Stock declines could make public companies takeover targets

January 26, 2009
Not so long ago, most Indiana public companies were firmly in control of their destinies. Now after seeing their stock prices plunge, many would , be little more than sitting ducks were outsiders to launch takeover bids. If anybody's still got the money and chutzpah to buy, that is.

"The year will be dominated by buyers with cash who can move quickly on opportunities," said Baker & Daniels LLP partner J. Jeffrey Brown, who leads the Indianapolis-based law firm's Private Capital and Venture Group. "But in a market like this, no companies are actively marketing themselves for sale unless they need to."

The credit crisis and subsequent national recession hit all of the state's publicly traded companies hard. But some are staggering from body blows.

Consider: Forty-five percent of the 64 public firms lost more than two-thirds of their peak stock values during the last 18 months—a period that begins prior to the financial meltdown. Eight of the companies lost at least 90 percent of their peak values. That leaves even some of the state's strongest companies more vulnerable to takeover than they would have been a year or two ago, because a battered stock is cheaper to buy, thus more attractive to an acquirer. Potential acquirers usually pay a negotiated premium over the market value of a company's stock.

Insurance giant WellPoint Inc., for example, was worth $51.3 billion in late December 2007. Its total market value is now $19.3 billion, a 62-percent drop.

Such changes are stunning. Even so, M&A experts say companies with sound fundamentals, like WellPoint, are likely to recover.

And they point out that potential buyers—whether companies in the same industry who'd stand to gain from strategic mergers or massive private equity funds that could engineer financial deals—have suffered huge losses of their own. As a result, few are positioned for shopping sprees.

Experts also note that bank financing is difficult to engineer. Until credit markets and the economy sort themselves out, possibly in 2010 or later, many potential deals will stall at the gate.

"Even though Indiana's public companies are trading at an all-time low, most of the people who would be interested in buying are also trading at their lows," said Glenn Scolnik, chairman of locally-based Hammond, Kennedy, Whitney and Co., Indiana's largest M&A firm. "When people's stock prices are low, they don't want to do stock deals. But if you have to borrow, you run into the same problem we all are. Right now, the credit markets are absolutely locked up."

"The thing a recession does, it scares everybody," Scolnik added. "Everybody now is spooked. Nobody wants to do anything aggressive or ambitious. And the few who do usually lose a lot of money or make a lot of money."

Falling knife or piano?

Some industries, such as automotive and media, are expected to recover from the recession later than others, and small companies in those sectors are considered more vulnerable than their larger counterparts.

Companies saddled with lots of debt are at greatest risk. Renegotiating their loans at favorable interest rates will be difficult given the distressed condition of the banking industry.

In a buyers' market, M&A experts anticipate most deals will involve troubled companies that must make the hard choice between acquisition and bankruptcy.

Before companies reach that point, though, they'll likely jettison pieces of themselves to raise cash.

"The one trend we already are seeing, and we'd expect throughout 2009, is more restructurings and recapitalizations," said Ice Miller LLP partner John Thornburgh, co-chairman of the Indianapolis-based law firm's Private Equity and Venture Services group. "A lot of troubled companies are selling or spinning off divisions, subsidiaries or assets."

That's precisely what Evansville-based Accuride Corp. did after its stock went into freefall, losing a greater proportion of its value in the 18 months analyzed by IBJ than any other Indiana public company -- a whopping 98 percent.

On July 17, 2007, the market value for tax purposes. Conseco wants flexibility to carry as much loss forward as possible in order to reduce profit, thus its taxes.

Takes two to tango

Some executives shrug off enormous changes in their stock prices. Indianapolis-based software maker Interactive Intelligence Inc., for example, had a total market value of $508 million in December 2007, but it's now priced at about $110 million.

Interactive Intelligence CEO Don Brown noted that his company's stock has historically seen a lot of volatility, swinging from $4 per share in 2001 to $30 in 2007, and back down to about $6 lately. But during that time, Interactive Intelligence's revenue grew from less than $50 to $120 million while the bottom line swung into the black. Since Brown and a few insiders hold the majority of Interactive Intelligence stock and the company has no debt, he said there's little fear of even a hostile takeover.

"Quite frankly, we don't really care what the stock price is at any given moment in time," Brown wrote in response to IBJ's questions. "Our focus is on continuing to grow our business with great products. We believe if we do that, the stock price will take care of itself."

"Our aim is to grow our revenues and remain profitable -- recession or no recession," Brown added. "The only impact the recession has is on our rate of growth. Companies find that our products provide a strong return on investment, so we continue to sell well even in this crappy economy."

Interactive Intelligence isn't the only local company at least partially insulated from a takeover attempt through heavy executive control of its stock.

Emmis Communications Corp., which owns radio stations and publishes city magazines including Indianapolis Monthly, has managed for a couple of years to rebuff calls from a shareholder angry with its low stock price to divest assets.

Frank Martin, senior manager of Martin Capital Management in Elkhart, last summer sent a scorching letter to Emmis lead director Susan Bayh, the wife of U.S. Sen. Evan Bayh, urging her to spearhead an attempt to pull up the price of Emmis stock. The shares had sagged to about $3 from more than $23 three years earlier; they now trade for only about 35 cents.

Last fall, Luther King Capital Management Corp., a Fort Worth, Texas, money manager, doubled its stake in Emmis to about 6.2 percent of all its stock and, without divulging details, said it wanted to start talks.

However, if Luther King were to launch an assault on Emmis, it would have a hard time getting past CEO Jeff Smulyan. That's because Smulyan holds a special class of stock that gives him control over the shares.

In a statement this month, Emmis said it and other radio companies are suffering from an advertising decline, and added, "Given [Smulyan's] controlling interest, we are no more or less likely for a takeover -- he determines that outcome."

Ironically, although low share prices can make public companies susceptible to takeover, they also can deter acquisition.

Some companies' stock prices are so beaten down that their assets—brand names, manufacturing plants, intellectual property—are worth more than the total value of the stock. As a result, directors would fend off low-ball acquisition offers.

"It takes two to tango," said Ice Miller's Thornburgh. "Remember, at the end of the day, a buyer can only buy if a seller wants to sell. I don't think boards and shareholders are going to be interested in selling. They're going to wait this one out. Many are going to conclude their companies are undervalued on a real basis, and this is not the time to sell."

Bottom line: Mergers and acquisitions this year are likely to be dominated by companies attempting to adapt to the new shape of the global economy; the recession will sort the weak from the strong; it's impossible to predict who will win or lose; and consolidation is inevitable once bank credit thaws and sales prospects grow again.

And that's as it should be, argued George Farra, co-founder of locally based investment research and management firm Woodley Farra Manion Portfolio Management Inc.

"The newfound thrift of the American consumer is really changing business plans from top to bottom. And once the adjustment is made, we'll be fine," Farra said. "We'll look different coming out of this recession. And that is the hallmark of the American economy. It's painful when it occurs, but when we emerge from the tunnel, it'll be with a different economy, and we'll be ready to take on the world again."

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