Financial crisis, recession hammer deal flow

January 26, 2009
Companies searching for a merger or acquisition partner had one heck of a time finding a match last year.

Place much of the blame on the credit crunch that rattled the nation's economy and sent deal-making into a downward spiral.

Only 47 major deals were consummated in the Indianapolis area last year, according to IBJ's annual list of Big Deals. That's down nearly 30 percent from 2007.

Worse, the $9.9 billion in volume was less than half the $23.4 billion in 2007 and a small shadow of the $38.5 billion in 2006.

Nationally, the number of deals fell nearly 23 percent and the dollar volume declined 38.3 percent from 2007, according to New York-based research firm Thomson Reuters.

Global merger-and-acquisition volume dropped by nearly a third, ending five years of growth. The financial bailout plan approved by the federal government has done little to help credit-seekers, said David Millard, chairman of Barnes & Thornburg LLP's business department.

"The credit market drives deals, but there is no lubricant in that engine," he said. "It's seized up."

Each year, IBJ tracks business deals of $5 million or more involving companies based in the metropolitan area. Only deals for which financial terms are available are included in the Big Deals list of mergers and acquisitions.

Eli Lilly and Co.'s $6 billion purchase in October of ImClone Systems Inc., a New York-based developer of cancer drugs, accounted for almost two-thirds of the local dollar volume. It was Lilly's largest deal ever.

The only other sale topping the billion-dollar mark was St. Paul, Minn.-based 3M Co.'s $1.2 billion acquisition of Aearo Technologies Inc., an Indianapolis company that makes goggles, earplugs and other personal safety equipment.

Milwaukee bank Marshall & Illsley Corp.'s $529 million purchase of First Indiana Corp. rounded out the top three.

Besides boasting the largest deal, Lilly was the most aggressive. It made six acquisitions, including the Posilac bovine growth hormone from St. Louis-based Monsanto Co. for $300 million. The pharmaceutical giant also sold rights to market the Cialis impotence pill for treating high blood pressure to Maryland-based United Therapeutics Corp. for $150 million.

Real estate transactions made up nearly half the deals on the list. Locally based real estate investment trusts Duke Realty Corp. and Kite Realty Group were almost as active as Lilly.

Duke, along with co-venture partner CB Richard Ellis Realty Trust, bought three warehouses and one office building in multiple states for $139.1 million. Duke bought two distribution centers and industrial property in two separate deals in Savannah, Ga., totaling nearly $35 million.

The company also unloaded 16 acres of business park land in Alexandria, Va., to the U.S. Army for $105 million. Duke also made numerous other real estate deals for which financial information was unavailable.

Kite purchased 123 acres of commercial land in Holly Springs, N.C., for $21.6 million, and another 18 acres there for $5 million. Locally, it acquired Rivers Edge Shopping Center near Clearwater Crossing for $18.3 million.

Kite sold its Spring Mill Medical office complex in Carmel for $28.2 million and its Silver Glen Crossing shopping center in South Elgin, Ill., for $20.4 million.

Pedcor Investments, a Carmel-based builder of affordable housing, and educational supplies maker Herff Jones Inc. also recorded multiple transactions last year.

We'll sit this one out

Despite Lilly's robust activity, many companies took a wait-and-see approach to deal-making until the prognosis for the economy improved.

Deals with a combined volume of nearly $800 billion were withdrawn in 2008 as the credit crunch, economic woes and volatile stock market took their toll, according to Thomson Reuters.

Steve Humke, co-chair of Ice Miller LLP's private equity and venture services group, cited several reasons for the trepidation. Foremost was tightening credit markets.

Financing for multibillion-dollar deals began to dry up in the second half of 2007 as fallout from the subprime mortgage mess began to spread. But the depth of the crisis has made it hard to fi nance even smaller, more routine deals in Indiana.

Private equity sources also felt the fallout as they tried to shore up performance of their portfolios.

Global private equity activity fell to a five-year low of $188.7 billion in 2008, Thomson Reuters reported. That's a 72-percent decline from 2007 and underscores just how troubled the private equity market may be.

Mezzanine lenders, which straddle the gap in risk between traditional banks and venture capitalists and angel investors, are picking up some of the slack.

"Banks aren't lending at all, so the mezzanine lenders are having a heyday, because now they can pick up deals with even less risk," Millard said.

Buyers also may have gotten cold feet after discovering some companies' demanding high prices that would have been in line before financial markets began sliding in mid-2007.

Mixed outlook

The first half of 2009 is shaping up to be just as grim, according to a December survey by the Palatine, Ill.-based Association for Corporate Growth and Thomson Reuters.

Forty-four percent of the dealmakers surveyed expected the climate to be worse in six months, 31 percent thought it would be the same and 24 percent believed it would be better.

Brian Baker, vice president of corporate finance at locally based City Securities Inc., is confident this year will be better than 2008, particularly since the firm already has closed one transaction.

Said Barker: "It's certainly a year that we're happy to have in our rearview mirror."
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