Big Deals.

Position::Brief Article

Indiana's largest mergers and acquisitions last year -- more sellers than buyers

The M&A game dealt Indiana some big-name losses in 2000, including Arvin, IPALCO and Bindley Western. The state's bedrock insurance industry also was shaken by mergers with out-of-state companies. But there were Indiana purchasers as well, led by NiSource's acquisition of Virginia-based Columbia Energy Group and a buying spree at Emmis Communications.

"I don't believe that the companies here in Indiana are of a size in their given industries which over time will necessarily make them the survivors," warns Richard Nisbeth, chief executive officer at Olive Corporate Finance in Indianapolis.

Mark Patton, president of Patton Investment Management in Indianapolis, is equally concerned by recent acquisition activity in the state. "It is very clear that the transactions that are taking place are on the sell side instead of the buy side," he observes. "We have lost a large number of corporations in 2000. They have been acquired by companies outside of Indiana, so we are losing headquarters. To me this is the most significant trend, and it is negative."

Nisbeth thinks deregulation in the utility sector will mirror deregulation in the banking industry several years ago. "There will be significantly more consolidation," says Nisbeth. "We're seeing it nationwide as well."

Take the example of IPALCO Enterprises, holding company of Indianapolis Power & Light, which is being acquired by AES Corp. of Arlington, Virginia, for a reported value of $3.2 billion. "AES has been very aggressive in acquisitions throughout the country. It seems to be one of those companies that has really jumped on the deregulation bandwagon, says Nisbeth. "I think whenever we see our local companies merged out of existence, we're always disappointed."

Nonetheless, Nisbeth was not totally surprised by IPALCO Enterprises' action. "This was a company that was struggling somewhat to find a strategic direction," he says. Conversely, Indiana-based NiSource Inc. gobbled up Columbia Energy Group of Virginia in a $6 billion transaction. "Like in banking, the energy sector has this mentality that big is beautiful," Nisbeth notes.

Gary Neale--NiSource's chairman, president and CEO--heralded the merger, which was completed in November, saying NiSource had taken a major step toward its vision of building "a super-regional platform for growth in value for our shareholders, customers and employees. We are geographically and strategically positioned to profit from the 60 percent growth rate projected for U.S. natural gas consumption using new technologies."

The deal gives NiSource distribution assets in nine states and pipeline operations in 16, making the Merrillville-based utility the largest U.S. natural gas distributor east of the Rockies.

Acquisition and merger activity is also picking up in the state's insurance industry, as reflected by Indianapolis Life Insurance being acquired by American Mutual Holding Company of Iowa, and Meridian Mutual Insurance Co. of Indianapolis by State Automobile Mutual Insurance Co. of Ohio. "A lot of insurance companies that used to have mutual ownership (ownership by policy-holders) are turning around and going public. The primary reason is that by issuing stock these companies can then he sold more easily," says Nisbeth, "We saw this with the savings-and-Loan industry a few years ago."

Patton laments the loss of Bindley Western Industries in Indianapolis, a pharmaceutical distribution firm "which has been a mainstay in Indianapolis and has been around for 30 years." This past fall, the company was acquired by Cardinal Health Inc. of Dublin, Ohio. "We are going to lose the Indianapolis headquarters, where there are 350 people," Patton says. "It's nice to have the decision-makers here. It's nice for the economy to feel the positive impact of having a corporate headquarters here and the benefits that go along with that."

But Patton understands that using high stock prices as currency for acquisitions makes economic sense. "Although stock prices came down dramatically in a lot of areas in the year 2000, the health-care sector was one of the best performing," he says.

Two other Hoosier companies whose names are disappearing due to out-of-state acquisitions are Arvin Industries and Lilly Industries. "There is no question that the upper-level management is leaving our state," Patton says. "When we have a major acquisition of a locally based company, they might leave operating facilities here in the state because it logistically makes sense, but they are not going to leave the corporate headquarters, which is where all the management is based."

Patton partially attributes acquisition activity to a conservative Hoosier mentality. "There is typically more risk, obviously, from the buyer's side. As a result, you're seeing more selling than buying of companies here in Indiana," he says.

But in the short term, he adds, "you're going to see fewer mergers and acquisitions as a result of lower stock prices. In fact, we've already seen it."

What can be done to curb future losses? "I think Indiana needs to continue the initiative of bringing entrepreneurs into the state and keep the talent in the state," Patton says. "We need to...

To continue reading