Joining in the discussion were David Hegeman, a managing director in the investment banking group of National City Capital Markets; Eugene Nesbeda, a senior managing director at New York-based private equity firm Cortec Group; Eric Hillenbrand, a managing director in the Detroit office of AlixPartners' performance improvement practice; Jeffrey Webb, a partner at San Francisco-based PE shop Industrial Growth Partners; and James Hoppel and Eric Rottier, who are both executives at Nasdaq-listed Chart Industries, a global manufacturer of highly engineered products such as heat exchanges, cold boxes and other cryogenic components. James, who heads business development, is the chief accounting officer and corporate controller at Chart, while Eric is the president of Chart Asia.

The following is an abridged version of the conversation.

Mergers & Acquisitions: As a jumping off point, can we go around the table and have everyone give us their take on the state of the manufacturing market?

Hegeman: We're seeing more and more middle- market manufacturers who are in a state of transition. Many of these companies are constantly reinventing themselves to figure out where they fit in a supply chain that is in flux.

Webb: We've seen some spottiness in some of our different end markets. Some of our portfolio companies are still very strong, specifically companies in the oil-and-gas sector and companies in aerospace. Obviously, the manufacturers that are exposed to housing and some of the automotive channels have been experiencing a bit of a struggle. But it's spotty.

A fair amount of our portfolio is international, and I'd say that companies with a decent amount of exposure to Europe or Asia are, by and large, faring better than the ones that are more domestically focused. There's just so much more growth occurring overseas.

Hoppel: From my perspective, focusing on Chart for a second, manufacturing has been robust not only in the U.S. but also in our China and Czech Republic locations. A lot of that has to do with the growth that we've seen in the industrial gas and hydrocarbon market, and a lot of our products actually go into energy-related applications. So for us, it's been robust.

Rottier: I think the markets in the U.S. are actually a little stronger than some of the gloom and doom you're hearing about in the press. If you look at where 2008 is starting, and then look at the last two quarters of 2007 compared to the last two quarters of 2006, you can actually see an improvement, whether it's production, or GDP or durable goods orders. The ISM report that came out for January, for instance, also had some nice highlights in it. The PMI is up. The export orders are up. So there are some real positives that are going on right now. 2007 started slow, but ultimately exceeded everyone's expectations.

If you look at issues related to supply and demand, we're in a new environment, with countries such as India and China showing an insatiable demand for raw materials. Whether it's metals, chemicals, cement, etcetera, it's creating a pull for both U.S. and European manufacturers.

Nesbeda: The theme for many manufacturing-based companies in this country is to become more customer focused in terms of providing solutions, not just products. And currently - even for middle-market and lower-middle-market companies - they're addressing their markets more on a customer basis and less and less on a geographical basis.

When I look at manufacturing and I look at the U.S. economy, the two don't always gibe. If you're a successful manufacturer, your best growth may be occurring alongside the OEMs, who are building for the Chinese domestic market.

It's very different than in the past, when people would say, "As General Motors goes, so goes the nation." That may or may not be true, but for a manufacturer today, they really have to take a global view. You have to look at your customer base and see where the opportunities are. Even many of these very small companies, if they're focusing on customers that are globalizing their business, and if they can follow that growth and take advantage of it, then you end up having a very different view than if you were to only read the front page of The New York Times.

Hillenbrand: We work across a lot of different industry segments. We have a big automotive practice, we work in industrial equipment, and we'll see a lot of companies in the consumer packaged goods industry. Overall, it can be a bit of a mixed bag.

In automotive, if you're heavily tied to the Big Three, you'll obviously encounter some challenges. But a company like BorgWarner, which has shown a lot of innovation, was able to get ahead of the curve from a global supply-chain perspective relative to some of their competitors and they have done very, very well. Our clients in industrial equipment are almost all healthy, because there's been so much demand for U.S.-based know-how in that type of market. And a lot of the consumer product companies tend to be healthy, because it's difficult to offshore something like detergent.

We also do a lot of work with mid-market companies in the consumer durables space, and that's where we're seeing an awful lot of this transformation occurring in the global supply chains. They need to have the high-touch, high-innovation focus to drive the business, but at the same time, they need to transform their manufacturing base and supply chain to deal with the low-cost suppliers.

Mergers & Acquisitions: Let me go back to what Gene was talking about for a bit, because I think it would be interesting to talk about how we got here in the first place. How did this evolution in manufacturing occur? It seemed like all of a sudden, four or five years ago, people just started talking about China and India and that was that.

Nesbeda: If you really want to go back, post-World War II, you had a handful of very large companies that were starting to globalize. Back then you were really talking about your Fortune 50 and Fortune 100 companies during the 60s and 70s, and they typically needed to have some sort of a relationship with the government to get these things to work.

In the 80s, I was with a little company called GE, and they started to do their 24/7 software development in India. You'd also see activity in places like China, where they were putting real assets on the ground. By the late 90s you started to see a number of billion-dollar companies doing this around the world.

Fast forward to today any one of us can jump on a plane, arrive at Zhuji, China, get a business license in the morning, and be up and running in between 30 to 60 days. It's actually much faster than you could ever hope to do business in this country.

So what's happened is that barriers have come down as governments have become more open. Also, currencies are better. And then you can just pick a particular theme: It could be about the market becoming flatter and faster, or the opportunity becoming available for smaller companies. It's no longer just something that the select few can do. At the same time, though, it's become a necessary step for many manufacturers to remain competitive.

Webb: We focus on companies with $150 million to $175 million of revenues. They're relatively small companies. And it's interesting, because even at that size, they're increasingly being told by their large multi-national OEM customers that if they're not in Europe and not in China, then [the OEMs] are going to find another source of supply. A lot of our portfolio companies have been following their large multi-national OEM customers to China. They're basically saying that if you want to retain our business, then you need to be there.

Nesbeda: That's right.

Webb: But the good news is that if you are there and you have world-class engineering and quality, then the large multi-national OEMs will continue to support you and buy your products.

Hegeman: And it's not just about following the OEMs and getting market access. Even manufacturers serving the domestic market, whether they're selling into the big-box retailers or just within the supply chain here, there's a constant pressure to reduce costs. And it's important to have a dual sourcing mechanism within your business model. Because you need to have the lowest cost, but you better be able to produce it here just in case you run into any disturbances or reliability issues. That's what we're also seeing at the lower end of the middle market.

Rottier: To step back a bit and focus on the China experience, people essentially went there for low-cost sourcing. Eventually, they started building whole products and exporting them. But now, as the economy has developed, China is consuming these products. And that's changed the world. Not only is there going to be something like $60 billion in foreign direct investment into China but there are hundreds of millions of people that want to consume products and they now have the disposable income to do so.

The middle class in China is bigger than the entire population of the U.S. As you look at the potential for the emerging economies and for every product across all segments, it's absolutely enormous. And it's good for the U.S.

Mergers & Acquisitions: How do you actually target that market? IBM had a report, I think it was last March, discussing the multiple layers between a company and its direct customer base in these markets. Would you say, because of this, that targeting the middle class can be tougher than the premise would suggest?

Rottier: In consumer electronics or consumer goods, you go over there today, and there are Home Depots opening up, there are Best Buys, they've got the Carrefours and WalMarts. It's the same stores you see here that are selling those products from all over the world. So if you're in the big box space, you're going through it right now. And it's amazing to see.

Nesbeda: If you want to buy a car in Beijing - just like every metro area in the United States - you can just go to a primary dealership. Actually, they're nicer dealerships than you see here in the U.S. You can go in and get a massage while your car is getting its oil changed. It's not bad.

We still tend to think of these developing countries in a monolithic way. People will say that per capita income is down in these areas, but it's not. And consumers are concentrated in certain parts of the country, so they are accessible. It's just something that requires you to go over and see. You have to figure out the local channels to a particular market, but in today's environment, it's not that difficult. Years ago it used to be tough, but today it's very accessible.

Mergers & Acquisitions: Let's talk about the North American market for a minute. We've all heard about the outsourcing trend but what does the manufacturing sector look like on our own shores?

Webb: It's interesting. If you look at the stats, if you look at the manufacturing portion of GDP, it actually continues to grow. Over the last 10 years, manufacturing GDP in the U.S. grew at a compound rate of 2.8 percent. In 02 and 03, the manufacturing sector had a cyclical downturn. And the talk in the press was that we're losing our manufacturing jobs. But at the end of the day, manufacturing is becoming more cost effective - and I think automation is a big part of that. This is a worldwide phenomenon. It's happening in the U.S., China, Europe - everywhere you look, manufacturing in general is becoming more cost effective.

Hillenbrand: It's the combination of automation and the adoption of lean manufacturing techniques, which is directly linked to the weakening of the unions. In the past they had more job protections and job classifications, and as they've been weakened, it's created more flexibility. So now you can have a crossover of functions, which reduces your absolute demand for labor.

Another factor that goes into the lean manufacturing trend is the design work. Engineers are designing products to make assembly less labor intensive, and that plays a role as well.

Webb: I agree, but I still think there is a general misconception that manufacturing is dying in this country. When you look at the statistics, it's still growing. It's a cyclical industry, so you're going to have cycles, but it's still growing.

Mergers & Acquisitions: Let me ask - because there has been so much debate about the role of private equity, and you have unions such as the SEIU that have come out against the asset class - would you say that PE has helped the manufacturing industry in this country?

Hegeman: Private equity has saved a lot of jobs in this country, simply because it has accelerated the pace of change in the U.S. manufacturing market. There are a number of companies that did not have the resources to compete and evolve the way they needed to. Private equity groups gave them the financial wherewithal and maybe the talent and other resources necessary to find value and grow in many cases.

Nesbeda: The average human being does not like to change. You hear it all the time: "Wait until the dust settles." People are always looking for periods of stability in their personal lives. And anybody - be it a private equity firm, a multinational company, or a government - if they're on the leading edge of changing something, they're going to be criticized by a very large portion of the population. But, at the end of the day, if the manufacturing sector did not go through an accelerated transformation, it was just going to be lost. And that's a very hard concept for people to understand.

In a particular situation, you might look back and say, "Ten years ago we had thousands of manufacturing jobs and today we're in the hundreds." But now, at the same time, you have more jobs in engineering, marketing and sales, because you're supplying the whole world. And that particular company is actually creating better, more stable jobs, even as there are fewer people on the assembly line. And, oh by the way, they also have facilities in China, India and the Czech Republic, whereas before they were based in just one town. That change is threatening to a lot of people on a personal level, and it's hard to deal with, but for the business and for the majority of employees that are left, the company is in a better situation. With that said, change is tough and people do get hurt.

Mergers & Acquisitions: Now you've worked in Europe. Would you say that Western Europe is experiencing the same kind of transformation?

Hillenbrand: Much more slowly.

Nesbeda: They are experiencing the transformation, but they're in state of denial. They're at least one generation behind the U.S., which could be a whole other topic. The social nets underneath those societies make it more difficult to change rapidly. With that said, you can go to a country like Germany, which is the heartland of manufacturing in Europe, or countries like the Czech Republic, Slovakia, Romania or Poland, and you're going to see that they've experienced a lot of growth from the transformation. They're dealing with the same thing we are here, just at a slightly slower pace.

Hillenbrand: In the last three years I've been involved in about 10 shutdowns in Western Europe, and the cost of shutting down a factory in Western Europe is prohibitive. You basically have to pay people for two years to not work, so your social cost is extremely high. What that ends up meaning is that you end up slowly starving those plants over time, and there are even ways to bankrupt an entity so it can reduce your social costs.

This has even had an impact on the growth occurring in Eastern Europe. We'll work with people who say, "We don't want to be in the Czech Republic. It's so close to Germany, that there are a lot of cultural similarities."

So they'll look at areas like Bulgaria, which might have a bit of a longer runway before they become Westernized, if you will, in terms of labor practices. The Czech Republic and a place like Hungary have more advanced industrial bases. When businesses in Europe first started moving East, those were the first places they went. But labor costs have gone up and there's a higher demand for skilled labor there, so people will try to leapfrog those areas now.

Mergers & Acquisitions: The outsourcing and offshoring movements have obviously had a large impact, but what other trends have affected manufacturing? Are companies today more inclined to be applications specific, working on entire systems as opposed to just one part?

Hillenbrand: We worked on a couple projects involved in small-engine manufacturing. They had very complex product lines, and at the end of the day, had to go through a massive process to reduce that complexity. It gave them a much more forecastable and consistent business. It ended up reducing what was a huge amount of inventory and took out the threat of obsolescence.

The question you're facing next, though, is how to offer late-stage differentiation and can you do that with an assembly type of operation.

Hegeman: There has been a change in the product solution that manufacturers are delivering. They may have one product in mind, but customers are demanding a suite, so maybe they'll import and distribute a certain part of that product line, then assemble it. The customer sees a product solution and the after-market support on top of that.

Mergers & Acquisitions: Where do you see this most often? Is it in aerospace, autos, or anywhere else, in particular?

Hillenbrand: We see it a lot in consumer durable goods. If you're here making showerheads, for instance, it's something that can easily be made in China. But the Chinese manufacturers may not have the customer relationships in the U.S.; they may not understand the channels; they may not know how to manage pricing into the U.S. market. So, again, if companies can sharpen their focus on the engineering, product development and design; channel relationships and overall management, then that should help their positioning.

To go back to the showerheads, to succeed you have to own that channel. Maybe Lowe's wants someone to help them manage that product as a category king. You need to have a solution for all of those other things that go into it. It's about managing that customer relationship.

Nesbeda: If you ask yourself how many pure manufacturing companies are left and successful in the U.S., you'll probably find that it's a very short list. That's not what customers buy. They buy products, services and capabilities from a supplier who can provide all of those needs wherever they need them. If it happens to be a U.S. market, fine; if it happens to be a global market, then if you're not there somebody else will be. Whether it's aftermarket or engineering support, whatever it is, if you're not providing the full package of needs, somebody else is going to figure that out. And if you're just making a widget and putting it out in the warehouse for sale, you probably won't exist in this country.

Manufacturing is a focal point, and there are product-based companies - we all have investments in them. But, even if you're making a sophisticated wellhead design, at the end of the day, a drilling rig needs to stay up and running.

Webb: That business is a service company more than it is a manufacturing company.

Nesbeda: That's what the customer is paying for. They want something there when they need it and they want you to anticipate that need ahead of time. And when you do that well, you have a very loyal customer and a very successful business.

Mergers & Acquisitions: The idea of outsourcing and offshoring has dominated the conversation, but I've been hearing rumblings about this idea of insourcing. The premise is that with a weak dollar, some manufacturing jobs are being brought back into the U.S.

Rottier: A weak U.S. dollar is only weak when you compare it to the euro. So if you're competing against a European supplier, than yes, it's an advantage for U.S. manufacturers right now. But you don't really set up an outsourcing/insourcing strategy based on currency. In reality, most of the low-cost countries that you're competing against are in Asia. The Chinese renminbi has only appreciated about 12% in the last four years. And most of the other Asian currencies are pegged to or bundled in a currency with the U.S. dollar. So, actually, it's not moving either way.

Hillenbrand: There are two different scenarios you have to look at. One is: I'm growing my business, and I need to establish a new plant. The other is: I have existing plants, and I'm trying to decide whether to relocate. Relocation is an expensive proposition.

There are a lot of different factors that go into those decisions. It's a very sensitive calculation. You have to look at fuel costs, ocean rates, days of inventory, duty rebates, etcetera. Typically when manufacturers are faced with these decisions it's about closing the U.S. location and opening a new plant someplace else.

Hoppel: From a manufacturer's point of view, to me, changes in currency are short term - it would all be speculation. And I've learned that you don't try to speculate on something if you're not an expert. Plus, when you're looking at products with longer lead times, you wouldn't get any benefit.

Mergers & Acquisitions: A lot has been made about following customers to new markets. But in the auto parts space, there's been a new drive to build a more diverse customer base. Is that a focus throughout the broader manufacturing sector?

Nesbeda: The first thing we ask as buyout shops is: "What's the customer concentration?"

Webb: We just associate customer concentration with risk.

Nesbeda: You can rationalize customer concentration, but, as a rule, it is risky. So you want to see diversity within a sector or, even if you're selling to a big box, you'd like to be in more than one. You'd also like to have something in different channels. For example, if you're in industrial goods, you want to be in different sectors of the economy and you would like to have some geographic diversification, so an Asian crisis or a strong euro doesn't infringe on your business.

Hoppel: We ran into problems in our D&S business [distribution and storage] earlier this decade because we were very U.S. focused. We weren't prepared for the downturn that occurred in the industrial gas market. But we've been able to expand geographically since then, and now have a much more diverse customer base, so I really doubt that we'd have to go through anything similar to what we experienced six or seven years ago.

Mergers & Acquisitions: Eric discussed some of the factors that companies consider before they make a decision to move offshore. Can we flesh that out a little bit?

Nesbeda: Make, buy, JV or partner. It's a continuum. There is no one answer, number one. It's a combination of where your cost factors are the lowest and where your markets are.

You're looking at long-term trends. You're not going to make those decisions based on a short-term currency variation or other near-term factors because you're going to be investing many years of effort and you want to make sure you get a return on that.

Rottier: If you're just offshoring products to a low-cost country, you tend to look at whether or not it's a commodity product. If it is, and you're under price pressure and you can ship high-density value in shipping containers, then that's a good candidate for a low-cost country. The other extreme is if you have low-unit volume on a product that has a very high-labor content, then that would also fit the low-cost country strategies.

But fundamentally, at Chart we're more in the mold of following the customer and providing a flexible market platform, where we can go to low-cost countries in which we've got a base load. If you concentrate on the base load, around that you provide customer solutions and build your product platform and you can combine that with some offshoring and the utilization of other low-cost country supply channels.

Hoppel: What a lot of people forget about is that while you may have good direct-labor and overhead rates, the amount of SG&A that you spend to get over there is substantial. And you forget about the travel costs and all of the people that you send over, and the transfer of technology. All of that gets lost in the discussion, but those upfront costs are significant. So for someone like us, we can't be chasing down the next low-cost country every couple of months. We have to be in a region for a reason.

Nesbeda: Another important factor is the nature of the product and how commoditized it is. If it's a pure commodity, it's pretty simple. If it has more intellectual property content, it can be a difficult decision and there are other issues involved. If that's the case, you might set up joint ventures or outsource certain functions that might be considered commoditized, but then set up an offshore facility that you own 100% to put all of the pieces together, which would include the assembly, quality control, whatever.

Mergers & Acquisitions: How real is the IP threat? I remember hearing a lot about it three or four years ago, and there have been a few specific events, such as the recent case involving Group Danone, but it doesn't seem to slow down activity abroad.

Nesbeda: It's real, but there are some smart ways to protect yourself, and most companies would prefer to find solutions that don't involve paying lawyers to deal with it.

Hillenbrand: I think it's very real, but it is getting better. A typical example that you might see is a joint venture in which a company is making hand tools, such as drills or something like that, and they'll be making the branded product on the first and second shifts, while the guy on the third shift is making a knockoff that's essentially the same line, with the same IP. And he's selling it under a different brand through a different channel.

I think it's improving. In China, for instance, the government has become more aware because of the WTO, but I think it still happens.

Hegeman: There are misconceptions among various businesses as to how valuable that intellectual property is. If it actually is very valuable, hopefully they are setting the prices, the margin and the content around it. But a lot of people have used that as a reason not to be more aggressive in their outsourcing plan.

At the same time, intellectual property has to move with the people and I think that is starting to accelerate. And whatever methods they use to insulate that IP, companies have to be realistic that change happens faster now.

Nesbeda: Practicality usually rules the day. If you have five or six components that make up your product then it's a little easier to manage. We've seen $200 million companies go into China and literally take the various geographies and say, "I'm going to source this in the south, this in the north, this in the west, and I'm going to put a small assembly facility that I own here and then manage each of those relationships and make sure that there's no shared ownership among my suppliers."

They bring it all in, like they're the spider in the web. That's a very practical way to deal with the IP issues. But if you go to a joint venture partner and say, "Here are all the drawings and all the pieces," then you're asking for trouble. Think about it, would you do that here in the U.S.? No. Then why would do it there? It's just common sense.

Rottier: There are some misconceptions about enforceability in a country like China too. You can take a nicely drafted U.S. intellectual property contract, and they'll sign it, but then they're funneling the drawings out the door to Uncle Jim, and he's building the same product down the road. What can you really do about it? How would you even prove it?

Webb: And it's not always so obvious. We've seen it in our heat-exchanger business. We have three product lines, one of which is an air cooler/heat exchanger that requires a lot of upfront design work. Our design, nine times out of ten, is going to be better and more robust than the competition's. And we've been in a situation where the OEM understands that our design is clearly the best, but does a sort of nod-nod/wink-wink to the lower cost guy, and says, "If you maybe just tweak it this way..." That's a difficult environment to compete in.

Mergers & Acquisitions: How do you protect against that?

Webb: You just have to be really careful about how you approach the whole design and engineering function with your customers. It's an interesting dilemma for companies that have facilities in China who are selling to multi-national OEMs. The OEMs are visiting your facilities, making sure that you have the same type of quality controls and standards that you'd find in other parts of the world.

Mergers & Acquisitions: So where does M&A fit into all of this? I can see the impact that a private equity firm might have, where they help usher in this kind of change. But where are you seeing consolidation taking place within manufacturing?

Nesbeda: If you need to expand into Europe or China, you look at M&A. If you're a middle-market company, you look at it the same way a big strategic might have done years ago.

Webb: It's make vs. buy all over again.

Nesbeda: It's make vs. buy everywhere you look. And we've had $200 million companies that we've bought in Eastern Europe and in India, but we've built in China. And you just go through the options depending on the country, the capabilities available in a particular country at a particular time, and who might be available as far as acquisition candidates - and then you make a decision.

Hillenbrand: Part of that decision may be to acquire a company that grants access to channels that may be beneficial, and that may drive businesses to think about an "acquisition" strategy as opposed to a "sourcing" strategy.

Hegeman: From the domestic private equity side, investors are looking for companies that have some direction about where they want to be in five years regarding their global manufacturing strategy. When we guide people on how to position themselves for a sale, we tell them to get things done in Malaysia, the Philippines or China, so they're already up on that learning curve.

Mergers & Acquisitions: Where are valuations these days?

Hoppel: That's interesting. It really depends on the region. If you look in the U.S., we'll generally see multiples in that seven to nine times range. But when you go to India, you're seeing outrageous multiples - as high as 20 and 30 times - depending on the sophistication of the business. If you're looking at Indian power generation and equipment suppliers, in particular, you're just seeing outrageous prices.

Mergers & Acquisitions: And I have to imagine that this is a key component in the make vs. buy decision?

Hoppel: Absolutely. When you start to look in regions like that, you do a more thorough analysis of greenfield operations, without a doubt. And when you're a public company, as we are, you have to deal with the question about how accretive any deal will be to the stock, and it's harder to justify if it won't be accretive immediately and produce a significant amount of synergy.

Sometimes you're just trying to expand geographically and a particular deal might be a great strategic fit. But if it's not accretive, you're going to get chewed up by the shareholders.

Webb: Another factor is that the risk profile is different. On one side, you have the benefit of gaining access to a very high-growth portion of the world economy. On the flip side, you've got countless horror stories to choose from where the seller of a business walks out two weeks later and sets up shop next door.

And enforcing things such as non-compete clauses is difficult. It's not quite as sophisticated as you might find in the U.S., and it's a lot more difficult to control things like that. Yet, at the same time, you still have to consider the huge potential upside when you take advantage of a rapidly growing market.

Mergers & Acquisitions: Tell me about the integration process. People talk about the difficulty of meshing cultures when two U.S. companies combine. That has to multiply when you're talking about bringing various international operations into the mix.

Hillenbrand: The first question you have to ask is: How strongly do you want to integrate the company? Do you want to integrate systems, manufacturing methods, etcetera, and how strong of a hand do you want to play?

A lot of those answers come in the due diligence process. You have to understand the managerial culture and what's currently in place, because a lot of what you're buying is the management. So you need to think carefully: Is the management team comprised of people that you're culturally in line with. If you're a lean organization and disciplined, are they going to fit in that type of environment?

You can go to China and walk into a factory that is as well laid out, as lean and efficient as anything you'd find in the U.S., but, in the same region, you can walk into another plant and it's just a mess. You really have to look very carefully at the cultural alignment.

Nesbeda: There is no such thing as an easy integration - anywhere in the world. Whether it's two U.S. companies merging or putting an Italian manager into a German company, neither scenario is easy. What it takes is good, strong leadership, and an intimate understanding of the soft side of the business, things like the culture and mind-set are the real challenges.

The more successful a company has been, the harder it is because they already do it right' and any other way is going to be wrong in their eyes. If you put a language barrier and time zones in between all that, the leadership of the acquiring company has got to be committed on a very personal level to drive whatever integration or change they're looking for.

Webb: On the flip side, though, is the huge benefit that can be realized if you find a business that has become stagnant with a management team that has become sleepy and tired. If it's a business with great products, and you can add some experience and infuse some energy into the organization then the opportunity is huge.

Rottier: To go back to the challenges of integration, one common mistake that we see is that companies will put 80% or 90% of their resources into the upfront process, whether it's finding the deal, executing the due diligence and dealing with all of the legal entanglements. And then they sign up for it based on all these synergies that they uncovered, but when they go forward, the integration process only makes up 10% to 20% of the total investment cost. And as they stumble through it, the deal becomes a failure.

Hillenbrand: We do a lot of work in "fixing" failed mergers, and normally, that's exactly the problem we'll see. Two years down the road, nothing has really changed; nothing was ever really integrated; and you basically can just close the financials, and that's about it.

The problem is that these companies didn't provide the resources to follow through. Everyone gets excited about the deal, and we all get excited when they happen, but after that comes the hard work.

Rottier: And often times they're just on to the next deal.

Mergers & Acquisitions: How has the credit crunch impacted decision making as far as M&A is concerned?

Hegeman: We're seeing a big difference in the size and types of deals that are getting done. If you know who the institutions are, and you've maintained close relationships with your lenders, then those deals are getting done. But for any deal that's taking on high yield, institutional paper or any broadly syndicated financing above $500 million, those deals have fallen off.

Webb: On the private equity side, you are also using a lot less leverage than you could six to nine months ago. On average, you're looking at half a turn to a full turn less of leverage. But that has started to show up in valuations. We've seen prices for companies coming down a little bit.

But I still think there are a lot of people who are feeling that pressure to put capital to work. A lot of guys are plugging that cap with equity because they like the business and they presumably think it has a lot of long-term value.

Mergers & Acquisitions: I imagine strategics still have the upper hand, though, given where the debt markets are?

Nesbeda: Absolutely. The stock prices haven't gone down as much, so they're back in the game. These things ebb and flow, kind of like currency.

Hoppel: Chart is certainly in a good position. We're a middle-market company and the acquisitions we're looking to do are on the smaller side, but we have a strong balance sheet, a lot of cash, and we have a financing facility in place that we're not completely utilizing right now. So we've positioned ourselves pretty well to handle a fair number of smaller deals and be very competitive in these auctions.

The problem we're running into, though, is that we are getting a lot of potential deals across our desk, and they seem very interesting, but we're still seeing asking prices that are way too high. So we're hoping that things lighten up a little bit.

Mergers & Acquisitions: How does the economy play into the decision to buy right now? It seems like uncertainty is creeping back into the equation. Can that be a neutralizer to the strategic buying power?

Hillenbrand: To James' earlier point, I know a lot of my clients have become more active on the corporate development side in terms of looking at deals, but every time we talk to them, they're saying things like: "These guys still think their businesses are worth more than we do."

There's been a lot of interest from strategics but it would seem like people are resisting the idea of selling into a down market.

Hegeman: Everyone realizes that M&A is a cyclical business. But generally speaking, financial buyers are very focused on cash flows and how they can reach an increased valuation five years from now. Strategics, on the other hand, are always going to take a longer-term view. But they are also very team oriented in terms of how they pursue a deal, and when you have that game mentality, there's always a hundred reasons to not pursue an acquisition.

Hoppel: I would add that the economy isn't really affecting our approach. That's because we're looking globally, so it's not changing our perception at all. In fact, we're looking to ramp up and pursue more opportunities. But, again, it's just taking that next step and trying to execute on some of these deals that is difficult right now because of the prices we're seeing.

Mergers & Acquisitions: I don't want to go too deep into economic theory, but what are your views on whether or not there has been a decoupling between the U.S. economy and the markets around the rest of the world?

Hillenbrand: There was a question that if the U.S. economy were to enter a recession, would it necessarily mean that the Asian economies will suffer? Initially, those stock markets stayed relatively buoyant in the face of economic weakness here. But all of a sudden - because the U.S. consumer still drives 40% of all global demand - when the U.S. consumer shows weakness it still has a big impact. With that said, you still have a lot of growth in China.

Nesbeda: There's going to be always some coupling between the U.S. economy and global markets. But trend-wise, it's going to be less of an issue. We've talked about the growth of the Chinese domestic market; there's also a burgeoning market in India; and the European economy is collectively bigger than ours, so there are some big numbers out there that aren't purely the U.S. anymore. But if we do go into a recession and consumers here stop buying, sure, there's going to be a huge hit in China. The entrepreneurs over there are building factories to make widgets for the U.S. consumer. Is it going to have the same impact it would have had ten years ago? No.

Participants

David Hegeman

National City Investing Banking

James Hoppel

Chart Industries

Eric Hillenbrand

AlixPartners

Eugene Nesbeda

Cortec Group

Eric Rottier

Chart Industries

Jeffrey Webb

Industrial Growth Partners

Ken MacFadyen

Mergers & Acquisitions