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Uptick in M&A activity suggests a turnaround

January 22, 2011

Merger-and-acquisition activity in 2010 could be portrayed as robust when compared with the dearth of deals the previous year.

Even so, the activity was far from a return to the days before the recession crippled company valuations and led to a tightening of bank financing.

IBJ documented 49 mergers or acquisitions last year, nearly five times more than the 10 transactions in 2009 and similar to the 47 of 2008.

Don Luciani, a partner at Birmingham, Mich.-based investment banking firm Amherst Partners, attributed the surge in M&A activity to an improving economy and an increasing availability of credit.

“The appetite of banks to finance transactions is still relatively conservative,” said Luciani, whose clientele included Marsh Supermarkets Inc. during his dozen years at Ernst & Young LLP. “For the right deals, there’s a feeding frenzy. But anything outside the sweet spot for banks is problematic.”

Deal-making last year began to spike in the fourth quarter, which bodes well for a rebound in 2011, said Steve Humke, a partner at Indianapolis law firm Ice Miller LLP, who represents high-growth companies.

In fact, three of the five largest deals documented by IBJ closed in the final three months of the year.

Helping to bolster the numbers are private-equity firms that again are beginning to explore opportunities to expand their portfolios by making acquisitions or by investing in existing assets, rather than merely managing their portfolios, Humke said.

Steve Warner, a partner at Indianapolis accounting firm Katz Sapper & Miller LLP, concurred.

“Everything that I’ve seen is that the trend in deal flow is starting to improve,” he said. “There’s a lot of money on the sidelines.”

Case in point: IBJ’s list of 2010 mergers and acquisitions is led by private-equity firm Platinum Equity LLC’s purchase in December of Jeffersonville-based barge builder American Commercial Lines Inc. for $777 million.

In Indianapolis, Eli Lilly and Co. accounted for two of the five largest acquisitions.

Lilly in December bought Avid Radiopharmaceuticals Inc., a Philadelphia maker of an experimental imaging agency that could help identify patients with Alzheimer’s disease, for $300 million.

That followed its purchase in July of Alnara Pharmaceuticals Inc., a Cambridge, Mass.-based biotech firm developing a drug for exocrine pancreatic insufficiency, for $180 million.

One of the bigger deals in 2010, which was announced in December but hasn’t closed, involves local tech darling Aprimo Inc. The marketing software company is being sold for $525 million to Dayton, Ohio-based data storage giant Teradata Corp.

The acquisition ends the independent run of Aprimo, co-founded by Bill Godfrey 12 years ago and now posting annual sales of more than $70 million. Just two years ago, Aprimo shelved plans for a $50 million initial public stock offering amid a deteriorating economy.

Perhaps the most controversial deals undertaken in 2010 didn’t involve a public or private company but rather the city of Indianapolis.

City-county councilors in October voted to turn over meter operations to Dallas-based Affiliated Computer Services. The deal calls for ACS to give the city $20 million upfront and an estimated $363 million to $620 million in meter revenue over the life of the 50-year deal.

Mayor Greg Ballard also is finalizing a proposal to sell the city’s water and sewer utilities to Citizens Energy Group, the public charitable trust that owns Citizens Gas.

The utility deal was approved by councilors in late summer and awaits support from Indiana utility regulators. If the water and sewer transaction gets final approval, it will free up $435 million for city infrastructure and transfer $1.5 billion in utility debt to Citizens.

And then there was the deal that never got done, much to the chagrin of Emmis Communications Corp. CEO Jeff Smulyan, who attempted to take the public company private.

Smulyan abandoned his weeks-long effort in September to strike a deal with a group of preferred shareholders on a $90 million buyout. It unraveled after his financier, New York-based Alden Global Capital, backed out of an “agreement in principle” to sweeten the terms for the preferred shareholders.

Smulyan’s JS Acquisition LLC is suing Alden for breach of contract. The suit is pending in federal court.

Emmis, for now, remains public. But Indianapolis is losing the headquarters of another public company, whose sale closed earlier this month—too late to be included on the 2010 list.

FinishMaster Inc.’s shareholders approved a deal to sell the locally based company to a subsidiary of Montreal-based Uni-Select Inc. for $172 million.

While many lament the loss of a local public company, Ice Miller’s Humke insisted the deals often have an upside, mainly capital from the sale that is invested into promising startups.

“We have a tendency to think, ‘Oh my goodness, this is a disaster,’” he said, “and many times it’s just the opposite.”•

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