Technology Industry Review Q3-2008; McGladrey Capital Markets

Enterprise Software

M&A Activity in the Enterprise Software Industry Heats Up

• JDA Software Group Inc. announces the acquisition of i2 Technologies Inc., a provider of supply chain management software ($542 million)
• International Business Machines Corp. announces the acquisition of ILOG SA for its pre-built software components capability ($301 million)
• Microsoft Corp. announces the acquisition of DATAllegro Inc., a provider of data-warehouse appliances
• Open Text Corp. acquires a division of Spicer Corp. specializing in file format viewer solutions ($12 million)
• Oracle Corp. announces the acquisition of Global Knowledge Software LLC, a developer of self-service training automation software

Digital Media

Consolidation in the Digital Media Solutions Industry Continues Its Momentum

• Vodafone Egypt Telecommunications S.A.E. acquires Sarmady Communications, a provider of Web-based advertising services
• L-1 Identity Solutions Inc. strengthens its credentialing solutions portfolio through the acquisition of Digimarc Corp. ($306 million)
• Host.net acquires WV Fiber Inc., a global Internet transit and multiprotocol label switching transport company, for its top clientele
• The Active Network Inc. acquires T&C Products Inc., a sports-management software developer
• Intersil Corp. announces the acquisition of D2Audio Inc. for its intelligent digital audio power amplifier capabilities

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Plastics and Advanced Materials Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Concerns Regarding Bisphenol A

The use of Bisphenol A (BPA) in consumer products is generating varied opinion from industry groups. BPA is used in a variety of products such as shatter-resistant polycarbonate plastic baby bottles and epoxy resin lining in food cans for safety of food from contaminants. Scientific and government bodies around the world have reaffirmed the safety of food-contact products containing BPA. The California Assembly recently rejected a bill that targeted the use of BPA in food contact products for use by children under the age of three.

Mixed Reactions on Plastic Bags Ban

As mentioned in last quarter's review, the ban on plastic bags continues to receive increased attention from all quarters of the industry. Several cities have banned the use of plastic bags outright, whereas others have voiced their opinion against a ban. Manhattan Beach, Calif., with 35,000 residents, became the third U.S. city with a ban on plastic carryout bags. A ban in San Francisco went into effect in November 2007, and a ban in Malibu, Calif., approved in May 2008, goes into effect in two stages, beginning in December. Most recently, Westport, Conn., passed a ban on plastic bags earlier this month that will go into effect in March 2009. Although some cities are getting vocal against the use of plastic bags, legislators in California failed to pass a plastic-bag tax in the recently completed legislative session. The bill required retailers to charge at least 25 cents for plastic bags, starting in July 2011, if they do not achieve a 70 percent bag diversion rate based on use reduction and recycling rates. A series of recommendations from the Ocean Protection Council in California could lead to more bans and taxes on plastics packaging. The report calls for producer responsibility for the take-back of packaging waste, and bans or fees on commonly littered items such as plastic bags and polystyrene containers.

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Recreation & Leisure Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Consumers Face Headwinds and are Conserving Cash

A number of economic factors are conspiring to impact U.S. consumer spending in the outdoor, sports, recreation and leisure sectors. The U.S. economy continues to reel under pressure from softness in the housing market, the extended credit crisis, failure of financial markets, and a worsening labor market. The one-time effect of the government's stimulus package has fully played out and increasing inflation has eroded Americans' buying power. Faced with a 17-year high consumer price index and a decline in personal income levels, U.S. consumers are running out of ways to sustain their former spending lifestyles. Lower gasoline prices have given consumers some tangible relief, and we are seeing that relief expressed in the various consumer confidence figures. While consumer confidence was at its highest level in five months in August 2008, financial events in September will chip away or reverse the sentiment.

Value to Outperform Luxury

Historical consumer psychology and behavior in times of distress provide valuable lessons to retailers, manufacturers and others supplying the outdoor, sports, recreation and leisure markets. Research indicates that as a crisis intensifies, stress relief plays a bigger role in spending behavior. At the same time, expenditures seen as extravagant will cause consumers stress. The higher the price, the greater the justification required for a purchase. Mass retailers are expecting to see a pickup in fourth quarter performance due to a shift among shoppers toward value, while department stores are likely to be negatively impacted as middle and upper-income households become increasingly vulnerable to economic pressures.

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Media, Entertainment & Gaming Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Media, Entertainment and Gaming — Recession-Resistant?

The media, entertainment and gaming industries have historically proven to be resilient during periods of economic weakness. During past economic slowdowns, consumers have continued to seek out various forms of entertainment as a means to escape, albeit temporarily, the increased stresses of daily life. With that said, it remains to be seen whether the current economic crisis will broadly and severely impact companies operating in the media, entertainment and gaming sectors or whether the discretionary income levels of the U.S. consumer will allow certain sub-sectors of the industry to continue flourishing.

Casinos Struggling to Drive Traffic

Casinos operating in major U.S. gaming destinations such as Las Vegas and Atlantic City have reported consistent declines in gaming revenues, lower traffic volume and lower average revenue per room during the first half of 2008. Given the current low levels of consumer confidence, rising unemployment and general uncertainty regarding the future state of the economy, this decline is not entirely unexpected. In an attempt to combat this trend, major resorts are discounting room rates to attract enough gamblers to keep their roulette wheels and slot machines spinning.

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Healthcare Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Home Healthcare

Home-based healthcare spending is projected to increase 7.5 percent annually over the next 10 years, outpacing overall growth in U.S. health spending and reaching $119 billion by 2017. Higher incidences of chronic conditions, better utilization of information technology, a stable Medicare and regulatory environment, and an aging population eager for cost-effective treatment at home all support this favorable outlook.

Universal Health Coverage

Universal health coverage is available in most large, industrialized nations, and many believe it could be the key to reversing rapidly increasing healthcare costs and covering the more than 47 million uninsured in the United States. Various proposals have been introduced, including such ideas as a government voucher system for a standard benefits package, evolving the current system to allow for portable insurance via state-chartered insurance exchanges, and expanding Medicare and the State Children's Health Insurance Plan to allow everyone to enroll.

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Government Services Industry Review Q3-2008; McGladrey Capital Markets

Key Topic: U.S. Army's Future Combat System

The Future Combat System (FCS) is the cornerstone of Army modernization. FCS provides warfighters and commanders with leading-edge technologies and capabilities, enabling them to dominate in asymmetric ground warfare while allowing the Army to build a force that can sustain itself in remote areas. The FCS program consists of eight new manned ground vehicles, a family of unmanned air and ground vehicles, the non-line-of-sight launch system, and advanced tactical and urban sensors that all are connected by a state-of-the-art network. Working together, these systems will help soldiers share real-time information across the battlefield. Fielding for the first full FCS Brigade is scheduled for fiscal year 2015, but FCS technology is being accelerated to the Army's modular brigades through “Spin Outs” that allow soldiers to utilize FCS equipment and technology as it becomes available.

In the News
Boeing Expands Capabilities in Unmanned Systems through Acquisition

The Boeing Company completed the acquisition of Insitu Inc., a U.S.-based aircraft manufacturing company, on September 9, 2008, for an undisclosed consideration. Insitu is a pioneer in the unmanned air systems (UAS) market and a leader in the design, development and manufacture of high-performance, low-cost UAS used for intelligence, surveillance and reconnaissance. Insitu employs close to 360 employees and is expected to generate revenue of $150 million in 2008, a 70 percent increase over 2007. The acquisition is in line with Boeing's growth strategy to strengthen its presence in the unmanned systems market.

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Global Financial Services Industry Review Q3-2008; McGladrey Capital Markets

Sector Highlights - Wealth Management
Increasing Awareness, Accelerating Savings

401(k) Plans Plan Providers - Auto Pilot Participation Soars

Lower-cost technologies have enabled an abundance of company 401(k) plan and program administrators to offer improved features to small and middle-market companies. Once a benefit only enjoyed by employees of larger companies, neatly packaged programs are now efficiently 'rolled-out' to companies of all sizes. Critical to a successful turnkey program is the ability to deliver education, management tools and investment choices to participants.

Education is aggressively being tackled by most providers, whether through software subscriptions or outsourced administration companies. The ultimate goal is to increase employee participation. This goal has become so critical that many employers are adopting an auto-enroll feature requiring specific 'opt-outs' from employees wishing to avoid participation.

Sector Spotlight - Insurance Technology
Surfing the Globe for Process Management Improvements

According to a mid-year DataMonitor report, North American information technology insurance spending should begin to improve heading into 2009, while Asia Pacific IT spending will remain the same, which means it will continue to be a more robust technology spending marketplace than either North America or Europe. Of particular note is the emergence of smaller insurers, which have been the slowest to adopt policy administration business process outsourcing. The visible strategic shifts due to today's competitive marketplace and the availability of efficiently priced technology solutions not only reduces costs, but allows for their continued role as a nimble alternative to larger competitors by devoting greater resources to desirable value differentiating functions.

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Food & Beverage Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Growing Functional Foods Market

Consumers are increasingly interested in products, typically called nutraceuticals or functional foods, that have specific benefits beyond nutrition, such as safety, enhanced beauty, immunity, digestive health and cognitive enhancement. Therefore, sales and new-product introductions in functional foods are increasing at a rapid rate. U.S. consumers spent close to $27 billion on functional foods in 2007 and are expected to spend $36.7 billion in 2012. Consumers, who are increasingly concerned about health and wellness, are choosing products boasting healthful ingredients. (Source: Food Institute Report, July 2008)

Shifting Consumer Trends

Consumer taste is shifting from simple grains to healthier foods such as vegetables, fruits, meats and dairy. The U.S. food industry has undergone significant changes because of shifting consumer trends, particularly the growing preference for products providing health, convenience and indulgence. Increasing awareness about the link between certain foods and diseases, such as cancer and heart disease, has resulted in much greater awareness about the importance of high-fiber diets, thus encouraging consumption of wholemeal and mixed-grain breads. Additionally, new product innovations, such as omega-3 fatty acids, are being introduced and targeted to health-conscious consumers. On a long-term basis, living standards and consumer preferences are expected to change with increasing education levels globally. Variety will become increasingly important to consumers, and retailers will reward product differentiation and innovation as new products offer the best growth opportunities. As a result, manufacturers can become more competitive through innovation and new product introductions. Key consumer drivers include convenience, health/nutrition, affordability, taste/freshness, functionality and availability. (Source: “An Appetite for Change- Food and Beverage 2012,” Deloitte and Foodbusinessnews.net)

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Energy Services Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Service Sector Drives Industry Consolidation

In the third quarter of 2008, strategic players strived to diversify their portfolios and obtain global scale. As demonstrated by the acquisitions of Expro International, Saxon Energy Services and W-H Energy Services, activity in the service sector fueled transaction levels in the third quarter of 2008. The primary drivers of M&A in the service sector were the growth in demand for oilfield services, utilization rates for rigs, and the need for service companies to scale-up globally in a consolidating market. The share of service-sector M&A in total energy transactions increased from 4 percent in 2005 to 9 percent in 2006 and to 23 percent in 2007. For the first three quarters of 2008, energy service transactions accounted for 35 percent of total transaction volume. The average value of energy service transactions nearly tripled from $162 million in 2006 to $451 million in 2007 and remained at that level throughout the first three quarters of 2008.

Energy Plays Attract Private Equity Buyers

Although energy plays have not historically appealed to financial buyers, private equity groups have shown an increasing interest in participating in the ongoing industry consolidation. Attracted by strong cash flows and reasonable multiples, private equity groups have moved past their concerns about commodity price volatility and operating costs to become active players in the space.

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Engineering, Construction and Building Materials Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Since 2006, the new-home construction and home improvement industries have suffered from declining asset values exacerbated by rising mortgage interest rates. Even the once resilient remodeling market, which historically performed well during economic downturns, is lagging as home-equity values continue to decline. Unlike prior downturns, we expect this trend to continue for three primary reasons:

Declining home prices are reducing existing homeowners’ equity positions, thereby reducing the amount of capital available for cash-out refinancing.
Tighter lending standards have been implemented, resulting in higher rates for home equity loans. Accordingly, we expect levels of consumer borrowing against homes to decline.
Historically, 27 percent of home equity loans extended were used to fund residential improvements. From 2003 to 2006, this increased to approximately 40 percent as homeowners took advantage of above-average home appreciation and low interest rates. In turn, we expect remodeling to remain depressed until the second quarter of 2009, reflecting a reversion to mean spending rates. This trend is already emerging, as the level of cash-out refinancings has declined the last two quarters, down 28 percent and 52 percent, respectively.

In the News

Social and environmental issues have taken center stage, especially the potential threats from climate change and natural resource scarcity. The popularity of green building has become an integral part of the construction industry. Manufacturers must now evaluate their building products on the environment level as well as their business. Early adopters are well positioned to address the growing demand for LEED-certified 'green buildings' in new construction, as well as renovation. Green facilities typically require higher upfront costs for construction; however, they afford higher rent premiums and occupancy rates and lower operating costs. According to McGraw-Hill, the value of green building construction is projected to increase to $60 billion by 2010. The education, office and healthcare segments will account for more than 80 percent of total non-residential green construction in 2008.

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Chemicals Industry Review Q3-2008; McGladrey Capital Markets

Capital Raising and Acquisition Financing in the Market Maelstrom

It is hurricane season, and it seems every weekend a new storm hits the financial markets, rendering one's previous perception of the business realities obsolete. However, there are facts that remain true:

• Equity in the private market remains abundant and is seeking profitable investments; funds not put to work will have to be returned or the internal rate of return will be lowered for the next capital raise.
• Credit markets have tightened and are the major issue.
  There are well-capitalized banks and financial institutions in search of good transactions that will help them meet their revenue and profitability targets.
• There are fewer banks, less competition, and less appetite for risk. This translates into higher fees up front, higher spreads, and tighter covenants.
• A financially strong company with a good strategic plan can finance an acquisition…and so can a well capitalized private equity firm.

Recent Trends

Chemical Industry M&A Landscape: 2008 vs 2007

The chemical industry finished 2007 with record level M&A activity, primarily driven by consolidation among the strategics. Lyondell and SABIC led the charge with the two transactions representing over $31 billion in total value, or about one-third of total 2007 deal value. Private equity buyers also stepped up to the plate,weathering the storm amidst the financial markets, and completed three major transactions (Univar by CVC, VWR by Madison Dearborn and Sequa by Carlyle) at prices of approximately $3 billion each.

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Basic Industries Review Q3-2008; McGladrey Capital Markets

Key Trends - Spotlight on the Housing Markets

Inventories, Inventories, Inventories

Housing starts, new home sales and existing home sales are the headline points regarding the housing industry. In our opinion, inventories are the cornerstone and driver of the eventual recovery. Inventories, both in new and existing homes, are the lynchpin to the housing recovery, both in its timing and its scope. Underlying supply and demand fundamentals are key to the housing markets. Excess supply, in the form of months of inventory, causes downward movements along the price curve until equilibrium is achieved. This excess supply has arisen from two primary sources: excessive build out of new homes from 2004 through 2006; and the subprime/Alt-A mortgage markets.

In the News

The Multi-Billion Dollar Tourniquet

The announced proposal of a government-funded financial aid package (current estimates place the total package in the $500-$700 billion range) to purchase mortgage-backed securities from financial institutions is an important step in stabilizing credit markets. While it is not an absolute antidote by itself, it is a necessary component in the efforts to stabilize a credit system that has stalled in the face of uncertain counterparty risk among financial institutions. Banks' balance sheets are bloated with mortgage-backed securities whose underlying assets are loans based on non-standard provisions such as negative amortization schedules and significant stepup reset features commonto the subprime and Alt-A mortgage markets.

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Aerospace & Defense Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Elections and the Defense Industry

During their respective campaigns, presidential candidates John McCain and Barack Obama have both emphasized the importance of national security and have maintained that the core U.S. Department of Defense budget will grow roughly 4-5 percent per year. This growth will effectively continue the trend already seen in the latter years of the Bush Administration, during which core Defense Department spending increased roughly 6 percent For major defense companies, this steady growth outlook is likely to attract investors, even during the current uncertain economy, with the exception being contractors having major exposure to the supplemental budget as the Iraq War winds down.

Cancellation of the KC135 Bidding

In June 2008, the Pentagon cancelled the $35 billion contract to build the next generation of U.S. Air Force tanker refuelers after the congressional Government Accountability Office concluded that the Boeing proposal for the contract did not undergo a fair review and proposed a fresh bidding process for the contract. Originally awarded to the European Aeronautic Defense and Space Company and Northrop Grumman, the contract was the first of the three that, when combined, could reach a value of $100 billion over 30 years. Political scrutiny surrounded the contract, as members of Congress opposed handing the contract to a European firm at a time when the U.S. economy is struggling.

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