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Indiana companies prepping for burst of acquisitions

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Conditions are ripe for a barrage of mergers and acquisitions to take place this year.

Companies are sitting on piles of cash. Credit—particularly from banks—has loosened while interest rates remain low.

And two years of little to no activity has put private-equity firms, many of which also have ample cash, under the gun to make investments before their life spans expire.

All of that, experts say, could create a perfect storm for a resurgence in deal activity that already is starting to take shape.

Firms “are calling us more frequently looking for opportunities to buy in the past six months than anytime in my history,” said 61-year-old Bob Shortle, CEO and head of the merger-and-acquisition practice at Periculum Capital Co. LLC, an Indianapolis-based investment banking firm. “There have not been a lot of transactions done if you look over the last three years. There’s some level of pent-up demand.”

The demand started to translate into deal-making in 2010. Through November of last year, there were 61 deals in which Indiana companies were purchasers or targets, according to Mergermarket, a New York-based intelligence service in mergers and acquisitions. That amounted to roughly $7 billion in activity. And it followed a year in which deals were so scare amid tight credit and high caution that some private equity managers said they may as well have taken a sabbatical.

This year, experts expect even more deals, though their optimism is tempered with cautious realism about still-high unemployment rates and slow economic growth.

“We think probably starting in March or April there will be a huge ton of deals,” said Glenn Scolnik, chairman of the board for private equity firm Hammond Kennedy Whitney & Co. Inc. “If the economy still looks good, I think there will be more deals in the last nine months of 2011 than in all of 2010.”

The cash factor

Among the biggest driving factors in the rosy projections is the record $2 trillion in cash held by U.S. companies, including some in Indiana.

As of Sept. 30, Eli Lilly and Co. had $6.1 billion in available cash, Simon Property Group had $1 billion, and software provider Interactive Intelligence Inc. had $85 million. The companies are headquartered in Indianapolis. In Columbus, diesel-engine maker Cummins Inc. had $1.2 billion.

Diane Denis, a Purdue University finance professor, said the existence of such reservoirs “almost certainly suggests that [mergers and acquisitions] will be picking up.”

“It already has been picking up for that reason,” Denis said. “There’s definitely empirical evidence that firms are more likely to make acquisitions when they have cash.”

Part of the reason is intuitive: Holding cash is not a productive use of assets. Particularly if companies are putting that money in the bank, they’re getting a low return.

“The pressure from shareholders to do something with that cash is going to continue to build,” said George Farra, co-founder and principal with investment management firm Woodley Farra Manion Portfolio Management Inc.

The large cash piles also make companies more attractive targets, experts say, because the cash they hold could finance the cost of the acquisition.

There are plenty of other options for spending the cash. Companies could invest in inventory or employees, pay dividends, or buy back their stock in an effort to boost share prices, as companies did in higher volume last year.

But local experts say acquisitions tend to be the favored option.

“Acquisition is clearly on the radar of most of these companies with large war chests,” said David Millard, chairman of the business department for law firm Barnes & Thornburg LLP. “The other options are not growth opportunities.”

Another set of potential buyers—private-equity firms—also are well-poised to buy.

While fundraising has been difficult the past couple of years, many of the firms had raised large amounts of capital before the recession. And the lack of opportunity to spend that money—particularly in late 2008 and 2009—has intensified the desire for some to put it to work.

That’s particularly true, Millard said, because those firms have a small time window in which they can acquire and resell firms.

And it’s not just a good buyer’s market. As the economy continues to emerge from the recession, prices are returning to reasonable levels. Scolnik said the number of buyers likely to emerge could, in some cases, give sellers more bargaining power.

“It’s going to become a market to happen every five to 10 years,” Scolnik said.

A wave of pending baby-boomer retirements, and planned exits by business owners beleaguered by the downturn, also could create a large pool of sellers.

Credit questions

Merger-and-acquisition experts say bank financing was easier to obtain last year than in 2009, when credit essentially dried up, and many expect the pattern of more generous lending to continue this year.

Credit “is definitely loosening up a bit,” said David Barrett, chairman of the corporate finance group at Indianapolis law firm Baker & Daniels LLP. “In my conversations with bankers, they’re definitely looking at a lot more deals right now.”

But, Barrett added, “it remains to be seen how many of those deals they end up approving and financing.”

Mike Renninger, a Carmel-based bank analyst, said many banks remain cautious in light of regulatory scrutiny over their loan portfolios.

“Banks are going to be very tight on financing acquisitions unless the buyer’s balance sheet is going to easily accommodate the acquisition,” Renninger said. “Banks have had to be so extremely picky on their loans.”

Still, Renninger said he sees plenty of potential for the deals to get done. Banks will be involved, he said, provided there is additional capital to finance the acquisitions coming from other sources.

Some unknown factors could thwart robust activity.

Questions remain about whether a double-dip recession will occur. And experts say politics plays a big role in mergers and acquisitions.

The landscape, however, seems to be tipping in favor of strong activity. Republicans controlling the U.S. House of Representatives, some say, seems to signal a better ride for business interests.

“There’s more confidence and we’ve got a stable business environment,” Millard said. “With respect to mergers and acquisitions, it is extremely important for people to feel like they have some predictability.”•

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