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Third quarter produces strategic acquisitions but no mega-deals

The deals continued to flow in the third quarter as the number of Maryland companies involved in mergers and acquisitions activity stayed strong, continuing a rebound that has carried on all year.

The quarter lacked a marquee deal like the second quarter’s $1.7 billion acquisition of Constellation Energy Group by Exelon Corp. The largest reported deal of the third quarter was the sale of Baltimore-based JMI Equity’s Seismic Micro Technology Inc. to IHS Inc. in a $500 million all-cash deal.

According to data compiled by Bloomberg Financial exclusively for The Daily Record, 72 deals took place during the third quarter of 2011, compared to 75 in the second quarter of 2011. By comparison, there were 77 deals in the third quarter of 2010 and 50 in the third quarter of 2009.

The mergers and acquisitions include pending and completed deals in which Maryland companies were the buyers, sellers or targets. The deal count included those that had reported transaction amounts and also tabulated property transactions by real estate investment trusts.

Some of the bigger deals of the quarter include the pending sale of Baltimore-based online learning provider Connections Education LLC to U.K.-based Pearson PLC in a $400 million all-cash deal. Hunt Valley-based television station owner Sinclair Broadcast Group Inc. added to its stable of stations during the quarter, picking up seven from Cerberus Capital Management LP for $200 million.

Health care companies were an attractive target during the quarter. In the biggest reported deal, TheraCom LLC, the Rockville-based online pharmaceutical arm of CVS Caremark Corp., said in September it is being sold to AmerisourceBergen Corp. in a pending $250 million deal.

In another transaction, Baltimore-based Remedi Senior Care was sold to Centerbridge Capital Partners in a $300 million, pending, all-cash deal.

While there was not a multibillion-dollar deal in the quarter, experts said it was a busy quarter in what has been a busy year for mergers and acquisitions.

Paul Kaplun, Partner, Venable LLP

“There’s just been a lot of activity going on this year, it’s been pretty amazing,” said Paul Kaplun, a partner in the corporate, securities and business transactions practice of Venable LLP.

Kaplun was a participant in a discussion sponsored by Venable in Bethesda on Wednesday that brought together investment bankers, tax specialists and business owners interested in the state of the mergers and acquisitions market. The emphasis of the discussion was on the middle market — companies with revenue ranging from $5 million to $1 billion. These have been involved in the majority of deals so far this year.

Niches and focus

Experts at the event said buyers are focused on looking for specific types of firms that will let them quickly expand into new areas of business, because that can be easier than starting from scratch.

“Companies are trying to transform themselves to compete in the new economy,” said Larry Davis, founder of Aronson Capital Partners of Rockville. “They’re doing this through M&A — buying companies that get them into new areas and selling ones that don’t fit for them anymore.”

Davis, whose firm advises government services and technology firms on mergers and acquisitions transactions, said some of the hottest targets are firms dealing with cloud computing, companies in the health care field, and those that work with the federal government — especially in defense or homeland security. The competition for companies in these areas has skewed company valuations, he said.

“What you’re seeing is 80 percent of the buyers looking at 20 percent of the companies on the market,” Davis explained. “If you’re in the right space, valuations are going to be heightened, but if you’re not, it’s difficult to find buyers.”

Annemarie T. Schovee, a managing director with M&T Bank’s Corporate Finance Group, agreed that some of the most attractive targets are companies working in attractive niche fields.

“I think that people have gotten a little more focused on what’s strategic for them,” Schovee said. “Buyers are looking for more specific criteria when they’re looking rather than just taking a broad look. There’s more selectivity.”

One Maryland company fitting that description is Elkridge-based CyberCore Technologies, which was acquired by Moelis Capital Partners, the private equity business affiliated with Moelis & Company, in July for an undisclosed sum. CyberCore provides information technology services to federal government agencies with a focus on intelligence and security.

“It’s an area that we as an investor have been focused on for a number of years,” said Stephan Oppenheimer, a partner at Moelis Capital Partners. “They were in a great space, it’s what we were looking for strategically and it was a great fit.”

Another example of a great fit is the sale of Baltimore email marketing firm Blue Sky Factory Inc. to New York-based private equity buyout firm The Riverside Company for an undisclosed amount. In another deal, Zymetis Inc., a company in the Technology Advancement Program incubator at the University of Maryland, which specializes in renewable chemicals and advanced fuels, was acquired by AE Biofuels Inc., a Cupertino, Calif.-based firm.

Also, WeddingWire Inc., of Bethesda, a network of wedding and special event websites, snapped up ProjectWedding.com, a California-based wedding planning website.

Financing the deals

The experts said that as in previous quarters, one of the biggest drivers in the uptick in deals has been the availability of cash, either through traditional bank lending or the involvement of private equity.

While banks, beset with capital and other economic concerns, have been largely absent from mergers and acquisitions the last few years, they are returning in noticeable numbers.

“In some cases we’ve seen lenders come as aggressively to deals as they did in 2007,” said Stephen W. Guy, managing director at KPMG Corporate Finance. “It’s shocking how fast the lenders have come back.”

While lenders are competing more for business, Guy said that private equity firms are also keeping very active. He said that at KPMG, about 70 percent of the sales they were involved in went to private equity firms.

Private equity has been very active in deals since banks started shying away. According to Bloomberg, private equity was involved in 13 of the deals in Maryland, down from 18 in the second quarter of 2011 but still well above 2008 and 2009 levels.

With the number of deals on the increase for the third quarter, experts expressed optimism that the trend will continue. Investment bankers at the Venable event reported a full pipeline heading into 2012 and little indication that deal activity would be diminishing much anytime soon.

“We’re already starting to see a flood of deal flow move toward the end of the year into the next,” Guy said.

Davis also said that he expects to see the deal level maintained heading into next year.

“All of the conditions that persisted in 2010 and so far in 2011 still exist,” he said. “There’s nothing to indicate M&A activity will not continue at this level.”

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