With the stock market again in the bull mode, the mergers-and-acquisitions market, which had been cooling its heels a bit in late summer, has snapped back to life, reports John Mavredakis, managing director of investment banking for Houlihan Lokey Howard & Zukin, the Century City finance shop.
"The M & A; market has come back with a vengeance," said Mavredakis. "It was a bit in turmoil (during the recent bear market/correction), but since then it has really rallied. Valuations for solid middle-market companies are back to their historic highs."
But for companies with shaky financials, the story is still a bit weaker than during the all-out merger mania seen earlier this year, said Mavredakis.
Additionally, many buyers and lenders on mergers are factoring in a recession in 1999 or 2000, said Mavredakis. "Most people are modeling 'what if?' scenarios, and then building capital structures in an anticipation of a slowdown," he said.
In plain English, that means lenders and borrowers are trying to make sure they don't get over-leveraged or over-extended. Nobody wants to borrow or lend too much money with the attendant interest payments that have to be made just when business slows down a bit. For companies with a flaw or two, financing can again be arranged, "but lenders lend less and charge more" than before summer, said Mavredakis.
Houlihan Lokey has certainly been busy, recently arranging the sale of Rancho Dominquez-based DEP Corp., the shampoo and personal products maker, to the German conglomerate Henkel KgaA. The $94 million sale included $40 million in cash to shareholders, and the assumption of $54 million in debt. Though DEP has been struggling financially, it has a franchise in the United States, and therefore is viewed as a good platform for Henkel, which wants to penetrate the U.S. market, said Mavredakis.
The public companies of Los Angeles County raised 15 percent less money in public capital markets in the third quarter, compared to the year-earlier period, according to Bowne of Los Angeles Inc., the financial-services printing company. In the third quarter, local public companies raised $2.89 billion in bond and stock offerings, compared with $3.40 billion in the year-earlier period.
In the second quarter of 1998, local companies raised $5.16 billion in the public capital markets, an all-time record.
In this year's third quarter, public companies issued $2.52 billion in bonds, $224 million in initial public offerings of stock, $125 million in preferred stock, and only $26 million in secondary stock offerings.
It is in the secondary stock offering market that the big plunge has occurred: In the second quarter, local companies issued $2.1 billion in public secondary stock, as corporate executives rushed to the public equities market to take advantage of cheap capital. In the third quarter that window shut, as the Asian troubles spooked lenders and investors worldwide.
Robert Nichols, one of the deans of the local money-management community, is rosy cheeked these days. Chairman of Westwood-based Windward Capital Management Co., Nichols has long been a fan of stocks so blue chip you might call them ultramarine. He likes the big boys, as in Enron Corp. (natural gas), Bergen-Brunswig Inc. (drug distribution) and Pfizer Inc. (drug manufacturing).
The bull market has really gone in Nichols' direction, and the recent rally again has Nichols' sails full.
"I was the only guy (during the recent correction) who said the market would end the year up, and I was right," said Nichols last week (a slight exaggeration). "This year I am going to get double-digit returns for my clients, again."
As of last week, the numbers suggest that 1998 has been a blue-chip kind of market, or what might be called a "Nichols market."
As of last week, the S & P; 500 was up 16.5 percent year-to-date, while the ultra-blue-chip S & P; 100 index is up 20.37 percent. In contrast, the Russell 2000, an index of mid-cap and small-cap stocks, is down 8.8 percent.
Nichols also likes to acquire blue-chip stocks that pay a good dividend.
"Right now, you have certain blue-chip stocks, such as Mobil Corp., paying 3 percent dividends, which is 65 percent to 70 percent of the yield on a five-year Treasury note," said Nichols. "Why buy a Treasury when you can get almost the same yield on a blue-chip stock, and get a good chance at upside appreciation?"
Hedge your criticism
Don't throw the baby out with the bathwater, says Michael Halpern, president of Century City-based Dorchester Advisers, which manages a $100 million hedge fund.
The recent debacle involving Long-Term Capital has made investors and others overly suspicious of hedge funds, says Halpern.
Of course, hedging going long on some aspects on the investment spectrum, while shorting others can also be a very conservative strategy, one designed to reduce risk, said Halpern, who used to run money for titan financier David Murdock, and before that Goldman Sachs & Co.
Dorchester's hedging strategies have resulted in stable, if not flashy performances. "We have a beta of almost zero," he says.
In non-financialese, that means the value of Dorchester's portfolio fluctuates far less than the S & P; 500, which has a beta of one. (Stocks or portfolios with betas of more than one fluctuate more than the S & P; 500, and vice versa.)
In 1998, Halpern has shorted some big caps he thought were overvalued, given some of the pricey P/E multiples seen out there. Last week, however, he said, "I think the market is going to be rallying for a while."
Halpern admits that during the bull market it has been hard to beat the S & P; 500. "But we have been earning 15 percent, and delivering that yield with very little risk to our investors," he said.
Contributing Reporter Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at email@example.com.
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