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By JASON BOOTH

Staff Reporter

Not every L.A. firm is acquisition bait.

While Los Angeles remains a breeding ground for companies that wind up being bought by outsiders, there remains an appetite for acquisition among a number of local businesses. And the action covers an assortment of industries and various-sized companies.

“The common theme is roll-up,” said David Horwich, senior vice president for corporate finance at First Security Van Kasper in West Los Angeles. “These are consolidating industries where you have excess capacity and excess competitiveness.”

With the stock market’s stellar performance over the last few years, even small and mid-size public companies have been able to use their stock as currency to make acquisitions.

Perhaps the most voracious local acquirer in recent years, in terms of number of deals if not value, is Veterinary Centers of America. Since the start of 1996, the Santa Monica-based company has bought 180 animal hospitals and other veterinary facilities nationwide.

“We saw opportunity in a fragmented industry that suffered from a lack of capital,” said Tom Fuller, the company’s chief financial officer.

But with revenues of around $220 million, Veterinary Centers is now approaching a transition from acquirer to operator. While the company will continue to make acquisitions among the roughly 2,500 potential targets across the country, he said the focus will be on developing a brand name and boosting internal growth.

“It is going to be harder for the company to achieve top-line growth through acquisition alone,” said Bryant Riley, president of West Los Angeles brokerage B. Riley & Co. “But you are going to see more operating efficiencies as they leverage the synergies between the hospitals.”

Since going public in 1994, Reliance Steel & Aluminum Co. has made 15 acquisitions including seven companies in 1998 alone making it one of the nation’s leading metal processing firms.

Chief Executive David Hannah said making acquisitions is vital both as a means of expanding into new markets and to keep Wall Street happy.

“We think it is the best way to grow,” said Hannah. “The only other way to expand is to fight for market share. That can be painful because you have to drop your prices. That’s bad for the industry.”

Without acquisitions, sales would be growing at only 5 to 8 percent per year on average, compared with the 30 percent growth the company has enjoyed following its acquisition strategy.

Four Media Co. has spent more than $125 million since the start of 1997 to buy seven firms in the film and television post-production industry.

The industry remains highly fractured, with at least 500 companies in Los Angeles alone, according to Sandra C. Mays, vice president of investor relations.

A common theme that has aided companies such as Reliance, Veterinary Centers and Four Media is that they operate in industries that have no clear market leader and are dominated by individual owners who may be looking to cash out.

Hannah noted that the metals processing industry is still dominated by owner-operated firms that were founded in the 1940s and 1950s. The founders are now reaching retirement age, and their relatives often do not want to pursue a career in what is perceived to be an old fashioned, low-tech industry.

The same is true in the veterinary industry, where a “large” hospital typically only has four doctors and revenues of under $1 million a year.

Consolidation in the post-production market, on the other hand, is being driven by the fact that it is decidedly high tech. In order to compete in a highly competitive market industry, owners have to continually upgrade their expensive digital editing and dubbing equipment. At the same time, talented employees can demand large salaries.

As a result, a large number of post-production firms both in Los Angeles and elsewhere are only just keeping their heads above water financially and would be glad of the cash infusion and technical support a larger player like Four Media could supply.

While all these companies represent the hunters rather than the hunted in their particular industries, economists make clear that their activity is not reflected through the rest of the L.A. business community.

“These are the exception,” said Ken Ackbarali, an economist at the Los Angeles Economic Development Corp. “In general, L.A. is still on the victim side.”

A number of larger L.A. firms have been active acquirers over the last few years, but their motivation is driven largely by desire to avoid being takeover targets themselves.

Hilton Hotels Corp. made headlines last year after it lost a drawn-out struggle with Starwood Hotels & Resorts Worldwide Inc. for control of ITT Corp.

Since then, it has quietly spent more than $1 billion to purchase 11 properties in the United States more than twice the $500 million Hilton typically spends on acquisitions per year.

City National Corp., long rumored to be a takeover candidate, has transformed itself from a Beverly Hills-focused institution catering to the needs of the entertainment elite to a multi-purpose business bank with branches from California to Florida.

Litton Industries Inc., for years considered an also-ran among defense contractors, has been trying to buy its way into the big leagues.

The company may have been stymied in its bid to buy Newport News Shipbuilding Inc., which would have made Litton the dominant builder of naval ships, including aircraft carriers. But Litton was able to buy Avondale Industries for $576 million, a deal that will put the company among the nation’s top military contractors.

“Without that acquisition, they were a very distant third to the other contractors,” said Paul Nisbet at JSA Research Inc. in Providence, RI. “With Avondale, they are now in shouting distance of General Dynamics. In this business you have to be large to compete.”

Despite the buying being done by a handful of companies, Los Angles is expected to remain a prime target for acquisition for years to come.

That’s because the local economy, increasingly dominated by small and mid-size firms in high-growth industries such as technology, software and entertainment, offers plenty of enticing targets.

“Any region that is a hotbed of new companies is going to be an attractive market,” said Thomas Weinberger, director of investment banking at Sutro & Co. in West Los Angeles.