Financing Alternatives Drive Rebound on M & A; Scene

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Financing Alternatives Drive Rebound on M & A; Scene

By KATE BERRY

Staff Reporter

Merger and acquisition activity rebounded substantially in the first quarter from depressed year-ago levels, as better financing alternatives allowed more companies to be gobbled up by strategic buyers and private equity firms.

In Los Angeles County, announced deal volume more than doubled to $2.8 billion in the January-March period, from $1.2 billion in the first quarter of 2003, according to Greenwich, Conn.-based Factset/Mergerstat. The figures exclude Comcast Corp.’s $54 billion bid for Walt Disney Co., which has been rejected by Disney’s board.

“Clearly, the volume of business is up primarily because people have a lot of money, access to financing is very good, the cost of financing is very low and buyers are optimistic,” said Howard Marks, chairman of Oaktree Capital Management. Marks noted that sellers are getting good prices while buyers are paying higher prices but with cheaper financing.

A total of 110 mergers were announced involving Los Angeles County-based buyers or sellers during the first quarter, compared with 73 companies for the like period a year earlier.

The figures represent a more modest pickup in activity from the fourth quarter, when there were 90 transactions totaling $2.5 billion in value.

Half the companies did not disclose purchase prices to Factset/Mergerstat, so the total value of first quarter activity is higher than what is reported. Still, it pales next to the bubble years of 1999 and 2000.

Factset compiles figures for announced deals, whether they are friendly or hostile. Transactions get completed in varying time frames and some don’t get completed at all. However, announced deals are the most widely followed indicator of M & A; activity, because the data is more recent than other available measurements.

In the year-ago period, all but buyers of distressed companies abstained from deals because of the weak economy and jitters surrounding the war in Iraq.

“Eighteen months ago the mentality was to batten down the hatches and pay attention to the business, not look for acquisitions,” said Robert Bertagna, head of the Los Angeles office of Lehman Bros. and head of investment banking for the Western region. “Now we’re seeing a lot more activity with bigger, strategic deals driven by low interest rates.”

Stocks of publicly traded technology firms have risen sharply from last year, so stock is now being used to fund acquisitions. Venture capitalists that once viewed the IPO market as their only exit strategy are finding another outlet from private buyers.

“A lot of interesting private companies were formed out of the funding that took place before the bubble,” said David Creamer, managing director at technology boutique Broadview International Inc., a division of Jefferies & Co. “Buyers can pick the winners from the losers because the losers are, in large part, gone.”

One wrinkle that has emerged in the California market: some firms are waiting for workers’ compensation issues to be resolved by the state Legislature.

“Workers’ comp can have a material impact on middle market companies and it certainly has affected their attractiveness in the M & A; market,” said Lindsey Alley, a director in the mergers and acquisitions group at Houlihan Lokey Howard & Zukin.

He believes that high workers’ comp rates have cut into the profits of middle market companies in the past two years. “A lot of buyers are waiting to find out whether the government will make changes,” he added.

(Last week, Gov. Arnold Schwarzenegger and legislative leaders were putting the finishing touches on a compromise workers’ comp reform package.)

The increase in merger activity picked up after Labor Day last year. At the time, hedge funds and mezzanine funds began chasing higher yields, essentially loosening up financial markets.

“The financing environment is more robust, allowing firms to bid up in the market, pay higher prices and do more deals,” said Jeri Harman, principal and managing director at American Capital in Sherman Oaks, which provides mezzanine and senior debt financing for buyouts led by private equity firms.

Much of the merger activity in the first quarter was dominated by classic economy sectors: financial services, distribution, consumer and industrial manufacturing and health care. Still, of the 110 announced first quarter deals, only five were priced between $100 million and $1 billion.

Private equity firms continued to be at the forefront of major deals, demonstrated by Leonard Green & Partners’ acquisition of Hollywood Entertainment Corp. for $837.2 million and Aurora Capital Group’s $260 million purchase of AK Steel Holding Corp.

The banking sector also heated up with the announced purchase of El Segundo-based Hawthorne Financial Corp. by Commercial Capital Bancorp of Irvine for $438.1 million; and of Whittier-based Quaker City Bancorp Inc. by Popular Inc. of San Juan, Puerto Rico, for $345.5 million.

Oaktree was on both sides of deals in the first quarter, selling Maidenform Inc. for $215 million to Los Angeles-based investment firm Ares Management LLC. In addition, Oaktree is a part owner of privately held InfraSource Inc., of Philadelphia, which bought Maslonka & Associates Inc. of Mesa, Ariz., for $50 million.

That deal is significant for Californians because Maslonka, an electric transmission construction company, is building 84 miles of transmission lines on Path 15, a highly-congested transmission corridor that contributed to electricity blackouts in Northern California in 2001.

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