Mergers & Acquisitions and Banking & Finance and M&I Bank

CEOs' friendship helped pave M&I's way for First Indiana buyout

July 16, 2007

If First Indiana Corp. was looking to pull off a sale quickly, Milwaukee-based Marshall & Ilsley Corp. was a natural place to turn.

First Indiana CEO Robert B. Warrington had been doing deals with the bank since he took the helm from Marni McKinney in 2006.

In January 2006, M&I acquired First Indiana's trust division. Later that same year, First Indiana began using software from M&I data processing subsidiary Metavante.

Warrington also is a friend and golfing buddy of M&I CEO Mark Furlong. They worked together as executives of Grand Rapids, Mich.-based Old Kent Bank before it was acquired by Fifth Third Bancorp in 2001.

The executives said the deals for the trust division and software were not designed as preludes to an eventual sale of First Indiana. But the ongoing relationship, and the common software platforms, helped build a comfort level between the companies that made an acquisition easier.

"Any time you get to know a person or entity, it gives you understanding and solace," said Warrington, 59. "We had a high degree of familiarity."

Despite those ties, banking observers say First Indiana's decision to sell--ending 92 years of independence--seemed abrupt. Under the deal unveiled July 9, M&I will pay $529 million, or $32 a share, a 45-percent premium to where First Indiana shares had traded.

Among the intriguing questions: Why now, just weeks after First Indiana rolled out a new superhero ad campaign and announced it was hiring a new accounting firm, a move that rarely precedes a sale?

And why didn't the bank publicly disclose it was on the block, a move that might have created a bidding war to drive the price even higher?

Deal came about quickly

Sale rumors have dogged First Indiana for more than a decade. Whenever a possible suitor surfaced, the bank would roll out another "we're here to stay" ad campaign, and talk would die down.

This time, though, the sale was real. First Indiana employees figured as much when they received a call Sunday night, July 8, about an important meeting the next morning.

Warrington said the deal came about "fairly quickly" with an organization the bank knows well. He declined to be more specific about timing.

For two organizations that work together so closely, an offer typically wouldn't just come out of the blue, said Mike Renninger, principal of Carmel-based Renninger & Associates LLC, a consulting firm specializing in bank mergers and acquisitions.

Renninger is skeptical of the banks' claim they weren't building to an acquisition.

Over the years, First Indiana has rebuffed attempts by other banks interested in discussing a merger, but they were willing to negotiate with M&I. Renninger was surprised such a prime acquisition target wouldn't have engaged in a longer, more thorough sale process to draw out all potential buyers.

Of course, Renninger added, it's the bank's right to choose with whom it partners, and M&I is a good candidate, with solid earnings and good asset quality.

"If this had been too low of a price, then everybody would have been squawking," Renninger said. "The fact that it's considered a fair price is reason enough to leave it alone."

Competition takes its toll

Longtime First Indiana director Gerald Bepko says the sale was the result of a gradual realization that the old strategy was no longer working in a fiercely competitive market.

"We thought maybe this was the best time to abandon independence as the best method of shareholder reward," said Bepko, the chancellor emeritus at IUPUI. "We were surprised by how good M&I's offer was."

When Warrington took over as CEO in 2006, after a two-year stint as president, his marching orders were to defend the bank's independence, Bepko said.

And Warrington took the task seriously, telling other bankers who asked him to lunch that they could meet and discuss his beloved Chicago Cubs, but talk of acquisitions was off limits, Bepko said.

Independence served the bank well for years, but recently it had been struggling. In the first quarter, the bank's operating profit was essentially flat. And before announcement of the M&I deal, the stock was off 13 percent for the year.

Even so, during a conference call with analysts in April, bank officials gave no hint they were rethinking First Indiana's independence.

"I would say that things are shaping up to be a typical year at First Indiana," Warrington said at the time.

The bank's second-quarter results, expected early next month, should shed more light on the bank's struggles.

The timing of the sale is curious, Renninger said. Just last month, the bank unveiled a cheesy superhero mascot, First Indiana Man, to save the bank by peddling free checking accounts. There was no word on whether he'll be getting a new M&I jumpsuit to go with the orange cape.

And what about other potential suitors? Warrington said the company's financial adviser, New York-based Sandler O'Neill & Partners LP, contacted other banks about a potential deal and some expressed interest.

He wouldn't say whether other offers were received, only that the deal was done with a "competitive backdrop."

"We feel really good and comfortable that we do have the best possible offer," Warrington said.

A fair price

In fact, some analysts believe the price is better than fair. A July 9 report from New York-based Goldman Sachs says the price paid for First Indiana--which amounts to 294 percent of the bank's book value--is at the high end for M&I's previous deals and similar transactions in the industry.

In the days after announcement of the deal, M&I shares slipped from $47.91 to $46.13. A report from Memphis, Tenn.-based Morgan Keegan & Co. blamed the drop on "seemingly full valuation paid for a Midwestern franchise."

The same report touts the unusual growth expected in Indianapolis when compared to the United States as a whole.

Charlottesville, Va.-based SNL Financial projects the population here will grow 9.1 percent, compared to 6.7 percent nationwide. Household income is projected to rise 19.4 percent, beating the national rate of 17.8 percent.

The deal will require job cuts in Indianapolis, so that M&I can realize cost savings of 20 percent. Officials would not say how many of First Indiana's 500 employees would be affected.

M&I has $56.5 billion in assets and more than 330 offices. Most of those are in Wisconsin. Others are in Arizona, Florida, Oklahoma and Missouri. First Indiana has 32 branches in central Indiana, $2.1 billion in assets, and $1.6 billion in deposits.

M&I expects to finance the deal with part of a $1.8 billion windfall expected from a spinoff of Metavante, its data processing division.

Furlong, M&I's CEO, said he isn't worried about losing Indiana customers who want to bank with a local company.

"The way we do business is, we act like a small, community bank," Furlong said. "The decision making is local; it's the only way to run a bank."

For years, First Indiana's leaders made the same point.

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