BENJAMIN MARK COLE

Contributing Reporter

The public mergers-and-acquisitions market involving publicly held companies, often financed by stock swaps has cooled for investment bankers in recent weeks, but there’s plenty of action left in deals consummated behind the scenes.

“On the public side, companies are rethinking deals,” said Fred Roberts, veteran investment banker and chairman of F.M. Roberts & Co. Inc. in West Los Angeles. “But many private companies still need financing. And if a company is capital-hungry, and they can’t go to the public market, they may have to merge (privately) to preserve growth.”

Also, Los Angeles, perhaps more than other large U.S. city, is a “middle-market town,” Roberts said, with an economy characterized by literally thousands of medium-sized firms held privately.

While Wall Street stocks may go up and down, and big public deals may get blown out of the water, middle-market deals tend to get done on their own merits.

Many times, middle-market mergers are completed because one company will gain new geographic territory, or realize economies of scale, or win valuable new technology.

One company may have a good distribution network but be tight on cash, while the next is cash-rich. Those business realities do not fade just because Wall Street is throwing a temper tantrum.

“If there are cost savings of a consolidation or merger, reduced overhead, or better geographic coverage, or one company has a strong sales presence while another company has great research and technology, then you have a case where two plus two equals five or six,” said Paul Nadel, president of East West Capital Associates in Westwood. “You don’t watch the ticker tape when there are compelling reasons to do deals.”

To be sure, if a general and protracted business decline follows on the heels of a major bear market, investment bankers concede that even private transactions will slow.

“I think the one thing that might be a concern is an overall recession, where people would be more cautious in trying to expand (by acquisition), and sellers might not sell and they wouldn’t be enjoying the prices of the last few years,” said James Freedman, chairman and managing partner at Brentwood-based Barrington Associates, one of the most active firms in the California middle-market M & A; business.

There’s no denying that deal flow was much slower in the early ’90s, when Southern California was in a protracted recession. But few investment bankers expect that scenario the worst recession of the postwar era to be repeated in the late ’90s.

At worst, a typical business slowdown is anticipated and such a slowdown will only cool the private deals market, not put it into deep freeze. Some even say there are more private merger deals floating around today, as access to the public stock and bond markets is closed off.

Private acquirers have another advantage: Without oversight by a board or, indirectly, by shareholders, they can quickly shape a deal that appeals to sellers, said Bill Doyle, founder of Kerlin Capital in downtown Los Angeles.

“This is a great time to do recapitalizations (or finance a merger) where the seller retains a significant equity interest. This takes full advantage of the availability of institutional funding but softens the valuation question for both the seller and the buyer,” Doyle said.

Institutional lenders are willing to finance mergers if they can expect healthy interest returns, and an equity kicker, said Doyle.

Beverly Hills investment banker Dick Israel concurred that there is plenty of private money available to finance mergers if borrowers can figure out a way to reward lenders with a 20 percent annually compounded return, including interest and equity.

“I just talked with a San Francisco-based private buyout fund today, and they target a 20 percent return, including interest and the return on equity, on buyouts they finance,” Israel said.

Israel said the fund invests in companies with $15 million in sales or more. “They are down here, looking for deals,” he said. “There is plenty of capital to finance mergers, or buyouts, at least so far.”

While investment bankers say the mergers market has definitely cooled since the August market correction, the numbers through the year remain strong.

From Jan. 1 through Sept. 11, there were 5,451 reported mergers of both public and private companies. Of these, 1,944 disclosed the price of the deal for a total reported dollar volume of a little more than $1 trillion, according to Mergersat, an arm of Century City-based financial house Houlihan Lokey Howard & Zukin.

Last year, in the like period, there were 5,313 reported mergers, of which 2,109 reported price, for a total volume of $390.4 billion.

This year’s higher dollar volume reflects the impact of several jumbo mergers, such as the acquisition of H.F. Ahmanson & Co. by Washington Mutual.

And so far, the August volatility hasn’t dampened merger activity for the second half of the year. From June 30 to Sept. 11, there were 1,543 mergers, of which 533 reported price, for a reported dollar volume of $252 billion.

The strong numbers underscore the fact that while new mergers may be put on hold, many investment bankers are busy working on deals already in the pipeline.

“These deals are a like a freight train,” said Larry Hurwitz, of Lawrence Financial Group Inc. in West Los Angeles. “The deals that are in process tend to be getting done now. New deals may have it tougher, find it harder to get money, but you can always get a deal done by giving up more equity (to lenders).”

In fact, 1998 has been so busy for investment bankers that many might actually welcome a breather.

“If I told you how many deals we are working on, you wouldn’t believe it,” said Freedman of Barrington Associates. “It has been coming in waves, all year long.”