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Area deals reach new pinnacle: Anthem's $22.7 billion purchase of Wellpoint heads busy year for acquisitions

January 24, 2005

In 2004, Indianapolis had plenty of both, crushing all previous local merger-andacquisition records.

IBJ tracks business deals larger than $5 million involving area companies in which financial terms are available. Last year, there were 56 of them, worth a grand total of $31 billion. Anthem Inc.'s massive $22.7 billion acquisition of Wellpoint Health Networks Inc. led the pack.

Before 2004, $17 billion was the most M&A activity Indianapolis had ever seen in a single year. All by itself, Anthem's deal crushed that 1997 record-to the delight of local observers.

"That's a big deal. It's the kind of business that's employee-intensive. The consolidation of some of those activities could bring a number of jobs and more expertise to Indianapolis," said Bob Shortle, managing director of Periculum Capital Corp. "You always worry about Lilly being our only player, and Anthem is clearly [now] in the same league with this acquisition."

But Anthem wasn't the only attendant at the party. Even if you strike the blockbuster from the list, Indianapolis saw more M&A than it had in years. In 2003, the city had 39 deals worth $7.2 billion; 2002 recorded 27 deals worth $8.8 billion.

A complete list of this year's deals starts on page22. A rundown of additional deals begins on page20.

Glenn Scolnik, president and CEO of business buyout firm Hammond Kennedy Whitney & Co. Inc., chalked up the increase to a rare alignment of the M&A constellations. During the recession, he said, company prices were down, which made most potential sellers reluctant to negotiate. In 2004, the market finally provided satisfactory returns.

Meanwhile, buyers continued to enjoy an abundance of available credit at nearhistoric low interest rates. And the longsluggish national economy finally began to show steady growth, increasing most firms' prospects for profitability.

Such an extraordinary confluence of factors is unlikely to be repeated in the near future, Scolnik said. But during 2004, it allowed both buyers and sellers to leave the table happy.

"The stars and the moon aligned up to a record year," he said. "For a while in '01 and '02, you couldn't see the light at the end of the tunnel."

Major real estate deals made up a large portion of the 2004 list, and Simon Property Group Inc. led the way, with three of its four deals in the top 10. Together, they were worth nearly $5.6 billion, with Simon's $5.1 billion acquisition of Simon's $5.1 billion acquisition of Chelsea Property Group the largest.

Simon wasn't the only player on the real estate market. Real estate investment trusts Duke Realty Corp., Windrose Medical Properties Trust and Kite Realty Group Trust were all active with multiple deals in 2004, as was real estate investment manager HDG Mansur Group.

"The stock market hasn't completely rebounded from its highs in 2000," said Christopher Hirshfeld, managing director of locally based Goelzer Investment Banking. "As a result, real estate has been a very good hedge."

In the world of high finance, generating superior returns always requires the tradeoff of higher risk. But M&A is increasingly seen as a safe harbor in the high-yield spectrum.

Investors are parking their money in buyout funds rather than bear the dangers of traditional venture capital and its alltoo-frequent flameout startups.

"If you went through the Internet meltdown, all the funds involved with that probably lost a lot of money," Shortle said. "There was a flight to safer situations. Obviously, a company that's already earning money is safer than a new venture."

The vast sums of capital now underwriting M&As has turned the industry upside down, Shortle said.

Strategic acquisitions, once the industry's bread-and-butter, are becoming less frequent than purchases by ever-larger buyout funds.

With relatively limited capital available, regional M&A funds used to concentrate on buying smaller companies and making them bigger. Then, a few years later, M&A funds would sell their portfolio companies to much larger firms in the same industry for strategic fits.

But the prevalence of enormous national M&A funds has created a new market. Rather than seek strategic buyers, a regional M&A fund can sell firms to its even larger counterpart.

"You see a lot more financially driven transactions," Shortle said. "It's an unprecedented change in investment banking."

One of the biggest waves in M&A hasn't crested yet. The industry is bracing for the enormous tide when the bulk of the baby boomer generation retires and transfers its wealth.

For many successful business owners, that will mean selling the companies they spent lifetimes cultivating.

The majority of baby boomer retirements are still five to 15 years away. But Hirshfeld said smart business owners have begun asking questions of M&A experts.

"Succession plans are one of the most commonly overlooked parts of business," he said. "What you don't want to do as a business owner is say, 'OK, I'm ready to sell' and not have your house in order."

Long-standing M&A trends also continued in 2004. Some, like the tendency of manufacturing businesses to move overseas, have spurred complex counterstrategies. Scolnik, for example, checks for "China risk" in every potential manufacturing deal. That's the risk that something will soon be produced less expensively in Asia. U.S.-based M&A firms are reluctant to enter any market that could evaporate overnight.

Instead, they gravitate toward products that can't be easily produced, or products and services where time is of the essence. In some industries, Hirshfeld said, timely delivery trumps price.

"Speed is a barrier to entry," he said. "You just can't compete from China if it has to be there overnight."

Local M&A observers are always most concerned whether Indiana is a net gainer or loser of company headquarters. Supporters of new Gov. Mitch Daniels have high hopes that his economic development efforts will-eventually-land Indiana new heavyweights, like the dealmakers who led IBJ's list.

"It will be slow and difficult. It's like turning an ocean liner around. It takes a while," Scolnik said. "But I do believe the sincerity of the pledge. And if you just look at the talent that's been attracted to that administration, that group of people will make positive improvements."
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