Perspectives on Historical M&A Downcycles and

Potential Implications for the Next Recovery

April 2020

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Observations on the M&A Environment

As the M&A market slows and enters its first downcycle in ten years, we thought that it was timely to review
lessons learned from prior cycles and consider what could be different in this pullback and recovery

 The M&A market entered 2020 after a decade-long M&A bull run, with volumes over $3tn for the last 6 years

— Despite emerging volatility and fewer mega transactions, activity (and specifically deal count) remained robust
through early March

— However, with the widespread impact of COVID-19, activity has meaningfully declined

 Over the last three decades, there have been three significant M&A downcycles (1990/91; 2001/02; 2008/09)

— On average, M&A volume declined by ~50% over a 2 year period and recovered to its prior peak over the
subsequent 3-6 years

— As the market troughs and recovers, three M&A waves tend to follow: Involuntary M&A, Near-in M&A and Voluntary
/ Growth M&A

 All M&A cycles are unique and this pullback could be different than the most recent downturns

— Event-driven downturns like the current one typically recover faster

— Corporates in most sectors, financial sponsors and capital providers were generally in strong shape before this
shock and may be well positioned to act quickly as the market recovers

— The uniqueness of this pandemic likely has far reaching implications for industry profitability, valuation, deal
structuring and more…judgment will be more critical than ever

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 Over the Last Three Decades, There Have Been
Three Significant M&A Downcycles

M&A Volumes over the Last 30 Years Key Observations

$5,000 1990-1991 2001-2002 2008-2009

$4,500
A B C Average Total Decrease
in M&A Volumes 53%
Decrease: Decrease: Decrease:
(41%) (65%) (52%)

$4,000
Duration of Each
Downcycle ~2 Years
$3,500
Decline in All 6
Downcycle Years >20%/Year
$3,000 (30%)
Volume ($bn)

$2,500
Average Decline
in Year 1 35%
(31%)
$2,000
(50%)
Average Decline
in Year 2 27%
$1,500
(28%)

$1,000
Peak to Trough
Duration 18-30 Mos.
(24%)
(23%)
$500 Timing from Trough to
Recover to Prior Peak 3-6 Years
$0

Announced M&A Volume S&P 500

Source: Refinitiv, Factset

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 The Current “Event-Driven” Downcycle Could be
Less Severe Than Recent Downcycles

“Event-driven bear markets like the current one typically see swifter falls and swifter recoveries. Event-driven bear markets, on average, reach a low in
around half a year compared with over two years for a cyclical bear market and nearly four years for a structural bear market. Also, in event-driven bear
markets, equity levels are typically back to their starting point within a year on average, compared to four years for a cyclical bear market and nearly a decade
for a structural bear market.”
Peter Oppenheimer, March 24, 2020

Historically, Event-Driven Bear-Markets in Equities Recover Faster1

Average S&P 500 Decline Average Length Average Time to Recover

0% 120 111
50
(10)% 42 100
40
(20)% 80
28

Months
27
Months
30 60
(30)% 60 51
(31)% (29)%
(40)% 20
(38)% 9 40
(50)% 10 15
20
(60)% (57)% 0 0
Average Structural Cyclical Event-Driven Average Structural Cyclical Event-Driven Average Structural Cyclical Event-Driven

The Current M&A Downcycle May Be More Analogous to the 1990-91 Crisis Which Was Shorter in Duration Versus the Last Two Downcycles

Downcycle Type Total Decline Peak to Trough Trough to Peak

A 1990 - 1991 Event-driven 41% ~22 months ~3 years

B 2001 - 2002 Structural / Event-driven 65% ~32 months ~4 years

C 2008 - 2009 Structural / Cyclical-driven 52% ~27 months ~6 years

Source: Goldman Sachs Macro Investment Research: Top of Mind-Roaring into Recession
Note: Goldman Sachs Investment Research defines downcycles as follows: Event-driven: caused by a one-off "shock" that doesn't always lead to a domestic recession (such as a war, oil price shock, EM crisis or technical market
dislocation); Structural: triggered by structural imbalances and financial bubbles; very often a "price" shock, such as deflation, follows; Cyclical: typically triggered by rising interest rates, impending recessions and declines in profits;
they are a function of the economic cycle.
1 S&P 500 Bear Markets Since the 1800s

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 Premiums Tend to Expand in Downcycles But
Do Not Fully Offset Total Declines
…But in General Do Not Achieve a Similar Price Level,
Headline Premiums Tend to Expand in Downcycles… Resulting in Discounts (vs. Avg. Premiums) to 52 Week Highs

37%
1%

7 pts

Premium to 52-Week High (%) 2

Premium to 1 Day Prior (%) 1

30%

(12) pts

-11%

Prior Period Median Downcycle Median Prior Period Median Downcycle Median

Note: Prior period median represents the median of the annual average premium over the five years prior to the downcycle
1 Source: Refinitiv. U.S. targeted public transactions greater than $500 million; 1989-present
2 Source: Factset. U.S. targeted public transactions greater than $500 million ; 1989-present

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Consideration Mix Often Shifts Modestly Towards
Equity and Financial Sponsor Activity Declines

Stock Consideration Increases in Downcycles While Sponsor

Activity Often Slows… …But This is Not Always the Case…
The 2008/09 had outsized but offsetting volumes
from government rescues (incremental 8% cash The 2001/02 Downcycle Actually Saw an
volume) and large spin-offs (incremental 7% Increase in Sponsor Activity
stock volume)

Financial Sponsor Buyer

Financial Sponsor Buyer

25%
All Stock M&A as % of

5 pts

M&A as % of Total

M&A as % of Total
20%
Total Volume

15%
4 pts
11% 10%
5 pts
5%

Prior Period Downcycle Prior Period Downcycle 1996-2000 2001-2002

Average Average Average Average
…And Sponsors Have Far More Dry Powder …Furthermore, Some of the Strongest Vintages Have
Outstanding This Time Around… Been Generated During Downcycles
$700 25% Strong Downturn Vintages
Dry Powder – Buyout Funds

$600 $563
20%
$500
by Region ($bn)

$400 15%

$300 10%
$225
$200
5%
$100 $95

$0 0%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
US Europe Asia Median Net IRR
Source: Cambridge Associates US Buyout Index (March 2019), Dealogic

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 While Every Cycle is Unique, Recoveries After
Severe Downturns Often Follow Typical “Waves”

Wave 3: Voluntary / Growth M&A

Coming out of the market trough, transaction

volumes tend to shift back to a greater
Wave 2: Near-In M&A growth orientation. This includes acquisitions
further away from the core, greater use of cash
consideration, industry and geographical
As the markets stabilize, management teams
diversity (including cross border) and a broader
and Boards often look close to home for
universe of acquirors (as opposed to initially the
potential transaction activity, particularly
strongest players).
situations in which high familiarity and
Wave 1: Involuntary M&A existing relationships / ownership facilitate
easier transaction execution and lower risk.
“Familiar M&A” is one form in which companies
As the market rapidly declines, the first wave of look to buy in existing JVs, combine with JV
activity is often composed of situations in partners or companies with existing commercial
which companies have limited options not relationships, or buy in companies / divisions
to transact. This includes financially distressed that are not fully owned. A second form is stock
corporate transactions, bankruptcy sales, driven mergers / MOEs that are close
forced asset sales to generate liquidity for competitors where management teams know
pressing maturities, or any situation in which the companies / management teams well.
Boards have limited alternatives. While Additionally, synergies in these situations tend
“Involuntary M&A” also includes hostile to be larger as a percentage of earnings thus
transactions in which buyers escalate pressure supporting activity.
and take the decision directly to shareholders,
this wave is still predominately represented by
Board negotiated transactions.

Rapid Decline Stabilization Recovery

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What Could be Different in this M&A Downcycle
and Recovery?

Theme Observations Potential Implications

Event-driven crises triggered by
Current crisis is event-  M&A market may recover faster than recent downcycles
one-off shocks tend to trough and
1 driven (COVID-19), not recover much faster; market  Preparedness is critical in case of “V shape” recovery
cyclical or structural supported by unprecedented  Be mindful of defense if outlook recovers faster than valuation
stimulus

Private Equity likely to Significant dry powder, stronger  Likely early actors with focus on “absolute” valuations
2 be much more active financing environment, more
 Financing markets are operating; banking system remains strong
supportive LPs and a competitive
(corporate and PIPEs) cost of capital vs. the public markets  Potentially more aggressive approaches (for some)

 After a decade of restructuring, fewer large scale transactions

Spin-offs, asset sales and other
Restructuring volumes
3 self-help led volumes throughout  An active market is likely but potentially smaller in scale
may not be as robust the last recovery  Focus on more structured transactions

Social distancing trends, localizing

Some industries may face supply chains and other changes  Understanding sector trends more critical than ever
4 uncertain and longer resulting from COVID-19 / future  Survival M&A drives challenged-sector consolidation
term structural changes pandemics; historical return of  Regional vs. cross-border strategies
capital policies may change

Boards, management teams and

Social factors may weigh  Sensitivity about timing / aggressiveness of approaches
regulators are likely to be far more
5 more heavily, at least focused on employment, preserving  Ability to achieve synergies as a key focus
initially corporate / national champions and  Political / regulatory defense strategies
other social factors

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 What Could be Different in this M&A Downcycle
and Recovery?

Theme Observations Potential Implications

Small deals likely to Digestible, less dependent on  Private owners less focused on recent trading
6 drive initial deal count external financing / approvals and
 Perceived lower closing risks (financing, votes, regulatory, etc.)
“under the radar” in terms of
volume macro challenges  Lower integration / distraction for acquirers

Banks / corporate Corporate balance sheets and  Strong corporate dry powder (but may still prefer equity)
7 banks entering this downturn
balance sheets far  Continue access to inexpensive capital
much stronger; private lenders
stronger have also significantly grown  More alternative sources of capital than ever

Cross-border M&A  Uncertain regulatory / govt response (protectionism / nationalism)

Cross-border M&A (especially
8 challenges may with Asia) was already facing  Structural / sector changes may shift economics
continue (or worsen) numerous headwinds  More focus on regulatory elements of contract

Activism may slow Public campaigns slowed in the  Vulnerability may be more focused on unsolicited M&A / defense
9 (with shift to defense) last downturn and many strategies
 Activist capital remains robust and is eyeing next opportunities
may not be viable in today’s
but it’s not going away environment  Strategics may focus on supporting M&A outcomes

In this evolving and uncertain

Judgment more  Deal-making processes and investor communications are evolving
environment, M&A advice, which
10 critical than ever in is tied to capital markets,  Valuation judgments increasingly complex
M&A structuring and ratings advisory, is  Understanding of ratings outcomes is critical
all the more crucial