These days, Larry Braun, managing director at Barrington Associates, finds himself smack in the middle of the dot-com meltdown, working on telecom restructurings, mergers and acquisitions.
He says it's a growth industry, as the New Economy, into which so much money has poured, has gone into a shakeout, with survivors often buying the not-so-strong. Indeed, over the years, each turn in the Southern California economy has seemed to bring more work to Braun, wherever he hangs his hat. In the tough California recession of the first half of the 1990s, many businesses had to consolidate to survive. In the boom of the late 1990s, top-dollar was being paid, so many business owners decided to sell when the selling was good, and acquirers had the money to buy.
After plumbing the middle markets of Southern California for more than 20 years, Braun has more than 200 notches on his belt deals in which he represented either the buyer or seller. Among Braun's clients have been such names as 3 Day Blinds Inc., BKK Corp., Certified Grocers of California Ltd., Naturade Inc., and Rubbercraft Corp. of California. But today, the merger-and-acquisition action is in the dot-com space. And Braun is right in the middle of that action.
He's among the ranks of lawyers who decided early on to go over to the other side and become a banker on corporate transactions. Prior to joining Barrington as a managing director last year, Braun was partner in the 300-attorney Los Angeles-based law firm of Sheppard, Mullin, Richter & Hampton LLP, where he served as chairman of the corporate and securities department. Braun has the academic bloodlines to support his mid-career shift; he holds both law and MBA degrees from Northwestern University in Chicago.Question:
In this year, we suddenly are seeing some new names pop up in the Internet finance scene names like Barrington Associates, Houlihan Lokey Howard & Zukin, and Chanin. Now the big words in the New Economy are merger and restructuring. What's going on?Answer:
Right now, large parts of the New Economy are consolidating. In the telecom industries, debt levels are very high, as people spend heavily to meet demand and build out networks. There has been huge demand for telecom services due to Internet traffic. But you see the telecom stock index is down 28 percent for the year. Some debt won't be serviced. So you will see consolidations. This year going forward, the mergers may be among smaller players, as the federal government is putting some (antitrust) hurdles up to larger mergers.
Q: What kinds of smaller players will merge?
A: Some of the larger national companies, such as AT & T;, have been outsourcing more and more of their work. But of course, after a while, you don't want to deal with hundreds of vendors. So there are roll-ups among the vendors. So an AT & T; used to contract with lots of little firms to build the network, to upgrade it. But those firms have been merging. You see the same thing in cellular. There used to be lots of little companies building the cellular infrastructure. But now they are being merged.
Q: We recently saw Nortel Networks buy Marina del Rey-based Sonoma Systems Inc., which manufactures hardware used in broadband telecom and Internet transmissions.
A: That's right, you will see a lot of those mergers too. Anything in broadband is huge. Consolidation will be rapid as people try to achieve lower costs or to acquire technology. You see the large companies the Nortels, the Lucents buying smaller companies for their technology. Not only is optical being built out, but the big carriers are upgrading their copper wiring, to get it closer in effectiveness to optical.
Q: What about dot-com companies? Of course, there has been a meltdown going on.
A: When we get involved there, we try to find a strategic partner who can add value. Sometimes, we take a bricks-to-clicks strategy. That is, we find a traditional retailer who wants a Web presence, or who wants wider geographic distribution. We will represent well-positioned Internet companies, which are profitable, or have a clear path to get there.
Q: Can you tell us which companies you are representing?
Q. Is the business-to-consumer sector as dead as everyone says? And how about business-to-business?
A: It is very tough to do much with a B2C company. B2B is much more acceptable, but tough too. We are actually getting involved in some of what we are calling B2E deals.
Q: All right, I'll bite. What is B2E?
A: There is a tremendous role for education done through the Internet. I think you will see a lot of growth and consolidation in that sector.
Q: How does Barrington charge for its services?
A: I'd rather not answer that, except to say our fee is very small compared to the extra value the seller obtains from our services.
Q: OK, but is it a contingent fee?
A: Yes, like most other bankers in this market, we charge a contingent fee, and usually we get a retainer when we take an assignment.
Q: And you have the exclusive right to sell?A:
Yes, again that is how most bankers work. We get an exclusive ... for about one year, usually.
Q: So how does a Barrington get involved in a New Economy merger?
A: Usually, we are approached by the seller. That is the bulk of our assignments. We like to think that we have developed enough of a reputation, that for any middle-market company in California, we are at least considered to represent the seller. We certainly are busy.
Q: What size deals do you handle?
A: Well, we don't really rule out anything, but anything from $15 million to $400 million or $500 million we will take. Our usual deal is in the $50 million to $250 million range.
Q: What makes you take on an assignment?
A: First, do we understand the company, and its place in the marketplace? Then, we try to identify buyers. If we think we can find a strategic buyer, which will result in a premium price, then we go ahead. ... Then, we have a series of meetings with management, owners and employees. But not all deals are only about money. Many times, owners selling out want to make sure their employees are taken care of. Other times, there are generational issues to take care of. ... Often, the older generation wants liquidity, but the younger generation wants equity in the company and continuing control.
Q: How do you resolve that?
A: Well, sometimes you can put the younger generation together with an LBO (leveraged buyout), a fresh infusion of capital to grow the company, and the younger people can take an equity stake in a growing concern.
Q: So how many professionals from Barrington will be involved in an assignment?
A: Of course, it varies from assignment to assignment. But usually, we have a managing director, a vice president, an associate and an analyst. But we have a weekly meeting by the managing directors, in which all the deals are discussed.
Q: You say weekly meeting. Is it formal?
A: It's every Monday at 9 a.m., and I have been here a year, and I have never seen anyone miss it. It is not a formal meeting, but Jim Freedman (company founder) is somewhat in charge, and it is very well organized. There is a tremendous exchange of information at the meeting, and a lot of experience (in the merger business) is in the room during a meeting.
Q: Who are the managing directors?
A: Jim Freedman, Ed Bagdassarian, Bernie Zaia, Michael Rosenberg and myself.
Q: How many deals are going at any time?
A: In the shop, we have about 33 deals in progress right now. So each managing director is overseeing five or six deals. I cover the New Economy deals.
Q: And all are sell-side?
A: Almost all. We have one or two equity-raisers, and the odd-bird buy assignment.
Q: When do you take on a buy assignment?
A:Well, in this case, I knew the buyer, and that they were serious, and that they had a candidate in mind.
Q: Do you have deals that fall apart?
A: It is rare. That happens sometimes when a company's performance begins to deteriorate during the selling process.
Q: I thought you were going to say that sometimes buyers back out, citing some detail or saying they need more information, when they actually are driving for a lower price.
A: Well, we almost always arrange for multiple buyers. ... Then we select one buyer for exclusive negotiations, but by that time the deal is pretty well nailed down, a very detailed letter of intent has been signed, and there have been meetings between (selling) management and the buyer. About 95 percent of the deals go through after that. But we have other buyers in the wings, if any one buyer won't commit.
Q: So you also own the Four Oaks restaurant in Bel Air?
A: Yeah. I figured if times ever get tough, at least I will be well fed.
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