Insurance and Banking & Finance and Real Estate & Retail

Busy year, no whoppers: Deals were numerous in 2007, but lack of blockbuster holds overall price tag down

January 28, 2008

The Indianapolis area didn't experience a monster-size business transaction in 2007 like it has in recent years, but that doesn't mean the deal-makers weren't busy.

IBJ's annual list of Big Deals tracked more large business transactions involving Indianapolis-area companies than ever before in 2007, even though the total dollar amount of the deals was dramatically lower than the previous year's.

Deals compiled by the Indianapolis Business Journal that closed in 2007 totaled $23.4 billion, well below the $38.5 billion posted in 2006. The number of deals, 67, surpassed the old high of 58 set two years ago.

Each year, IBJ tracks business deals of $5 million or more involving companies based in the metropolitan 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.

A year ago, the Big Deals list was propped up by a record-setting $28.4 billion acquisition of Guidant Corp. That deal surpassed the previous record-setter, Well-Point Inc.'s $22.7 billion merger with Anthem Inc. in 2004.

The 2007 list was led by a much smaller deal-locally based Simon Property Group Inc.'s and San Francisco-based Farallon Capital Management LLC's acquisition of Mills Corp. and its 38 retail properties for $7.9 billion.

Still, robust activity occurred in spite of the fallout stemming from the subprime mortgage mess. The crisis is making it harder to finance leveraged buyouts because banks that have extended credit to mortgage companies are reluctant to lend huge chunks of money.

Yet, local private equity and investment banking firms have managed to stay active because their deals typically are for much less money, said Steve Humke, a partner at Ice Miller LLP's private equity and venture services group.

"Most companies in Indiana are smaller, so $100 million would be average," he said, "but in New York, that would be tiny."

Besides Simon's transaction, three more billion-dollar deals were consummated:

Toronto-based Onex Corp.'s and Washington, D.C.-based Carlyle Group's purchase of Indianapolis-based Allison Transmission Inc. from General Motors Corp. for $5.6 billion;

Carmel-based auto auction Adesa Inc.'s sale to several private equity funds for $3.7 billion;

Eli Lilly and Co.'s acquisition of Icos Corp., the Bothell, Wash., maker of Cialis, for $2.3 billion.

The four deals accounted for 84 percent of last year's total M&A value of $23.4 billion. But, in 2006, just two acquisitions made up 85 percent of the $38.5 billion of activity. Guidant's purchase by Boston Scientific Corp. for $28.4 billion in 2006 and the related sale of its vascular business to Abbott Laboratories for $4.1 billion pushed that year's local M&A dollar amount to heights unseen.

Funding scarcer

Larger deals haven't vanished from the Indianapolis market, but the lending climate, at least for now, has made them tougher to complete, said Jim Snyder, a partner at local buyout firm Hammond Kennedy Whitney & Co.

"You saw the great big deals run into problems because of the financing," he said. "It takes longer to close, because people are checking things out more rigorously than they were before."

To be sure, Finish Line Inc.'s proposed $1.5 billion purchase of Tennessee-based Genesco Inc. is a prime example, experts said. Indianapolis-based Finish Line and its financial backer, the Swiss financial giant UBS, have been trying to cancel the acquisition agreement, while Genesco has been trying to force Finish Line to close.

Finish Line contends it has the right to walk away because Genesco's financial results have declined dramatically since the deal was struck in June. To resolve the dispute, the three companies have waged court battles in Tennessee and New York City.

It's become routine for banks to give deals second and third looks when they would have loaned the money at first glance not long ago, said Mike Miles, a managing director of local investment bank The Riderwood Group Inc.

When banks lend less, buyers are forced to pick up the slack and bring more equity to the table, which causes prices to drop. In turn, the market stalls.

"You're going to have a difficult time with CEOs and entrepreneurs hoping the market [returns]," Miles said. "That will slow down activity, because they're hoping prices will come back."

Nationally, M&A activity already has cooled. In 2007, 11,305 deals closed worth $1.6 trillion, a slight increase from $1.5 trillion the previous year. Yet, the fourth quarter of 2007 boasted the least amount of action.

Even so, local investment bankers and private equity firms are optimistic about this year's prospects. Periculum Capital Co. Inc., for instance, so far has letters of intent signed on three deals, Managing Director Robert Shortle said.

He attributes his company's productivity to the expense and rigors of the Sarbanes-Oxley Act, which has kept some smaller companies from going public. Moreover, the regional investment banking firms that managed initial public offerings here have been purchased by larger, outside banks, taking the IPO infrastructure with them. Shortle's former firm, Raffensperger Hughes & Co., was among the casualties.

"For those two reasons, you're not seeing as much [IPO] activity as you used to," he said, "and I think it's a permanent change."

Active dealmakers

Meanwhile, Simon Property Group was among the most active suitors last year, participating in three of the 10 largest deals. Besides its involvement in the biggest, Simon partook in the fifth- and 10th-largest deals as well.

Westfield Group bought Florida malls from Simon and Farallon Capital for $400 million. Simon acquired Las Americas Premium Outlets, an upscale outlet center in San Diego, from Stoltz Real Estate Partners for $283.5 million.

Simon's smaller deals included its acquisition of the remaining 40-percent interest in University Park Mall and University Center Mishawaka for $50.7 million, and its purchase of The Maine Outlet in Kittery, Maine, for $45.2 million.

Eli Lilly also was aggressive. In addition to its purchase of Icos, the drugmaker bought Massachusetts-based Hypnion Inc. for $315 million and Kansas-based Ivy Animal Health Inc. for $150 million.

What's more, Lilly acquired the exclusive rights to teplizumab, a humanized anti-CD3 monoclonal antibody, from MacroGenics Inc. in Maryland for $44 million; and the exclusive rights to Glucokinase Activator, a type 2 diabetes treatment, from OSI Pharmaceuticals Inc. in New York, for $25 million. The price could rise into the hundreds of millions on both of those deals based on future incentives.

Conseco Inc. was involved in multiple deals, too. The insurer sold its annuity business to Illinois-based Reassure America Life Insurance Co. for $76.5 million, and bought Reassure America's life insurance business for $63 million.

One much-talked-about deal, Milwaukee-based Marshall-Isley Corp.'s purchase of First Indiana Corp. for $529 million, will appear on next year's list because the sale closed Jan. 3.

Besides First Indiana and Adesa, another company that lost local ownership is Haverstick Consulting Inc. Kratos Defense & Security Solutions Inc. in San Diego bought it for $90 million.

Those join Guidant, Windrose Medical Properties Trust, Marsh Supermarkets Inc., Hat World, Union Federal Bank and others as Indiana firms that have been sold to outof-state interests in the past few years.
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