Insurance and Banking & Finance

BEHIND THE NEWS: With benefit of hindsight, some sales look savvy

March 10, 2008

S o m e t i m e s , being a good businessperson means knowing when to get out of the business.

That truism comes to mind because of the recent carnage in banking.

Shareholders in First Indiana Corp., it turns out, cashed in at the right time, as did investors in privately held Union Federal Bank and its parent, Waterfield Mortgage Corp.

Last July, just before the subprime mortgage crisis threw credit markets into disarray, the board of First Indiana agreed to sell the Indianapolis-based bank for $529 million in cash. The deal closed in January.

You can be sure First Indiana wouldn't get anywhere near that price today. Stock in the purchaser, Milwaukeebased Marshall & Ilsley Corp., traded at $37.97 the day it unveiled the deal. Shares now fetch 40 percent less.

The fortuitous timing wasn't lost on shareholders when they gathered in December to OK the deal.

"It's a sad day, but a happy day-happy because we did the right thing," First Indiana patriarch Bob McKinney said at the meeting.

The former owners of Waterfield and Union Federal know the feeling.

In 2006, they sold Fort Wayne-based Waterfield's home-lending operations to several buyers-including Long Islandbased American Home Mortgage, which snapped up the mortgage-origination arm for $450 million. Later in the year, Waterfield sold Indianapolis-based Union Federal for $322 million.

Today, American Home isn't even in business. It's one of 233 lenders that have collapsed since late 2006, according to the Mortgage Lender Implode-O-Meter, a Web site tracking the woes.

If Waterfield's owners knew their industry was heading for the tank, they didn't admit it. Regulatory filings submitted by the company say what drove the deal was increasing frustration among investors that they were unable to turn their stakes into cash.

"The concerns over liquidity were voiced by many shareholders at Waterfield Mortgage's annual shareholders' meeting in the spring of 2004," one filing said.

Luck also appears to have played a role in Central Newspapers Inc.'s welltimed sale to Virginia-based Gannett Co. in 2000.

Gannett paid an eye-popping $2.6 billion in cash for Central, whose holdings included The Indianapolis Star, The Arizona Republic and smaller newspapers.

Since then, the Internet has wreaked havoc on the industry. Gannett shares fetch half what they did the day the company agreed to buy Phoenix-based Central. Today, the entire New York Times Co.-whose holdings include the flagship newspaper as well as The Boston Globe, The International Herald-Tribune, smaller newspapers and the information portal About.com-is valued by investors at just $2.6 billion.

If Central brass saw the digital storm brewing, it didn't say so. In correspondence explaining the deal to shareholders, Central wrote that "its size and scale were not sufficiently large to enable the company to benefit from economies of scale available to larger competitors in the [newspaper] industry." It didn't say anything about the Web.

Buffett and the Indy 500

Warren Buffett's annual letter to shareholders is a rite of late winter. It's always a lively read, with jabs at corporate excesses as well as a few yarns.

This year's letter, released Feb. 29, took aim at the "financial folly" of financial institutions whose "weakened lending practices" fueled the housing boom.

Buffett also tells a tale of his biggest purchase ever outside the insurance industry-the $4.5 billion acquisition of 60 percent of Chicago-based industrial manufacturer Marmon Holdings Inc. in December-with a curious Hoosier tie.

"You'll like the code name that Goldman Sachs assigned the deal," Buffett wrote, referring to the adviser for the seller, Chicago's Pritzker family.

"Marmon entered the auto business in 1902 and exited it in 1933. Along the way, it manufactured the Wasp, a car that won the first Indianapolis 500 race, held in 1911. So the deal was labeled 'Indy 500.'"

Painful milestone for Irwin

March 3 was a low point in the history of one of Indiana's most storied banks.

Columbus-based Irwin Financial Corp. said it was suspending its quarterly dividend to conserve cash. The parent of Irwin Union Bank is continuing to struggle with loan-quality problems, despite selling its mortgage unit in 2006.

"I am committed to resuming dividends as soon as conditions permit, although this is unlikely to be possible in 2008," CEO Will Miller said in a statement.

Irwin was founded in 1871 by Joseph Ireland Irwin, a tightfisted man who once walked from rural Bartholomew County into Columbus so he could save the 30-cent rail fare.

For years, Irwin ran a mercantile store in Columbus with a safe where other merchants stored their money-a sideline that evolved into the bank.

After Irwin's death, his son W.G. took over the bank. In 1919, W.G. backed inventor Clessie Cummins to found the Cummins Engine Co.
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