Number of Big Deals Grows in 2010

 The climate in Arkansas for mergers and acquisitions improved last year, and the forecast is for continued recovery.

The number of big deals - those known or thought to be valued at $9 million or more - announced in the state during 2010 rose to 64 compared with 58 in 2009. And that big-deal figure of 64 doesn't include the apparently unprecedented number - 13 - of bank acquisitions involving Arkansas companies last year.

(Click here for a list of the biggest deals of 2010.)

The bank acquisitions are listed separately because though they all involved assets far in excess of $9 million, calculating their individual values is much more difficult. All the banks acquired had failed, so the FDIC, as receiver, essentially paid the acquiring financial institutions undisclosed sums to take over the distressed financial institutions.

(For the list of the biggest bank deals, click here.)

The biggest acquisition announced last year was the purchase of Baldor Electric Co. of Fort Smith by the Swiss conglomerate ABB Ltd. for $4.2 billion. (See story, Page 1.) That far outweighed the largest sale of 2009: the purchase by Little Rock's Windstream Corp. of Iowa Telecommunications Inc. for $1.1 billion. In 2009, Windstream occupied four spots in the list of top 10 high-dollar purchases.

Windstream, though not as active in 2010, stayed in acquisition mode, paying $782 million for Q-Comm Corp. of Overland Park, Kan., and $310 for Hosted Solutions LLC of Raleigh, N.C.

Wal-Mart Stores Inc. was also busy last year, working to compensate for slowing growth in the United States by buying huge international concerns, primarily grocery retailers. The shareholders of South Africa's Massmart agreed last week to Wal-Mart's $2.2 billion offer, announced in September, to purchase 51 percent of the company. The Bentonville retailer is now poised to enter the African market.

Wal-Mart, however, still sees room for grocery growth in the U.S., according to a research report released last week by J.P. Morgan analysts.

The company "continues to see plenty of opportunity to grow in the U.S. especially in dense urban markets," the report said. The report noted Wal-Mart's recent announcement of a new small-store format but predicted that the most significant small-store rollout wouldn't occur until 2013-14.

'A Fantastic Improvement'
"There was certainly a resurgence in M&A activity," said Marshal McKissack, managing director and head of mergers and acquisitions at Stephens Inc. of Little Rock. "We looked at the total U.S. markets, where we focus, and overall deal activity was up 21 percent on an announced basis.

"And if you break it down into middle-market M&A, where we spend a lot of our time at Stephens, it was up almost 50 percent, so definitely a fantastic improvement relative to 2009."

Several factors account for the rebound, McKissack said.

The financing market "was vastly improved over 2008 and 2009, so lenders were back in the game."

In addition, inactivity in 2008 and 2009 created pent-up deal demand that found an outlet in 2010. Buyers sitting on piles of cash felt the need to put that money to work to create growth.

"And the underlying fundamentals of the marketplace - generally and then specifically to business - there was some stability so buyers and sellers could come together," he said.

Banks Go Deal Hunting
Last year, Home BancShares Inc. of Conway, parent company of Centennial Bank of Conway, announced the acquisition of six distressed banks, all in Florida, one of the states hardest hit by the housing bust. That made it the top buyer of failed banks in the U.S. last year.

(On Thursday, Home BancShares Inc. reported a fourth-quarter loss of $13.8 million, dragging its profit for 2010 down to $17.6 million. The loss is the result of a loss of $26.5 million on extraordinary items, including big write-offs for problem loans in Florida and two specific business relationships in Arkansas: Gene Cauley and Kevin Lewis. But the loss would have been much greater without $25.2 million in pre-tax gains from two FDIC-assisted acquisitions in the fourth quarter.)

Bank of the Ozarks of Little Rock bought four banks in FDIC-assisted deals in 2010, and it's already been busy in 2011. On Jan. 14, it announced that it had expanded its purchases with an FDIC-assisted deal for Oglethorpe Bank of Brunswick, Ga.

Asked how many more of such purchases might occur, Randy Dennis, president of DD&F Consulting Group of Little Rock, said, laughing, "That's like asking how long a piece of string is." DD&F provides bank consulting services to the financial services industry.

"I think you're going to find Centennial, Bank of the Ozarks, Simmons and Arvest are all still looking at deals like this," Dennis said. "There's a lot of potential bank failures in Florida, in which Centennial has an interest. There are a lot of potential bank failures in Georgia, South Carolina and North Carolina, where Bank of the Ozarks has an interest. And there's probably going to still be failures in Missouri and Kansas, where Simmons and Arvest have an interest. So to the extent that there are failures out there, then I think all of our buyers are going to continue to look."

Dennis called the buying binge "a once-in-a-lifetime opportunity for banks to acquire the institutions and actually have the FDIC pay them to do it."

The banks "are assuming deposits and purchasing assets, and the FDIC, in almost all except the Southern deal, is providing loss-share on the assets," he said, referring to the acquisition of First Southern Bank of Batesville by a Missouri institution, Southern Bank of Poplar Bluff. Under loss sharing, the FDIC covers part of the loss on a pool of assets. "It's a great deal," Dennis said.

"I'm proud of our Arkansas banks because I think our bankers have been more attuned to this [acquisition opportunity] than any other state."

Windstream's Future
Jeff Gardner, president and CEO of Windstream, signaled in an interview with Arkansas Business last week that the telecommunications company might be focusing more in the future on expanding and integrating its existing businesses.

"We're always in the market, obviously," Gardner said of potential purchases. But the acquisition of Hosted Solutions has given Windstream an opportunity to grow its existing assets, he said. Hosted is "a big player in cloud computing and managed services, so we've got plenty to do next year in terms of integrating that and improving the existing Windstream data centers."

Windstream's acquisition of Q-Comm included its wholly owned subsidiaries Kentucky Data Link Inc., a fiber services provider in 22 states, and Norlight Inc., a local exchange services company primarily serving the Midwest. Both KDL and Norlight are based in Evansville, Ind.

"Fiber is a huge part of our business, and KDL was an extremely unique asset in that there's a footprint there that really overlaps nicely with Windstream's footprint," Gardner said. "Whether we'll buy another fiber company is hard to say for sure, but we're definitely committed to investing in KDL. ... There's a lot of opportunity there to grow that business organically, and I'm not certain whether we'll see other nice opportunities. I think KDL represented a really unique asset for us."

The Global Picture
On Jan. 10, Thomson Reuters released its global review of mergers and acquisitions activity for 2010.

The value of M&A activity worldwide totaled $2.4 trillion last year, a 22.9 percent increase over 2009 and the strongest full-year performance since 2008. Emerging markets accounted for 33 percent - $806.3 billion - of the activity, a 76.2 percent jump compared with 2009, Thomson Reuters said.

"2010 marked the return of measured confidence for the investment banking industry," said Neil Masterson, global head of investment banking at Thomson Reuters. "While we are clearly still in a post-credit crunch environment, M&A and private equity firms are returning to robust deal activity and investment banking fees are on the rise."

Masterson said that "with corporations holding record amounts of cash, attractive financing opportunities, and a growing IPO pipeline, many of the factors are in place for continued momentum in 2011."

McKissack, of Stephens Inc., said, "We see continued improvement in 2011 versus 2010. A lot of the things that were driving the market in 2010 are still there in 2011.

"The strategic acquirers and financial sponsors have a lot of capital to put to work. There are record amounts of cash stored up that need to be deployed at rates of return. The financing markets are likely to remain active in 2011. That's a fantastic backdrop for M&A."