Mergers & Acquisitions and Deals

Merger-and-acquisition activity expected to warm in the Indianapolis area

January 23, 2010

Just how wimpy was merger-and-acquisition activity last year?

Not one of the deals brokered by Indianapolis investment bank Periculum Capital Co. involved a business changing hands; all nine focused on bulking up financing for struggling companies.

The year was “not dead, but comatose,” recalled Senior Managing Director Bob Shortle.

BKD Corporate Finance LLC, an arm of the Springfield, Mo.-based accounting firm, had a sparse year, too. BKD closed just one deal, according to Senior Vice President Tony Schneider.

Their experiences were not unique. IBJ was able to document only 10 mergers or acquisitions valued at $5 million or more last year, a fraction of the 47 transactions in 2008 and the 67 in 2007.

People like Shortle and Schneider, who make their livings brokering transactions, figure there’s nowhere to go but up, and indeed that’s what they anticipate.

Shortle

Pent-up demand to buy and sell companies will result in a noticeable thaw in activity as the year advances, they say. And if conditions improve enough, the market could even turn quite warm.

Values of businesses put up for sale will rise slightly but probably won’t return to 2005 or 2006 levels for another couple of years—not until banks shed more of the caution they’ve adopted in light of the financial crisis.

“2010 is going to be a pretty good year for mergers and acquisitions,” said Glenn Scolnik, chairman of Hammond Kennedy Whitney & Co., an Indianapolis-based private equity firm. Investors “have been on the sideline, and everybody wants to get money invested.”

Hammond Kennedy has a couple of deals in its pipeline. Periculum and BKD are signing up sellers, too.

That doesn’t mean business owners are excited to talk to people like Scolnik. Values have sunk since the go-go years when money was flowing and would-be buyers bid up acquisition prices.

The few companies that are selling are bringing five to 5-1/2 times earnings before interest, depreciation, taxes and amortization. In 2006, values were closer to seven times EBIDTA.

Values will climb to about six times EBIDTA this year, Scolnik predicted.

Scolnik

About the only owners looking to sell are those whose lenders are cutting them off or who are approaching retirement and don’t want to invest the blood, sweat and tears necessary to survive the next few years in hopes of seeing valuations rebound.

BKD’s Schneider said, “Either you become the one who’s consolidating or you become the consolidator.”

Long gone are buyers betting on financing a deal with cheap money. Now, most would-be buyers are “strategic,” meaning they want to expand or take out a competitor to enable them to raise prices.

No industry will be significantly hotter than others for merger-and-acquisition activity, Shortle said. However, automotive will continue to be brutally competitive, thus driving down valuations. But businesses operating in food industries probably will see a number of transactions.

Some banks struggling to work through bad loans will likely topple to sellers, although Shortle said he couldn’t predict how many in Indiana.

Scolnik predicted that industries on which Hammond Kennedy is focused—aerospace, energy and pet care—will be active.

Aerospace because many aging airplanes must be replaced; energy because old electric grids must be updated and electricity from wind and other alternative energy carried via existing infrastructure; and pets, because people with disposable incomes increasingly are lavishing some of it on their animals.

Clouding the horizon are uncertainties about the swelling federal deficit.

“That’s the outside big dark cloud that could otherwise ruin a good recovery,” Shortle said. Many business owners “do not have a lot of confidence things will get a lot better.”•

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