Mergers, Acquisitions Back in Business in Big Way

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A flurry of mergers and acquisitions at the end of 2013 provided a clear sign that Los Angeles is back in business. And it looks like the momentum will power into this year.

The number of transactions involving companies in Los Angeles and Orange counties as well as the Conejo Valley of Ventura County declined, but the deals were much bigger. According to data provided by S&P Capital IQ, a New York financial analysis firm that compiles M&A information for the Business Journal, the number of deals announced in 2012 was 1,886 and fell to 1,709 last year. However, the total value of the deals in 2012 was $232 billion, rising to $252 billion last year.

In the last three months of 2013, 583 deals, valued at $84 billion, took place. Transactions announced in December alone had a total value of $39 billion.

In 2012, an abundance of buyers was chasing few targets, but motivated sellers emerged on the scene last year. Several factors have contributed to an environment that could be as favorable for M&A activity as it has been in a decade. Potential buyers are still actively seeking to deploy cash and can buttress it with an abundance of cheap debt. Also, a surging stock market is evidence of investor confidence in American businesses.

“I think 2014 is going to be an off-the-charts year for M&A activity,” said Bryant Riley, chairman of West L.A. investment bank B. Riley & Co.

In agreement is Benjamin Kuo, publisher of Socaltech.com, a website that tracks local M&A activity.

“Generally, private valuations rise when the public valuations rise – pretty much in lockstep,” Kuo said. “So, when you have a good year, that’s also reflective of the prices that private equity firms can get for their own companies in the market.”

Last year got off to a slow start because an increase in the capital gains tax that became effective Jan. 1 gave dealmakers tremendous incentive to close transactions before the end of 2012 that under normal circumstances would likely have bled into 2013. This was a major reason M&A activity was relatively quiet at the beginning of that year.

“There was a sense of urgency at the end of 2012 to get things done,” Riley said. “There was a huge rush.”

Signature deals

The biggest local deal of 2013 was the sale of Century City aircraft leasing company International Lease Finance Corp. by New York insurer American International Group Inc. to Dutch firm AerCap Holdings for $28 billion, a total that includes the assumption of $21 billion in debt. Thousand Oaks biotech giant Amgen Inc. bought Onyx Pharmaceuticals Inc. of South San Francisco for $10 billion in the second largest M&A transaction to occur in the L.A. area last year.

Ares Management of Century City made a significant investment in the high-end retail sector, teaming up with a Canadian pension fund to buy Dallas department store chain Neiman Marcus Group for $6 billion in a move illustrative of growing consumer confidence. In another major deal, Beverly Hills talent agency William Morris Endeavor Entertainment agreed to purchase IMG Worldwide Inc., a New York events and entertainment company, for $2.3 billion, giving WME a bigger presence in the sports world.

Chicago private equity firm Thoma Bravo made a lot of money quickly by buying and selling Westlake Village electronic payment processor Digital Insight Corp. It bought the company from Mountain View’s Intuit Inc. for slightly north of $1 billion in a deal announced in July and completed a sale for nearly $1.7 billion in December to Duluth, Ga., payment processing giant NCR Corp.

Banking recovery

Los Angeles County’s banking industry came alive with M&A transactions in 2013. The largest of these deals was West L.A.’s PacWest Bancorp’s acquisition of CapitalSource Inc. of Chevy Chase, Md., for $2.4 billion. PacWest also bought Westlake Village’s First California Financial Group Inc. for $233 million.

Other notable banking transactions include the acquisition of Saehan Bancorp by Wilshire Bancorp Inc., both in Los Angeles, for $106 million. Also, Hanmi Financial in Cerritos purchased Central Bancorp in Garland, Texas, for $50 million in December.

Riley attributes much of this surge in activity to the economic recovery, as the industry has learned from some of its mistakes and fostered a corporate culture with greater accountability.

“A lot of banks had to work through their balance sheets,” Riley said. “There was not a lot of clarity on their loans.”

Banking transactions immediately after the crisis often consisted of opportunistic buyers seeking to acquire undervalued assets from desperate sellers at a deep discount. In contrast, Riley views the recent deals as a sign that potential acquirers now see banks as strategic rather than distressed purchases.

Regaining control

In two notable L.A. deals of 2013, longtime chief executives moved to take back control of their companies.

Dole Food Co. Inc. founder and healthy living proponent David H. Murdock took the Westlake Village produce giant private in a transaction valued at $1.4 billion. Murdock bought all outstanding stock in the company so that he could make changes in the company without having to answer to shareholders.

Activision Blizzard Chief Executive Robert Kotick led an investment team that bought a controlling stake in the Santa Monica video game company from French media conglomerate Vivendi for $2.3 billion. Kotick, whose partners in the venture include Chinese Internet giant Tencent Holdings and L.A. private equity firm Leonard Green & Partners, has been in charge of Activision Blizzard since 1991, and initiated the buyout to free the company from its struggling parent and sharpen its focus on making games.


What’s next?

Kuo anticipatest a boost in M&A activity as companies that were venture funded until now are ready to take the next step.

“I think there’s a lot of companies ripe for exits,” said Kuo, who thinks such firms view a private equity purchase or a buyout “more favorably than going public.”

Ultimately, the biggest reason might simply be time healing wounds inflicted by the financial system nearly tumbling down.

“You have rising stock prices, cheap debt, cash – and you’re another year away from 2008,” said Riley. “That mentality is behind us.”

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