Simon & Sons Doing Deals Far From Busy Tech Sector

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William E. Simon & Sons merchant bank is practicing the old “hit ’em where they ain’t” strategy of investing.

In Southern California and throughout the nation, interest in Internet and other high-tech companies is so intense that other investment options such as solid manufacturing companies are going overlooked or even getting snubbed, said Robert MacDonald, president of private equity for Simon & Sons.

(The firm was founded by William E. Simon, former secretary of the treasury under President Richard Nixon.)

“Just look at what public mid-sized manufacturing companies are selling for,” MacDonald said.

Indeed, many industrial concerns, despite a healthy ’90s decade, are selling for single-digit price-earnings ratios on Wall Street. By contrast, the S & P; 500 trades at about 30 times earnings, and mature tech companies can sell for 70 times earnings or more.

With that partially in mind, Simon & Sons operates an “executive in residence” program in which senior officials from the manufacturing world can sit in-house at Simon and scour the West Coast in search of good buys aided, of course, by their intimate knowledge of the industrial world. The executives then assume management positions at companies that Simon buys, taking personal equity as well.

Mike Bernath, former chief executive and part owner of Pacific Precision Metals Inc. in Azusa, is one example of the Simon & Sons executive program, and he is now gunning for another factory-hive to buy and run for the merchant bank.

Simon & Sons has also taken a stake in Do+Able Inc. in Chino, which produces garage shelving for Home Depot Inc.

MacDonald believes there are numerous such companies to buy in Southern California, especially because these operations are currently so out of favor. But he points out that Simon & Sons also acquires companies in the ever-popular information technology sector and in education.

Generally, the firm likes to buy companies for between $50 million and $100 million.

Somewhat surprisingly, MacDonald said the “industry roll-up” business acquisition strategy employed by so many leveraged buyout shops in the 1990s has faded. Why? Too many roll-uppers were buying in a hurry and getting more than a few bad apples in the mix.

“The business of buying a company is hard work,” said MacDonald. “It takes a lot of research and due diligence.”

And it’s better done in ones or twos, than by jet-setting around the country, fast-making an empire.

Not Roth Securities?

The Newport Beach-based brokerage formerly known as Cruttenden Roth recently changed its name to Roth Capital Partners the sort of moniker one usually associates with a private equity fund or group than a brokerage.

That just shows you how much the brokerage-investment banking game has changed, said Byron Roth, chairman of Roth Capital.

“What we have been doing is investing a lot in private companies and with venture funds,” said Roth. “You can’t show up and win the beauty contest (the IPO underwriting) if you haven’t been an early-stage investor as well.”

Companies often select underwriters from those that believed in them early. With that in mind, Roth Capital partners just hired Fariba Ghodsian in its West Los Angeles office. The former Lehman Bros. analyst who holds a doctorate from Oxford University and MBA from UCLA will be a researcher in the biotech market, which Roth (and many others) think will be the next hot sector to rival Internet firms.

Ghodsian said Los Angeles’ biotech world looks a little like the local Internet sector did about three years ago just before venture capitalists flooded money into Web investments.

Ghodsian is following several local private companies, including Pasadena-based Clinical Microsensors Inc. and Cyrano Inc., both of which came out of the Caltech sphere and deal with DNA and artificial smell technology, respectively, and Urogynesys Inc. in Santa Monica, which is working on possible DNA-related strategies against prostate cancer.

At USC, UCLA and Caltech, and medical centers such as Cedars-Sinai and the City of Hope, some of the components needed for Los Angeles to emerge as a biotech center are in place, said Ghodsian and Roth.

“We just have to get the venture capitalists more interested,” Ghodsian said.

Saving Trees

These days, with more investors having access to the Internet, lots of companies file disclosure documents electronically with the Securities and Exchange Commission.

Does that mean the paper IPO prospectus is going the way of the dodo bird?

Not yet in fact, more issues are using color pictures and fancy covers as the “prospectus is becoming as much a marketing tool as a disclosure form,” said John Jackson, senior vice president at financial printer Bowne of Los Angeles Inc., which despite its name is based in Dominguez Hills.

A recent IPO prospectus for World Wresting Federation Entertainment Inc., for example, had heavy stock fold-out covers, replete with cover photos of snakes, scowling wrestlers and scantily clad women.

Still, the work of SEC filing is going high-tech. Today, issuers, underwriters and lawyers submit documents and many corrections to Bowne via e-mail, although the company does provide physical conference rooms in downtown Los Angeles and Century City so all parties can meet and resolve details in person, if need be.

“Much of this business still requires the old-fashioned face-to-face contact,” said Jackson. “It is something innate in our species.”

Late in the IPO filing game, fixes come furiously and in batches. But even e-mail is not as fast as people sitting around a table making lots of corrections approved by an appropriately timed grunt from another party.

Bowne, with 350 employees in town, can pump out several million disclosure documents overnight if need be with its $50 million plant somewhat like a major newspaper operation. But most filings require between 100,000 and 200,000 copies.

Even the ink-stained Jackson expects that in time, disclosure documents will totally become online operations, with no more paper. While the SEC’s Edgar site looks down on graphics, other parallel private sites do not.

Obviously, it’s expensive to print documents. “It may take a few more years, but I expect disclosure to be done all online someday,” said Jackson. “It’s probably not if, but when.”

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].

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