Wednesday, June 23, 2010

While Large Cap Transactions Remain Challenged for Second Half, Looming Tax Increases Will Light Fire Under Middle Market Merger & Acquisition Activity, According to PricewaterhouseCoopers

/PRNewswire/ -- Despite earlier improvements in credit and equity markets and corporate balance sheets, U.S. merger and acquisition (M&A) activity remained sluggish in the first half of 2010. Unforeseen economic events in the last two months triggered a global ripple effect reviving sentiments of uncertainty -- setting the stage for a challenging M&A environment for large cap transactions in the second half, according to the Transaction Services practice at PricewaterhouseCoopers, LLP (PwC). However, PwC contends that the middle market may be a different story.

"Going into the second half, record dry powder in the private equity space and unprecedented cash levels on the balance sheets of corporate America will combine with the desire of family held businesses and private equity backed management teams to sell prior to looming tax increases," says Bob Filek, partner with PricewaterhouseCoopers' Transaction Services.

U.S. M&A activity was down three percent compared with the same period in 2009. The number of closed deals in the first half of 2010 represents the lowest deal volume this decade, according to PwC. For the first five months of 2010, there were 2,969 closed deals representing $317 billion, compared with 3,065 deals valued at $323 billion in the same period of 2009.

While deal value and volume are down, willing lenders and open credits markets are available for transactions, according to PwC. "Banks and institutions are providing capital to execute deals," says Greg Peterson, partner with PricewaterhouseCoopers' Transaction Services. "They are lending more conservatively, but credit is available from a variety of sources and in a variety of types -- including traditional leveraged loans."

Corporate buyers continue to employ strategic deal making, pursing attractively valued companies and seeking out 'mergers of productivity' as a means to capture benefits of scale and cost savings, maintains Filek. "Companies are taking advantage of depressed valuations -- looking for deals to grow and diversify at discounted prices. Even with the uncertainty in Europe, a hesitant consumer and volatile markets, it's still an attractive time to buy."

The median deal size in the first half was $107 million, indicating that smaller, middle market deals have become the new 'normal.' "While there is still ambition to complete mega deals, the 'hit rate' will be low. The sweet spot for deals will be one to five billion dollars and below, with a mega deal or two sprinkled in," says PwC's Peterson.

PwC expects divestitures, carve-outs and spin-offs to continue to contribute to deal activity as companies separate certain assets and operations no longer seen as core to the business. The likely candidates to acquire these assets are private equity players who have strong relationships with large corporations that may be interested in selling certain assets. Business units within the industrial products and technology sectors are among the industries where PwC expects to see increased divestiture activity.

"Private equity players will also remain active in the distressed area, using their debt, hedge and distressed funds to find deals in untraditional ways," continues Peterson. "While there are concerns about stricter regulation for certain alternative investment classes, private equity is a resilient and innovative business run by sophisticated investors who will still get deals done, regardless of what transpires in Washington."

The current private equity overhang at nearly $850 billion (three and a half times the overhang in 2000) represents 54% of all capital commitments made between 2004 and 2009. Over 85% of the $850 billion is in funds larger than $1 billion, including 48% in funds larger than $5 billion, according to Cambridge Associates.

Declining values of the Euro and Pound are also providing a strong backdrop for cross-border deals, particularly in Europe. "Typically, during U.S. downturns, European companies take advantage of a poor U.S. economy, but this time, foreign buyers have to deal with issues at home, including a challenging financing market, reduced demand and declining currency values," according to PwC's Filek. "As a result, we expect the inverse to occur. U.S. corporates are going to see good opportunities to acquire high quality franchises and brands in Europe."

Sectors ripe for consolidation include:

-- Aerospace & Defense - Activity in the security, surveillance and
homeland security sectors are expected to continue as suppliers seek
to diversify their offerings and seek growth areas away from
traditional defense budgets. Look for organizational conflict of
interest concerns to drive some activity, with A&D companies
evaluating options to exit such activities through a sales process.
-- Automotive -- With crashing 2009 assembly volumes in the rear-view
mirror, companies with strong balance sheets and access to capital are
poised to re-enter the deal market. Over the next three to five
years, M&A will be driven by new technologies, regulations and
consumer requirements. Tier one suppliers will work to realign their
product portfolios to take advantage of the restructured industry.
Developed markets will focus on fuel economy, hybrid and electric
vehicles and infotainment and communications in vehicles, while
developing markets will focus on delivering low cost vehicles and
acquiring technologies.
-- Entertainment, Media & Communications -- Private equity interest
remains strong with new investment in and through platform companies.
High-profile acquisitions over the past several years, as well as
numerous middle-market acquisitions, have led private equity's
interest and influence via platform investments to expand across the
E&M landscape. As private equity investors continue to assess the
cyclical and structural issues within certain E&M subsectors, PwC
expects that interest to permeate even further via bolt-on
acquisitions as well as new platform company investments.
Additionally, more traditional, well-capitalized corporates in this
space appear to be stabilizing and interested in potential M&A
-- Financial Services -- Until the impact of U.S. financial regulation is
fully realized, uncertainty will be cause for continued stagnation of
deals in the sector, other than some continuing interest in FDIC
supported takeovers. However, opportunities exist for companies to
divest non-core assets and consider capital raising alternatives such
as debt or equity raises. Consolidation in the property and casualty
insurance is still expected in light of continued soft premium pricing
and desire to maximize scale, while life insurance consolidations will
likely continue to be a less active space given returning investment
portfolio valuations and focus on product redesign.
-- Healthcare -- As the full impact of U.S. healthcare reform becomes
better understood, look for increased industry M&A and joint venture
activity. Consolidation will accelerate in the services and health
insurance/managed care sectors, driven by the need to reduce costs,
increase productivity and develop more integrated business models.
Technology will play an even larger role; and leaders will embrace
strategies and innovations that will lead to more collaboration across
all health industry sectors.
-- Oil & Gas -- Oil & gas commodity price differential will drive
companies to increase their oil positions through acquisitions.
Equipment and service companies will expand their product and
geographic footprint through transactions. The offshore drilling
moratorium will be an obstacle for those highly levered to Gulf of
Mexico E&P projects but will likely not dampen the growing level of
transactions in the sector.
-- Power & Utilities -- Despite uncertainty surrounding energy policy and
regulatory changes, M&A activity in the sector has been a pleasant
surprise, as significant regulated and merchant company transactions
have been announced in the first two quarters of 2010. PwC expects
this trend to continue, with a cautious eye towards regulatory
approvals of the announced transactions. IOUs continue to shed
non-core assets and M&A activity remains strong in the renewable
space. Expect to see continued sales of merchant power plants,
particularly driven by the current and projected commodity prices.
-- Retail/Consumer Products -- Watch for the strongest sectors to lead
the way in accelerated activity focused on growth. Food and household
products companies will look to expand portfolios and enter emerging
markets as a way to boost revenue growth. Retailers faced with a
lackluster U.S. consumer will be focused on business models that make
sense for them in emerging markets. European specialty companies
depressed by the recent downturn could be attractive to opportunistic
U.S. buyers.
-- Technology -- Record profits and favorable revisions in investors'
expectations will drive M&A as a means of accelerating innovation
cycles. The 'new R&D' will continue to drive mid-market transactions.
PwC expects software incumbents to round-out offerings or acquire
industry-specific applications and as major hardware players expand
into end-to-end solutions. Look for semiconductor deals to come to
the fore as the long-awaited cyclical rebound begins to take hold.
Consumer technology and Internet majors will continue to work their
way along the value chain to capture market and mindshare as mobile
computing, entertainment and communications markets converge on
intelligent and user-friendly devices.

According to PwC, the wild card in the second half will be just how much incentive looming tax increases give buyers to sell. "The economics could be compelling enough to drive a rush to exit by December 31, which could mean a busy holiday season for deal makers," says Filek.

*The accuracy of our previous forecasts does not guarantee future accuracy.

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Wednesday, June 16, 2010

Fannie Mae Notifies NYSE and Chicago Stock Exchange of Intention to Delist

/PRNewswire/-- Fannie Mae (NYSE:FNM) today reported in a filing with the U.S. Securities and Exchange Commission (SEC) that the company had notified the New York Stock Exchange (NYSE) and the Chicago Stock Exchange (CSE) of its intent to delist its common and preferred stock. This notice was made in response to notification by the NYSE on June 15, 2010 that the company no longer met NYSE continued listing standards relating to the minimum price of Fannie Mae's common stock and to the issuance of a directive dated June 16, 2010 by the Federal Housing Finance Agency (FHFA), Fannie Mae's conservator, for Fannie Mae to delist its common and preferred stock from the NYSE and any other U.S. stock exchange where its common and preferred stock are listed.

According to a press release by FHFA, the Acting Director of FHFA directed both Fannie Mae and Freddie Mac to take such actions.

In accordance with SEC rules and regulations, Fannie Mae intends to file a Form 25 (Notification of Removal from Listing under Section 12(b) of the Securities Exchange Act of 1934) on or about June 28, 2010. Fannie Mae anticipates that the delisting of its common and preferred stock from the NYSE and CSE will be effective 10 days after Fannie Mae files the Form 25 with the SEC.

After the delisting of its stock, Fannie Mae expects that its common stock and all series of preferred stock that were previously listed on the NYSE will be traded in the over-the-counter market and quoted on the OTC Bulletin Board (OTCBB), a centralized electronic quotation service for over-the-counter securities, under a ticker symbol that has yet to be assigned. Fannie Mae expects that its common stock and preferred stock will continue to trade on the OTCBB so long as market makers demonstrate an interest in trading in the common and preferred stock.

Fannie Mae does not expect that the transfer of the trading of its common and preferred stock to the OTCBB will affect, in any way, Fannie Mae's ability to fulfill its mission to provide liquidity and stability to the mortgage market, or its focus on home-retention, foreclosure-prevention, and refinance efforts under the Making Home Affordable Program. The transition to the OTCBB also will not affect the company's obligation to file periodic and certain other reports with the SEC under applicable federal securities laws.

Certain statements in this news release may be considered forward-looking statements within the meaning of the federal securities laws, including those relating to our intention to take steps to cause the company to be delisted from the NYSE by filing a Form 25; the expectation that our common stock and series of preferred stock will continue to be traded in the over-the-counter market and quoted on the OTCBB; and the expectation that the transfer of trading from the NYSE to the OTCBB will not in any way affect our ability to fulfill our mission. Although Fannie Mae believes that the expectations set forth in these statements are based upon reasonable assumptions, future conditions and events may differ materially from what is indicated in any forward-looking statements. Factors that could cause actual conditions or events to differ materially from those described in these forward-looking statements include, but are not limited to legislative or other governmental actions relating to our business or the financial markets; our ability to manage our business to a positive net worth; adverse effects from activities we undertake to support the mortgage market and help borrowers; the investment by Treasury and its effect on our business; changes in the structure and regulation of the financial services industry, including government efforts to improve economic conditions; the conservatorship and its effect on our business (including our business strategies and practices); the depth and duration of weakness in the housing market and economic conditions, including the extent of home price declines and unemployment rates; the level and volatility of interest rates and credit spreads; the accuracy of subjective estimates used in critical accounting policies; and other factors described in Fannie Mae's quarterly report on Form 10-Q for the quarter ended March 31, 2010, and Fannie Mae's annual report on Form 10-K for the year ended December 31, 2009, including the "Risk Factors" and "Forward-Looking Statements" sections of these reports.

Fannie Mae exists to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market. Fannie Mae has a federal charter and operates in America's secondary mortgage market to enhance the liquidity of the mortgage market by providing funds to mortgage bankers and other lenders so that they may lend to home buyers. Our job is to help those who house America.

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Friday, June 4, 2010

Former Federal Reserve Economist Tells Lawmakers to Slow Down

/PRNewswire/ -- As lawmakers begin meeting next week to mull over legislation aimed at averting another financial crisis, a former Federal Reserve economist cautions that such sweeping reform could have serious unintended consequences. "This is very ambitious and hugely complicated legislation that is being done very fast," says Robert Bliss, who is now a professor at Wake Forest University Schools of Business. "Some of the changes are positive, but others could create bigger problems than the ones they are trying to solve."

A House-Senate conference committee will try to reach a compromise on the financial regulatory reform bills passed by the House in December 2009 and the Senate a few weeks ago. Headed by Senator Chris Dodd and Rep. Barney Frank, the committee will work to reconcile the two versions with the goal of passing a final bill by July 4th. Among the issues the committee will be seeking to resolve is the regulation of the over-the-counter derivatives market, expanded audits of the Federal Reserve Board, and the creation of a new consumer protection agency.

But rather than trying to pass such sweeping legislation with an eye toward the November election, lawmakers would be better off taking more time to seek expert opinion. Bliss said lawmakers would benefit from bringing in more business and economic experts to advise them rather than approaching the legislation as a political issue. It also is important to take the reform's worldwide implications into account.

"The legislation and these proposals are entirely domestic, and the financial system is entirely international," said Bliss, who formerly served as a senior financial economist at the Federal Reserve Bank of Chicago.

"Although the 2008 financial crisis started in America, it impacted Europe because their banks were buying our subprime mortgages, and now we're looking at a situation where there's a major financial crisis brewing in Europe and that's going to feed back in the U.S. financial markets and our economy," he added. "In today's global markets, we can't have our heads in the sand about the reform's international implications."

Despite the inherent risks involved, Congress is likely to pass the legislation in the weeks ahead. "The financial crisis of 2008 has passed, and now we're talking about a response to it," Bliss said. "But the consequences will continue to play out well into the future."

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Funding Status of U.S. Pensions Falls to 82.0 Percent in May, According to BNY Mellon Asset Management

PRNewswire-- Falling stock markets in May sent pension plan assets lower, resulting in the worst funded status for the typical U.S. corporate pension plan since October 2009, according to monthly statistics published by BNY Mellon Asset Management. The funded status in May declined 4.3 percentage points to 82.0 percent.

Through the end of May, the funded status of the typical U.S. corporate plan is down 3.5 percentage points for the year.

The falling stock markets resulted in a decline of 4.8 percent in assets at the typical U.S. corporate plan, while liabilities were little changed in May, rising 0.3 percent, as reported by the BNY Mellon Pension Summary Report for May 2010. Plan liabilities are calculated using the yields of long-term investment grade corporate bonds. Lower yields on these bonds result in higher liabilities.

"U.S. stocks in May had their worst month since February 2009, declining nearly eight percent, while a weakening euro helped to send international stocks down more than 11 percent, said Peter Austin, executive director of BNY Mellon Pension Services, the pension services arm of BNY Mellon Asset Management. "May's results wiped out equity gains on a year-to-date basis. Unfortunately, there was no relief on the liability side as the Aa corporate discount rate remained essentially flat despite a 30-basis-point widening of spreads to Treasuries."

Austin added, "The May 6 U.S. market flash crash reminds us that the equity markets remain very sensitive. Continuing fears over the European sovereign debt crisis and the fragility of the global economic recovery are likely to result in increased market volatility for the near term. In response to this expected volatility, we are hearing from a growing number of corporations that are seeking new solutions to manage financial risks posed by their pension plans. There appears to be growing interest for funding strategies that seek to establish deadlines to achieve and maintain specific funding levels, with the goal of providing a buffer against wide swings in either the equity markets or in interest rates."

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Wednesday, June 2, 2010

Governor Signs Legislation Creating Tax Reform Council

Governor Sonny Perdue yesterday announced that he has signed House Bill 1405, legislation creating the Special Council on Tax Reform and Fairness for Georgians. The Governor was joined by House Speaker David Ralston and Lt. Governor Casey Cagle.

“Throughout my term and during this challenging economic time, we have transformed state government by implementing efficiencies and cost-savings measures in our agencies,” said Governor Perdue. “This legislation sets up a framework that will allow for a serious examination of our tax code and ensure that it works for Georgians.”

The members of the council, as specified in the legislation, are Governor Perdue, Dr. David Sjoquist of Georgia State University, Dr. Jeffrey Humphreys of the University of Georgia, Dr. Roger Tutterow of Mercer University, Dr. Christine Ries of Georgia Tech, the 2010 chairperson of the Georgia Chamber of Commerce, the 2010 Georgia chairperson of the National Federation of Independent Business and two members each appointed by the Lt. Governor and Speaker of the House.

The Special Council on Tax Reform and Fairness for Georgian will conduct a study of the state’s current revenue structure.  Following their study, the Council will make a report of its finding and recommend legislation to the Speaker of the House and the Lieutenant Governor.

Under the legislation, the Council will make a recommendation to the Special Joint Committee on Georgia Revenue Structure.  The Special Joint Committee will then write a bill which will be voted on by the General Assembly without amendments.

This process is similar to the federal Defense Base Realignment and Closure (BRAC) Commission from the mid-2000s.

NFIB/Georgia, the state’s leading small business association with 7,900 members statewide, praised the legislation

“This is a big victory for small business,” NFIB Georgia State Director David Raynor said. “Small business is the heart and soul of Georgia’s economy and one of the challenges facing our entrepreneurs and small, family businesses is high taxes. We thank the governor for signing HB 1405 into law, and we thank the House and Senate leadership for making NFIB/Georgia a part of the reform process. The decision to put the chairman of the NFIB/Georgia Leadership Council on this council shows us that our elected officials understand the crucial role small business plays in Georgia’s economy and will play in its recovery.”

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One Georgia Bank Approved by the United States Department of Transportation to Assist Minority, Women and Veteran Owned Small Businesses

(BUSINESS WIRE)--One Georgia Bank and the U.S. Department of Transportation announces a partnership whereby One Georgia Bank will be a Participating Lender with DOT’s Office of Small and Disadvantaged Business Utilization (OSDBU). The Short Term Lending Program (STLP) is aimed at helping qualified small and disadvantaged businesses compete for government contracting opportunities.

“One Georgia Bank is already a leader in providing solutions to small business owners with our SBA and USDA guaranteed lending programs”

Under STLP One Georgia Bank will provide a line of credit that will be secured primarily by receivables from transportation contracts. The US DOT will fully guarantee the line. Companies eligible for STLP are certified Disadvantaged Business Entities or businesses certified by the U.S. Small Business Administration Section 8(A) Program, Hubzone, Disabled Veteran or Service Disabled Veteran Owned Business. The maximum loan amount is $750,000.

“This program will go a long way to providing the type of targeted assistance that small businesses competing in the transportation industry need right now,” said OSDBU Director Brandon Neal. “It will really help level the playing field for smaller companies eager to compete.”

“One Georgia Bank is already a leader in providing solutions to small business owners with our SBA and USDA guaranteed lending programs,” stated Willard “Chuck” Lewis, President & CEO of One Georgia Bank. “STLP gives us another tool to bring to market that will help businesses go to the next level.”

STLP eligible activities include maintenance, rehabilitation, improvements, or revitalization of any of the nation’s transportation modes which include public, commercial, Federal, State, or local agency. One Georgia Bank is currently processing its first application under the program.

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