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Corporate shopping spree: Massive Guidant deal helps make 2006 a record-setting year for local M&A activity

January 29, 2007

Last year was a record-shattering period for the Indianapolis-area merger and acquisition market, thanks in large part to the loss of one public corporation.

Guidant Corp.'s acquisition by Boston Scientific Corp. for $28.4 billion last year and the related sale of its vascular business to Abbott Laboratories for $4.1 billion made the 2006 Big Deals list bigger than ever.

That's because the two deals made up about 85 percent of the $38.5 billion of M&A activity tracked down by the Indianapolis Business Journal in 2006, surpassing the $31 billion figure of 2004 by a wide margin.

Each year, IBJ tracks business deals of $5 million or more involving companies based in the Indianapolis area. Only deals for which financial terms are available are included on the Big Deals list of mergers and acquisitions (see page 20).

Numerous other local deals occur each year that can't be included in our rankings due to a lack of financial data. A rundown of many of these deals begins on page 18.

In 2006, there were 58 Big Deals worth a grand total of $38.5 billion. The 58 deals were three more than last year and two more than the previous record of 56 set in 2004.

Boston Scientific's acquisition of Guidant was a record-setting deal for the market, surpassing WellPoint Inc.'s $22.7 billion merger with Anthem Inc. in 2004.

Some may look at Guidant's exit, as well as the sales of Windrose Medical Properties Trust, Marsh Supermarkets Inc. and Union Federal Bank, and lament the metropolitan area's loss of more local public companies. Last year also saw promising local tech companies Suro Surgical Systems Inc. and Performance Assessment Network Inc. sell out to larger corporations based elsewhere.

But Steve Humke, a partner in Indianapolis-based law firm Ice Miller LLP's private equity and venture services group, said such moves are understandable.

"There are still aggressive, ambitious companies in the [local] market who are looking to grow their bases," he said. "The fact of the matter is, in all parts of the country, there are probably more companies that sell than buy. It's an absolute logical exit strategy."

Real estate firms dominate

For all the activity, though, local companies were less willing to buy than sell. In fact, they made just 19 of the 58 purchases last year, valued at $1.9 billion. The amount pales in comparison to 2005, when acquisitions by local companies totaled $8 billion.

But last year's deals did feature a more diverse mix of companies, even if real estate firms still dominated the market. In 2005, they accounted for more than half of the 55 deals. Last year, they were involved in less than half of the 58 deals.

In terms of the biggest, trailing the two acquisitions involving Guidant was Toledo, Ohio-based Health Care REIT Inc.'s purchase of locally based Windrose Medical Properties Trust for $924.5 million. Earlier in the year, Windrose bought three specialty hospitals in Louisiana, Oklahoma and Texas in August for $26.2 million.

The sale of Windrose halted the acquisition spree the company had embarked on. In 2005, Windrose took the title for most Big Deals-eight worth a total of $331 million.

Locally based Kite Realty Group was the most active company in 2006, acquiring four shopping centers for a combined $95 million and selling Mid-America Clinical Labs, a local medical laboratory it developed, to an undisclosed buyer for $21.3 million. Kite sold property as well to suburban-Chicago-based Caputo's Fresh Markets for $14 million.

Following the Windrose acquisition and securing the fourth spot among the biggest deals was locally based Duke Realty Corp.'s acquisition of 32 buildings, land and assets in the Washington, D.C., area from Virginia-based Mark Winkler Co. for $855 million.

Locally based Simon Property Group Inc. logged the next-biggest deal within the real estate development community. It sold its remaining stake in the Mall of America to the Ghermezian family for an estimated $450 million. Further, it and two partners bought 5,485 acres in Phoenix from the DaimlerChrysler Corp. for $312 million.

Activity strong

The record amount of cash that changed hands here in 2006 mirrors what occurred globally. The $3.8 trillion resulting from mergers and acquisitions worldwide last year was 38 percent higher than the previous year's total, according to Thomson Financial. The amount also surpassed the former record of $3.4 trillion established in 2000.

Local M&A activity was at its lowest during and immediately after the recession. Now that it's picked up steam again, most money managers expect the trend to persist. Private-equity fund-raisings have been high-25 percent of deals nationally were achieved with private-equity funding-and M&A managers need to put the money somewhere. Deals are needed to make good returns, so the trend generally favors company sellers over company buyers.

"Another thing helping is the credit environment we're in is steady interest rates," said Matt Toole, an analyst at Thomson Financial in New York City. "That makes financing quite a bit easier."

Humke, too, expects the high level of activity to continue this year given the surplus of available capital, increased global competition and emphasis on growing market share.

"I think what we saw in Indiana is what we're seeing across the country," he said. "There's a huge amount of money that is being brought to bear in the acquisition activity. Five years ago, it was strategic buyers; now, it's private-equity companies."

A survey Thomson Financial conducted in conjunction with the Palatine, Ill.-based Association for Corporate Growth shows the sectors that should experience the most activity the first half of this year include technology, health care and life sciences, and manufacturing and distribution.

M&A cycles tend to last four to six years, and the current one is approaching that span, said David Millard, chairman of the Business Department at the local law firm of Barnes & Thornburg LLP.

"I don't see an end in sight," he said. "There's a lot of money out there chasing deals."

Not the normal deal

Embattled Emmis Communications Corp., whose shares sank nearly 60 percent in value last year, was another active player. It sold one radio and five television stations in three separate deals totaling $554 million.

Besides the acquisition of Guidant, the most high-profile purchases may have been those of Marsh and Union Federal Bank.

Boca Raton, Fla.-based Sun Capital Partners bought the Marsh grocery chain in September for $88 million. Including debt, the deal was worth $325 million. A month later, Ohio-based Sky Financial Group Inc. closed its $321.5 million acquisition of Union Federal, Indianapolis' third-largest bank, and its parent, Waterfield Mortgage Co. Inc. of Fort Wayne.

But perhaps the most unusual deal resulted from a divorce settlement giving the ex-wife of Interactive Intelligence Inc. CEO Don Brown nearly one-fourth of the Indianapolis company's common stock.

Kyle E. Brown received 3.9 million shares, or 23.9 percent of outstanding common shares, valued at $37.4 million, under a property settlement approved Feb. 14 in Boone Superior Court.
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