There’s still a fair amount of M&A activity in today’s troubled market, but the forces driving the deals today are far different than they were during the heyday of M&A transactions two and three years ago. If there’s a silver lining to today’s dark clouds, it might be found here in the Kansas City market, where economic conditions are less volatile than they are nationally or in the major media markets.

In 2006 M&A deals were on a roll topping out at $3.8 trillion worldwide, setting a new record. In the first six months of 2007, M&A transactions had already beat the record set in 2006. By November 2007, transaction deals totaled $4.4 trillion worldwide. Shareholders were getting more bang for their buck this time around than they did during the last M&A upswing in the late 1990s.

That is until 2008 when the bottom fell out. As 2009 cautiously begins the question remains, “Will M&A activity recover and to what level?”

Dealmakers assumed M&A activity was going to benefit from last fall’s $700 billion bailout package, which was to fund the purchase or insure distressed assets from financial institutions as a part of the Troubled Assets Relief Program. Its goal was to spur growth and point the country in the right path for economic repair. The outcome was far less effective in inciting future M&A deals.

“Each of the following factors is currently having a negative impact on M&A deal activity,” said Ed Crumm, partner, BKD, LLP. “There is a lack of lending sources as banks thus far have been unwilling to lend despite TARP; and the current economic downturn creates a significant amount of uncertainty and people doing deals do not like uncertainty.”

According to a national survey by the Association for Corporate Growth and Thomson Reuters, 86 percent of dealmakers said the current M&A environment is fair or poor, and 44 percent say the environment will get worse in 2009.

Local M&A dealmakers, though, don’t subscribe to the doom-and-gloom scenario permeating the national scene.Most
believe Kansas City will continue to fare better than the nation as a whole.

“M&A activity in defensive industries will not be hit too badly, and M&A activity in the few countercyclical industries
may prosper or will hold its own,” said Pat Trysla, CEO and managing director, Frontier Investment Banking Corp. “Companies in defense should still thrive in, or even in a few cases benefit from, this economy and will be less sensitive to downward pricing pressures. Those types of companies should be able to attract buyers or investors, as the case may be, and receive impressive valuations. Certainly, total M&A activity in the larger market and the middle market will get a boost from the expected increase in mergers and acquisitions in connection with bankruptcy proceedings and other insolvency-driven issues.”

In one of the more prominent local deals of 2008, Polsinelli Shalton Flanigan Suelthaus law firm merged with Shughart
Thomson & Kilroy, P.C., to establish Polsinelli Shughart. The deal was finalized Feb. 1. The firms had combined revenue of about $174 million in 2008. The deal creates a firm with nearly 500 lawyers in several cities.

“There is always going to be some level of M&A activity,” said Frank Ross Jr., Chairman, Business Law Department,
Polsinelli Shughart. “Opportunities are out there even in a tough economy like this. For those companies that think long term they will be able to find a way to expand regardless of the economy. In the first few weeks of 2009 there was an abundance of local M&A activity. We follow the same motto as our clients and think long term to reach our goals.”

The firm has not yet experienced a downturn in M&A transactions this year. The reason, says Ross, is that Kansas City is comprised primarily of privately and closely held family enterprises that think long term, have solid performing management teams and have products with strong market perception. These companies aren’t dependent on securing debt and are, in most cases, easier to finance. Ross added that in 2009 the government’s ability to pass a plausible stimulus package will have to have some effect on our infrastructure and possibly provide a substantial boost to the local economy by providing opportunities for private equity and corporate buyers.

So call the forecast for M&A activity in 2009 as one of cautious optimism locally—the region can’t completely escape
the national credit crunch, which will lead to a decrease in Kansas City area M&A deals. Nearly 78 percent of respondents from a nationwide survey released by the National Association for Business Economics said tightening credit conditions affected customers and 52 percent said the credit crunch directly hurt businesses in their industries.

In 2008, there were 114 M&A deals locally, down 34.5 percent from 2007 which saw 174 deals, according to a recent M&A report by Christenberry Collet & Co. Inc., a Kansas City investment banking firm. However, the firm was quick to add that the 114 deals in 2008 were up from the 110 deals in 2006, 102 deals in 2005 and 104 deals in 2004. Statistically, at least, Kansas City’s M&A market remains healthier than does the national market. Although the firm expects M&A deals to remain down in 2009, it expects the credit market to open toward the end of 2009. The company believes “there are still a lot of private equity funds and corporate strategic buyers with money to invest and there should a lot of bargains available once the economy settles down.”

“Successful transactions are accomplished through some form of leverage and if you can’t get enough financing on a deal then it is difficult to generate enough return on equity. That’s a big factor right now,” said John Hense Jr., Principal of Christenberry Collet & Co. Inc. “There are two factors that provide a positive spin on M&A deals in 2009. The first is that there is a significant amount of liquidity in the market right now as corporate cash and cash equivalents are currently at $1 trillion. The second is there are companies that are perceived as undervalued. If you have this type of mix then you will see the companies with a huge amount of cash on their balance sheet make a move in 2009.”

Companies will continue to curtail business spending, according to the survey released by the National Association
for Business Economics. Nearly 44 percent of economists believed capital spending in their industries would fall off in 2009, compared with just 16 percent who believed their businesses would increase spending. Rising unemployment,
tightening credit conditions and a difficult lending environment have led economists to give a more pessimistic outlook for 2009 by forecasting a prolonged recession stretching out over years rather than months.

“The recession has taken funding sources out of the market and a huge percentage of deals are leveraged,” said Jim
Ash, Partner and Chair of the Business Services Division, Husch Blackwell Sanders LLP. “As companies see their sales
erode, they have to pay attention to the core business first.

“With poorer sales and asset devaluation, what loans are out there are not available because they can no longer
qualify for them.”

In 2009 M&A deals will come mostly from companies with cash and low debt, according to Ash. “No one will lever up
too much in this market and funding likely won’t be available with a very heavy equity component,” he said.

In order for an M&A deal to be a success in 2009, Ash adds that companies will need to ask the following questions
in order for their M&A deal to be a success in 2009:

• Why do I think I can do better at the business than the current owner?

• What do I have they don’t or could not get?

“By answering these critical questions, a business will avoid certain pitfalls by trying to take on the challenges of a
new business in a time when their own business is facing a recession—it’s a tough thing to make successful,” Ash said.

The sectors, according to Ross, that will see the greatest opportunity for buyout investments during the first six months of 2009 are manufacturing and distribution, healthcare and life sciences, technology and financial services. Most are securing financing for M&A deals through commercial banks, mezzanine lenders and seller debt, respectively.

“Companies will likely need to contribute significant cash,” said Crumm. “Seller financing options and earn-out structures will become an increasingly important part of deal structures. Financing deals with senior and mezzanine
financing and contributing equity/cash will also become more important.

“Credit markets loosening, improving operations, cutting costs and focusing on core segments will lead to successful
mergers in 2009,” he added. “Companies with growth opportunities and a business plan to demonstrate how they can capitalize on these opportunities within the next 12 to 24 months will be imperative. Also, strong management is always critical in any transaction.”

M&A deals in the Midwest will be fueled by high net worth buyers wanting to pursue a business of their own after a
corporate shake out, according to Tim Skarda, president, Allied Business Group. These buyers are looking to relocate to
the Midwest out of a need to decompress their lifestyles based on affordability and a slower pace. Skarda emphasizes that the Kansas City area will likely experience this boom as these buyers look to simplify their lives in a tougher economic environment and, he believes, this region provides this perfect opportunity. He adds that the biggest challenges facing companies in M&A deals will be maintaining performance and profitability.

Dealmakers believe new loans will now be written more carefully, be more heavily documented, carry tougher capital
and contractual requirements, and carry higher interest rates.