Five Questions: Brian Keane, Managing Director and Head of Investment Banking, Citigroup Capital Strategies

1 How would you assess the current state of the M&A market and what are your expectations for 2006?

The current state of the M&A market is in a word, strong. What we’re seeing is a lot of increased buying activity primarily from private equity firms, having raised about $180 billion last year for acquisitions. A lot of that is targeted at the middle markets. Likewise with corporate buyers we’re also seeing increased activity. As their multiples increase and their growth expectations increase, acquisitions become a very viable part of their strategy. In addition to organic growth, acquisitions are becoming a big part of their strategy. We’re seeing increased activity from both; a heavy increase from private equity firms and a solid increase from the corporate buyers.

2 How does the middle market of today compare to the middle market of five years ago?

There are a couple of things that are notable. If you think about five years ago, we were just coming out of the bubble. Five years ago a lot of sellers had very high expectations for their liquidity options. They were thinking IPO in many cases. That door has been effectively slammed shut on them. That was really a function of two things. Post bubble IPOs dried up in general and the bar was raised significantly on what it takes to become a public company. The second thing is that even if an IPO is a possibility for them, Sarbanes-Oxley and some of those pressures have made the IPO option much less attractive. So a lot of private companies are looking at M&A alternatives instead of an IPO. Today we’re also seeing much more realistic expectations on the part of private companies when considering an M&A alternative.

3How are things different for buyers in the M&A market today?

On the buy side today there are more buyers, namely in the private equity community. You have more funds that have targeted middle-market buyouts. Among both the private equity firms and the corporate buyers you also see a much more disciplined approach to the whole M&A process. This means increased due diligence and a lot more scrutiny than they might have given a company five years ago. During the bubble period companies didn’t want to lose deals so they were doing them fairly quickly and due diligence wasn’t as extensive as it is today. … While there are more buyers, deals do take longer because of that heightened due diligence and conservatism. You really have to condition your client to be prepared for a longer, more drawn out sell-side process.

4 What does the exit market look like for middle-market companies over the next 18 months?

It looks very, very good. Private equity firms haven’t slowed down their activity. They’re still raising a lot of capital and they still have a lot of capital that needs to be deployed over the next several years. You’ll still have a lot of money in the private equity community looking at deals. As the economy continues to grow and the market is hitting new five-year highs, companies will have continued pressure to keep on growing at a rapid pace and M&A has to be a part of the equation for them. We’ll also see baby boomers hitting a point in their lives and their careers where they’re looking at succession for their businesses and they’re looking at the M&A market as the best alternative to gain liquidity.

5 What do private equity firms need to know most about today’s M&A market?

Many of these privately held businesses are looking for financial partners as much as they are for the highest valuation. In many cases the highest valuation won’t prevail, but it will be the private equity firm that understands their business and can potentially bring value to their business, whether its relationships or industry knowledge.