U.S. companies that were purchased in the first quarter of 1998 fetched prices at an average of 26 times their annual earnings, according to a report by Mergerstat, an arm of Century City based financial house Houlihan Lokey Howard & Zukin.
These may be the richest prices in modern history paid for assets, said Russell Belinsky, managing director of Chanin Kirkland Messina LLC, a merger and merchant banking shop in West Los Angeles. "Prices might have reached this level in the hottest part of the 1960s, but not for a sustained period," said Belinsky.
Making mergers and acquisitions trickier these days is the fact that one of the standard post-takeover strategies of the past may not work anymore, said Belinsky.
During the great leveraged-buyout era of the 1980s, one standard tactic was to simply send a letter to all vendors declaring a 10 percent price reduction. If any balked, the acquirer would get new vendors. In addition, you would lay off excess workers.
But that doesn't always work when unemployment is very low, and vendors have enough business. "It's a lot tougher exerting pricing power with vendors today. It helps to be a Wal-Mart to do that," said Belinsky. "And sometimes, the problem is keeping employees, not firing them."
Belinsky knows of what he speaks: In the last 18 months, his firm has acquired Steinway & Co., the Queens, N.Y.-based piano maker, and Utilimaster Corp., an Indiana-based subsidiary of Harley Davidson Inc. that makes truck bodies for Ryder, Federal Express and Frito-Lay.
For others seeking buyouts, Belinsky said the consolidation game is still a good strategy. "If you can reduce duplicative overhead, than you can still achieve savings (after a buyout). But, definitely, each buyout today, at these prices, has to be viewed carefully on a case-by-case basis," he said.
Chanin Kirkland Messina is on a roll, now having more than 30 professionals in Los Angeles, up from a handful five years ago. "We are hiring," said Belinsky, a phrase that has become something of a mantra with investment bankers these days. "But so is everybody else. That's the toughest part of the business: getting people."
Mr. Financial Stats
Bryan Taylor, for 10 years a professor at Cal State Los Angeles, about five years ago posted a Web site full of historical financial data. One can peruse inflation rates back to 1264, U.S. government bond yields to 1800, or U.S. stock price-earnings ratios to 1871. He's got dozens of series posted, and many more for sale.
That's right Taylor is now running an international business, done by e-mail, under the name Global Financial Data Inc. in Alhambra. That's "globalfindata.com," for Webbies.
Taylor sells to a broad base of clients, both domestic and international, and including academics, investors, institutional investors, banks and lawyers. "It's a little bit of everything," he said.
He charges $25 for a single data file, and $6,000 for his entire set of 5,000 files. He says he is grossing about $10,000 a month and has very low overhead. "This computer and e-mail are my overhead," he said.
A former Dean Witter stockbroker and financial historian, Taylor notes that the S & P; 500 price-earnings ratio, at about 27, is at "an all-time high."
Cause for alarm? Time to get out, while the getting is good? "The market can't keep advancing like it has," said Taylor.
Additionally, he said P-E ratios could drift back to 20, and still be rich from a historical standpoint. "That would cause a 30 percent correction in the market," he said.
Taylor stops short of predicting a bear market, but does say, "this market is going to have to catch up with itself." That means a flattish market, even while earnings continue to grow, said Taylor. Otherwise, a correction is probable.
It was January 1996 when Robert Nichols started up Windward Capital, a money-management firm in West Angeles, and he already has $250 million under management.
At 60, and armed with a Ph.D. from Claremont, Nichols is one of the deans of the local money-management community.
Nichols had a rare opportunity in 1992 he left a management firm he founded, RNC Capital Management, and signed a non-compete agreement. That left him with time on his hands, but an intellectual bent and years of experience (he started running money in 1971).
Pouring over gobs of historical data, Nichols determined that stocks that pay higher dividends than the average of S & P; 500 stocks are good risks. Right now, the average stock in the S & P; 500 index pays about 1.5 percent annually in dividends, but Nichols likes to collect only stocks that pay at least 1.8 percent.
Nichols contends such high-dividend stocks appreciate almost as much as the bellwether S & P; 500 index in good times, but drop less about 40 percent less in downturns.
Of course, there is more to investing than just checking dividends, and a company has to stack up in other ways, "but at any time there is a pool of about 700 stocks we can invest in," said Nichols. "We pick about 35."
Since he started in the money business, Nichols has noted one big change computers and online information.
In days of yore, it was a labor-intensive task to learn about stocks and the stock market. Today, an enormous amount of information is instantly available online.
"We used to have 10 analysts sitting around a marble table with original Liechtensteins on the wall," said Nichols. "Now, you don't need any analysts. You can read "consensus" ratings of analysts off the computer in real time. It used to take two weeks to decide to sell a stock. It was often political. Now I sell a stock in a second, if I have to."
Handler on board
The West Los Angeles-based brokerage house Jefferies Group Inc. last week named 36-year-old Richard Handler to its board.
The New York-based Handler also recently drew notice for his huge salary in 1997: $17.6 million, including a $17.1 million cash bonus, based upon his excellent work in building the company's high-yield bond department.
Handler is a nine-year veteran of Jefferies.
Contributing reporter Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His e-mail address is email@example.com.
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