding minority interest is recorded at its carrying amount FAS 141R Recognized at fair value, with limited exceptions Acquired Assets & Liabilities – Partial Acquisition

Acquirer purchases 75% of Target’s common stock for $250M in cash Facts  FV of NCI is $75M  FV of 100% of identifiable assets & liabilities is $100M  Carrying value of Target’s net assets is $50M Example – Partial Acquisition

Analysis FV of consideration transferred FV of NCI FV of consideration & NCI FV of 100% of assets/liabilities Goodwill $250M 75M 325M (100M) $225M Example – Partial Acquisition

141141R Financial Statement adjustments Cash$(250M) Identifiable net assets (a)$88M$100M Goodwill$175M$225M NCI (b)$(13)$(75M) (a)FAS 141 – ($100*75%) + ($50*25%) (b)FAS $50*25% Partial Acquisition

Acquirer has 30% previously held equity interest with carrying value of $150M Acquirer purchases additional 50% interest for $300M & obtains control  FV of previously held equity interest is $200M  FV of NCI is $100M  FV of net assets is $500M  Carrying value of net assets is $400M Example – Step Acquisition

141141R Financial Statement adjustments Cash$(300M) NCI (a)$(80M)$(100M) Previously held equity interest$(150M) Identifiable net assets (b)$480M$500M Goodwill$50$100M Income (c)0$(50M) (a)FAS 141 – $400*20% (b)FAS 141 – ($500*50%) + $150 + ($400*20%) (c)Gain on previously held equity interest ($200 - $150) Step Acquisition

FAS 141 Allocate pro-rata to first reduce noncurrent assets then to earnings as extraordinary item FAS 141R Recognized in earnings Bargain Purchase

Acquirer pays $200M in cash to acquire 100% of Target FV of current assets is $100M FV of long-lived assets is $150M Example – Bargain Purchase

141141R Financial Statement adjustments Current assets$100M Long-lived assets$100M$150M Gain on bargain purchase0$(50M) Bargain Purchase

ASC 810, Consolidation (FAS 160 – Noncontrolling Interests)

Before Proportionate amount acquired recorded at FV After After control obtained, subsequent changes in ownership accounted for as capital transactions (i.e., investments by owners) Step Acquisitions

Before Issuance of new shares by sub – gain/ loss recognized in income or directly to parent’s equity Sale by parent of existing sub shares – gain/loss recorded in income After Capital transaction (i.e., distribution to owners) Decrease in Ownership (Control Maintained)

Before Deconsolidate & recognize gain/loss equal to FV of consideration received less carrying value of interest sold Any remaining NCI recorded based on historical carrying value After Similar to before, except retained NCI revalued to FV & gain/loss recorded Loss of Control

Company A owns 100% of sub B A sells 60% of B for $360M (control lost) B will be deconsolidated & accounted for under equity method FV of sub B is $600M Carrying value of identifiable net assets is $440M & goodwill of $60M Example – Control Lost

BeforeAfter Financial Statement adjustments Cash$360M Increase in equity method inv (a)$200M$240M Decrease in net assets$(440M) Decrease in goodwill$(60M) Income$(60M)$(100M) (a)Before – ($440+60)*40%; After - $600*40% Example – Control Lost

Co. A owns 60% of Co. X; Co. B owns remaining 40% Co. A purchases 40% from B for $300M FV of X is $750M FV of X’s identifiable net assets is $600M Carrying value of net assets is $520M Previously recognized GW is $130M Carrying value of NCI is $260M Example – Control Maintained

BeforeAfter Financial Statement adjustments Cash$(300M) Increase in net assets (a)$32M0 Increase in goodwill (b)$60M0 Elimination of NCI (c)$208M$260M Decrease in APIC0$40M (a)($ )*40% (b)$300 – ($600*40%) (c)Before – $520*40% Example – Control Maintained

Fiscal years & interim periods beginning on or after December 15, 2008 Early adoption prohibited Effective Date

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