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Busy year, but no record: A Wellpoint deal leads list for second year in row, but 2005 lacks blockbuster

January 30, 2006

For the second year in a row, a giant Wellpoint deal led the pack. As much money was involved in Wellpoint's $6.7 billion acquisition of WellChoice Inc. as in the rest of the list combined. It was a huge deal by most any company's standard-except Wellpoint's.

The year before, Wellpoint's $22.7 billion merger with Anthem Inc. led all deals and then some. Thanks to that single mega-deal, 2004's $31 billion list total shattered all previous local merger and acquisition records.

Also thanks to Wellpoint, Indianapolis was an overall Big Deal net gainer in 2005. Purchases by local companies totaled $8 billion, compared with sales worth $4.8 billion.

But exclude Wellpoint, and the picture doesn't look as rosy. Many of the year's largest deals saw local companies selling off major assets-or even agreeing to be bought out.

"If you take Wellpoint away, and of $5.9 billion, only a quarter of what's left was Indiana buyers. That's pretty huge," said John Reed, vice president of locally based investment firm David A. Noyes & Co. "I've argued many times about medians vs. means. In small populations, medians get rid of extremes. It's utterly unrepresentative to look at the outliers."

C o n n e c t i c u t - based Crompton Corp.'s $1.8 billion purchase of Great Lakes Chemical Corp., the second-largest deal of the year, is a perfect example.

George Farra, managing director of local investment firm Woodley Farra & Manion, said he wasn't surprised to see the deal emerge. He said companies whose stock consistently lags the market are often ripe for a takeover.

"Great Lakes has been a chronic underperformer for the last umpteen years," Farra said. "It's not a surprise that they accepted an offer from Crompton, which I believe was a reasonably good premium."

Big on real estate

There were a great number of big real estate deals last year-28 of the 55 on the list, worth a total of $2 billion. Indianapolis-based Duke Realty Corp. led the pack in terms of total value, with two deals worth a combined $1.3 billion.

Locally based Windrose Medical Properties Trust took the title for most Big Deals. It had eight acquisitions worth a total of $331 million.

Another Indianapolis-based real estate investment trust, Kite Realty Group, made six deals worth $94.6 million.

Emmis busy

Indianapolis-based Emmis Communications Corp. also had a busy year, selling off television assets worth $875 million in four deals and buying a radio station in Slovakia for $12.6 million in another. Wall Street liked the strategy, Farra said.

"Emmis got into television and the market instantly hated it a few years ago," he said. "The worry was the network affiliate stations would dilute the value of the [company] franchise. The fact that Emmis has either sold or traded them for radio franchises kind of confirms that."

Big deal on delay

Perhaps the most talked about Big Deal in 2005 was one that didn't even make the list, because it didn't close. Indianapolisbased Guidant Corp.'s topsy-turvy negotiation for acquisition by Johnson & Johnson for about $25 billion kept dealmakers riveted all year long. At the situation's nadir, many feared product-liability issues might kill it altogether. These days, they're amazed by the bidding war that broke out with Boston Scientific.

Had the purchase gone through, 2005 would have been a record year for dealmaking in Indianapolis in terms of dollar value. If J&J consummates the deal as expected in the coming months, 2006 could well set a record.

Many folks will bemoan the loss of another of the city's few public company headquarters, particularly one in the life sciences. But Indiana Venture Center President Steve Beck has a decidedly glasshalf-full attitude.

The better premium that Guidant's shareholders receive, the more wealth they'll gain. Then, Beck said, there's a good chance they'll plow some of the proceeds back into new companies.

The cycle is necessary to grow the local economy. If former owners reinvest the profits they made off Guidant or Great Lakes Chemical, they could spur formation of even bigger local companies to replace them.

"If you think about the process of selling, everybody thinks it's a negative [for the community]," Beck said. "It's only a negative if the whole business is moved out of town. But the wealth that's created, if that wealth is re-employed, that's what's made Silicon Valley and Boston and Minneapolis as strong as they are. It becomes a big circle."

"They've got cash now," Beck added. "They're going to wheel and deal and go back to the marketplace."

Activity on the rise

Local merger-and-acquisition 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 keep rolling. Private equity fund-raisings have been high. M&A managers need to put it to work somewhere, said Bob Shortle, managing director of locally based Periculum Capital Corp. They need deals to make good returns. The trend generally favors company sellers over company buyers.

"You have a lot of money needing to go somewhere," Shortle said. "That will drive valuations and activity at some level."

Most of the same factors that led to high merger-and-acquisition levels in 2005 remain the same in 2006. Interest rates are still low by historic standards. Banks have loan-friendly policies. And the baby boomer generation's retirements, which fuel many company sales, have only just begun.

Jeff Hopper, a partner and M&A specialist at local law firm Barnes & Thornburg, said January activity indicates a robust year.

"You can't speculate too far. But from what I see already in early 2006 in my practice, it's continuing for sure into this year," he said. "And I'd be very surprised if it didn't continue throughout the year."

For good or ill, Big Deals are here to stay. In today's bottom-line-oriented business environment, everybody wants to find economies of scale.

"The fact is, you need size, you need bulk," Reed said. "A lot of ma-and-pop grocery stores or specialty manufacturers might have a viable argument [for remaining independent] in the short term. But in the long term, there's going to be consolidation, and that means acquisitions."
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