First Quarter Deals Lag as Market Turns
By ANTHONY PALAZZO
Staff Reporter
Mergers-and-acquisitions activity in Los Angeles County remained at depressed levels during the first quarter, tracking a worsening national trend, according to statistics compiled by Mergerstat LP.
For the first three months of 2002, only 31 deals were completed involving locally based companies, compared with 39 deals in the like year-earlier period, according to Mergerstat.
Deal value rose to $5.9 billion, however, from $4.8 billion a year ago, as the completion of Northrop Grumman Corp.’s $2.4 billion acquisition of Newport News Shipbuilding Inc. skewed the dollar totals higher. (Mergerstat doesn’t include debt in its calculations of deal values, only equity.)
“The fact that there are fewer deals done in L.A. County versus last year is consistent with what we’ve seen on a national basis,” said Lindsey Alley, a director of mergers and acquisitions at investment banker Houlihan Lokey Howard & Zukin, which owns Mergerstat.
Alley believes a bottom was hit in February, however, saying that deal activity has picked up in the past 30-45 days. Others agree.
“We’re approaching the closing of three
transactions and we’ve signed up a number of new transactions,” said Mark Vidergauz, managing director of Los Angeles-based investment banker Sage Group LLC. “We’ve definitely seen a very significant pick-up in activity in the last six weeks or so.”
In tracking local merger activity, the number of deals is a more reliable indicator than dollar amounts, Alley said, as regional deal values can fluctuate greatly from quarter to quarter.
Nevertheless, a broad decline in deal volumes nationally has been reinforced by smaller deal size. Through late March, Mergerstat tracked 1,658 transactions announced nationwide during the first quarter, compared with 2,449 deals in the like year-earlier period. Deal value fell even more sharply, to $73.9 billion from $157.8 billion.
Even in the fourth quarter of 2001, when deal-making activity practically ground to a halt after Sept. 11, more deals were attempted than in the just-ended quarter. During the fourth quarter, there were 1,840 acquisitions announced nationwide, worth $135.4 billion.
Locally, first quarter activity was dwarfed by a single fourth quarter deal: Amgen Inc.’s agreement to buy Immunex Corp. for $15.8 billion. (In 2001, the number of deals involving an L.A. County-based buyer or seller fell to 477 from 621 in 2000, according to Mergerstat figures. The aggregate value of the deals whose values were disclosed fell to $35.9 billion from $43.3 billion.)
Defense, aerospace hot
Defense and aerospace has remained one of the strongest sectors for mergers and acquisitions. Northrop’s pending hostile bid for TRW Inc., announced during the first quarter, for example, tops the list of local deals announced in the first quarter at $5.9 billion, excluding debt.
“The defense and aerospace and government technical services stocks are trading at highs, relative to historical performance,” Alley said. “As a result, their stock is good currency to make acquisitions.”
Alley said his firm is getting more calls from buyers and sellers in defense and aerospace than it has in the past 10 years. Large defense contractors are seeking to round out their product lines. “We are getting calls from the largest, who are acquisitive, and the smaller companies, who are interested in selling.”
Other areas showing signs of life include healthcare and entertainment, said Todd Jadwin, an independent investment banker. “Anything with cash flow is still hot, it’s back to basics.”
Indeed, two health-related deals were among the top 10 announced locally in the first quarter. They include the $53.8 million sale of Apex Therapeutic Inc., of Los Angeles, to Curative Health Services of Hauppage, N.Y., and the purchase of Cincinnati-based Health Personnel Options Corp. by Calabasas-based staffing firm On Assignment Inc. for $150 million.
One buyer finding strategic opportunities in the media-and-entertainment field is CDP Capital Entertainment, based in Hollywood. CDP Capital is a joint venture of CDP Capital Communications, an arm of Canadian fund manager Caisse de depot et placement du Quebec, and the fund’s managing partner, Henry Winterstern.
CDP Capital Entertainment put together the $134 million deal to take Dick Clark Productions Inc. private during the first quarter. CDP approached Clark, Winterstern said, because they were looking for a television content property to complement and enhance its existing alliances in talent management and production. Consolidation in the media industry has created opportunities for investors such as CDP to bring capital to entertainment companies that need it to navigate the new environment, Winterstern said.
Distressed firms sought
Other partners in that deal were veteran television executive Jules Haimowitz, who brings operational expertise, and Mosaic Media Group Inc., a talent management firm in which CDP also has an investment.
Bankers said telecom and technology deals have been getting done during the downturn, but they’ve mostly been deals where the buyer is essentially shopping for assets of distressed firms. “The companies that are healthy or semi-healthy are still reluctant to commit their balance sheets or their future at this point,” Jadwin said.
Elsewhere, a number of factors have contributed to an increasing willingness to do deals recently, Vidergauz said. People are more optimistic about the state of the economy, and there’s been a general adjustment of expectations on the part of sellers and on the part of private equity investors, who can’t rely on generating the same returns they did during the late 1990s, he said.
Private equity firms were accustomed to using bank debt to leverage their deals and produce higher profits, but those lenders are still reluctant to take risks. Now private equity firms are willing to accept a lower profit structure, Vidergauz said.
Finally, large NYSE-listed companies must make strategic acquisitions if they are to continue to meet Wall Street expectations for rising profits. “Their issue is they can’t grow internally,” Vidergauz said.
