King Cash Rules Fading M & A; World

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The still-pending acquisition of Image Entertainment Corp. by an investor group lead by film producer David Bergstein typifies the kind of year it’s become for mergers and acquisitions.


Bergstein’s $132 million offer, backed by hedge fund money, was made early in the year, well before the effects of the subprime mortgage meltdown spread widely into credit markets.


Still, the deal has yet to close indicating some serious last-minute number crunching leaving shareholders wondering if they would have been better off taking a slightly smaller offer a few years ago from Lions Gate Entertainment Corp.

And it’s not as if Image’s stalled acquisition is the only one. Comparable complications could potentially bedevil at least five other pending public company deals, plus others yet to come.


“Pendulums swing,” said Scott Adelson, Los Angeles-based senior managing director for investment banker Houlihan Lokey. “Capital used to be extremely plentiful arguably even too cheap but now private equity is having a more difficult time than even six months ago getting a deal done.”

Suitors who once assumed that plentiful cheap debt would fund any deal even close to penciling out, now had better come bearing watertight financing, or even better, cash in hand.


Globally, 2007 was a record year, with M & A; up by about 20 percent to $4.4 trillion, according to preliminary Thomson Financial data. But much of that activity occurred early in the year, as the last six months saw a sharp fall of nearly 30 percent.

Local activity, at least as measured by announced deal values, was slower, totaling $87 billion through November, nearly 8 percent off last year’s pace. And if it were not for the huge $26 billion buyout of Hilton Hotel Corp. in July, the numbers would have been far worse.


Of course, L.A. remains at heart a middle-market economy, and the value of many midsize deals are never publicly announced. That makes it difficult to exactly measure local M & A; activity. Still, it appears that 2007 wasn’t as good as 2006 and 2008 will likely be worse, though some deals will get done.


“The M & A; market was going up and up each year with no pull-back, so even without the credit crunch I don’t think we would have surpassed last year,” said Jerry Mars, vice president at the Los Angeles office of Barrington Associates. “Even so, while multiples aren’t quite what they were, there’s still debt capital out there.”



High profile


The year was notable for some standout deals. Last year’s biggest transaction the $12 billion acquisition of Univision Communications Inc. was dwarfed when private equity giant Blackstone Group said in July that it would spend $26 billion to add Hilton to its hospitality holdings. And in defiance of the credit crunch, Blackstone’s heft enabled it to push through the deal before the end of October.

A handful of other transactions rose above the $2 billion mark. Those include Bain Capital Partners’ recently completed purchase of Guitar Center Inc., and the pending strategic acquisition of Gemstar-TV Guide International Inc. by Macrovision Corp.


The video game subsidiary of Vivendi also managed an $18 billion merger with Activision Inc. in December, but that was a strategic acquisition, not a private equity buyout. It’s likely private equity will take a smaller role in future acquisitions for a while.


While almost half of the dozen deals completed so far this year were for investment rather than strategic reasons, the six announced deals yet pending all involve a strategic buyer. Among those are Pomona aftermarket parts supplier Keystone Automotive Industries Inc. It was scooped up over the summer by Chicago auto parts recycler LKQ Corp. for $797 million.


Los Angeles-area companies haven’t always been the seller, either. Glendale-based restaurant chain IHOP Corp., headed to the Midwest to make a $2.1 billion offer for suburban Kansas City, Mo., competitor Applebee’s International Inc. That deal is expected to close by the end of the year.


Conversely, El Segundo-based Computer Sciences Corp. only had to head down the freeway to build up its health care information technology expertise by acquiring Long Beach-based First Consulting Group Inc. in a pending $365 million deal.


Mars said he wouldn’t be surprised to see some of the companies that went private this year re-enter the public markets down the road. He notes that his office first took L.A. nutritional supplement maker Herbalife Ltd. private to enable a reorganization after its founder’s death then public again a few years later to raise capital for a worldwide expansion.


“If you’re not the hot kid in school right now, maybe it’s time to go private for a while,” Mars said. “You can always go back.”

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