Investment banks are finally back in a hiring mode, anticipating an upswing in merger activity in 2005 after three dismal years of layoffs and cost cutting.

Though Wall Street firms remain cautious, boutique investment banks focused on the middle-market the bread-and-butter of deal-making in Los Angeles are searching for analysts and associates with the expectation of an expected economic rebound next year.

Bankers say several factors are driving M & A; activity. Public companies and private equity firms are flush with cash. Borrowing remains cheap. And higher valuations are attracting more companies to sell or recapitalize.

Besides entertainment, industries ripe for takeover activity include computer software, broadcasting, and leisure and publishing. Many of the deals next year will reflect the growing dominance of private equity firms and hedge funds, and the return of strategic buyers. Mega-deals also are making a comeback, reflected by the $11.5 billion marriage of Sears Roebuck & Co. and Kmart Corp.

Investment bankers point to a strengthening deal flow so far this year. The number of mergers and acquisitions announced in the third quarter jumped 20 percent from the year-earlier period, while the value of deals soared 70 percent nationwide to $530.2 billion, up from $312.4 billion in the third quarter of 2003.

Several local firms are diversifying into new markets as a hedge against both the cyclical nature of the stock market and M & A; activity. Even companies that have had no presence in L.A.'s investment banking scene are trying to build their business here. KPMG Corporate Finance LLC, a spin-off of the accounting firm, now has a staff of seven, up from just two in February, said Nick Desai, a KPMG vice president.

Also jumping into the investment banking market in Los Angeles is FTI Capital Advisors, a newly created investment banking subsidiary of FTI Consulting Inc. Last month, FTI hired two longtime investment bankers in Los Angeles: Robert M. Werle, a former managing director of Jefferies & Co., and Jay Sherwood, a former managing director at Seidler Cos.

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