After several years of feverish deal making, local merger and acquisition activity is poised for a substantial drop-off in 2001 as a result of the slowing national economy.
The number of deals in Los Angeles County actually increased a bit during the first two months of 2001, compared to the like year-earlier period, but the average dollar amounts of the deals dropped precipitously. And in accord with a developing national trend, most analysts believe there will be fewer local transactions in the months ahead.
“It’s not surprising to see the aggregate value of deals going down as the market goes down,” said Mark Lanigan, co-head of investment banking at the Los Angeles office of Credit Suisse First Boston. “The deal activity hasn’t slowed down that much yet but it will, it’s only a matter of time.”
According to Thomson Financial Securities Data, there were 41 mergers and acquisitions in Los Angeles County during the first two months of 2001, compared to 36 in January and February 2000.
But the value of the deals being made is shrinking, said Adrian Easterbrook, an analyst with Mergerstat, a division of local investment firm Houlihan Lokey Howard & Zukin.
“The deals are still being made but not at the same level,” Easterbrook said. “With the drop in the tech market and the dot-com shakeout, companies are still getting acquired but instead of a $2 billion or $3 billion valuation, it’s more like $500 million.”
In a year of big mergers, the Los Angeles area experienced some of the biggest deals of 2000. Among the landscape-altering transactions were Northrop Grumman Corp.’s takeover of Litton Industries for $5.1 billion in cash and assumed debt (which is still pending U.S. and E.U. approval), Tribune Co.’s acquisition of Times Mirror Co. for $6.8 billion, and Gemstar International Group’s $14.3 billion purchase of TV Guide Inc. In addition, two of the biggest merger deals nationally left large footprints here: the $126 billion marriage of America Online and Time Warner, and Vivendi SA’s acquisition of Seagram Co. for $34.4 billion, including the Universal companies.
Among the local merger deals making headlines so far this year have been Metro-Goldwyn Mayer Inc.’s $825 million investment in four channels owned by Cablevision Systems Corp., Checkout.com’s sale to Amplified Holdings Inc. of Atlanta, and CB Richard Ellis Inc.’s sale to an investor group for $750 million.
The strong economy of the past few years fueled one of the most active merger-and-acquisition markets in history, but signs of a slowdown were already emerging in 2000. That trend is expected to advance as a variety of economic factors make transactions more difficult, analysts say.
The single biggest factor slowing the pace of mergers and acquisitions is the decline in the value of the major U.S. securities markets over the past 12 months. Combined with more conservative lending by financiers and weaker earnings by many corporations, dropping stock prices have put a chill on potential partnerships because executives are reluctant to pull the trigger when they feel the trading price is undervalued.
“We’re not seeing a lot of the massive Time Warner/AOL mergers,” said Paul Tosetti, the Los Angeles-based co-head of mergers and acquisitions at Latham & Watkins. “It’s real hard if you’re on the selling side, when you’re stock was $80 a share 12 months ago and now it’s $5.”
More succinctly, “People just aren’t as anxious to make deals when the markets are down,” Lanigan said. “They’re more interested in righting their internal operations and getting their own house in order.”
On the national level, merger-and-acquisition transactions totaling about $300 billion were completed in the first two months of 2000, compared to $100 billion so far this year, said Richard Peterson, chief market strategist with Thomson Financial.
Los Angeles-area merger-and-acquisition activity had a value of $83 billion in 1999 and $97 billion in 2000, Peterson said, while the national totals were $1.7 trillion and $1.8 trillion, respectively. Local numbers are unlikely to surpass $75 billion this year, he said.
“It’s reflective of a nationwide trend. We’ve had several strong years of activity, but I think it’s really going to abate because of the prevalent market conditions,” Peterson said.
While the dropoff in mergers and acquisitions reflects a growing sense of caution among corporations and private companies alike, the Los Angeles area is expected to fare better than elsewhere in the nation.
“Will there be less activity in 2000? Certainly. But it’s still a very strong economy locally,” Lanigan said. “A lot of the industries that are focused here, aerospace and entertainment for example, are doing well.”
Another reason for relative optimism locally is that, while Los Angeles is home to few of the nation’s largest corporations, the region is rich in middle-market companies.
“The middle market, which is the real core of the Los Angeles and Southern California marketplace, has actually been solid,” said Tosetti, whose firm has merger-and-acquisition practices in 14 cities internationally.
He said Latham & Watkin’s local merger-and-acquisitions practice has remained busy, although the nature of the work has changed over the past 18 months. Instead of primarily working on deals to create new corporate alliances and synergies, the focus has shifted to putting troubled companies on more solid footing.
Although he’s optimistic that the region can weather the national economic downturn in relatively good shape, Tosetti acknowledged that the climate for dealmaking has definitely changed in Los Angeles.
“There’s not what we saw a year ago, with the exaggerated value equities, where you were combining two high-tech companies in a swap-for-swap merger, where two plus two was thought to equal 12,” Tosetti said. “It’s a much tougher market to get deals done.”
