Year-End M & A; Action Could Flow Into 2005

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Merger activity surged in the fourth quarter, driven by easy financing and strong corporate profits that sparked a resurgence of billion-dollar deals in Southern California.


At this point, investment bankers expect 2005 to be even stronger for merger activity as large public companies sitting on mountains of cash opt to grow through acquisitions. While prices are high, they are likely to be driven higher as competition heats up from overseas buyers.


For the fourth quarter, 124 companies based in L.A. County either were bought or sold, a nearly 40 percent increase from the 90 that changed hands in the fourth quarter of 2003, according to FactSet Mergerstat, the Santa Monica-based provider of M & A; information.


Total deal value in the fourth quarter jumped 325 percent, to $10.6 billion, from $2.5 billion in year-earlier period. Reported deal value would have been much higher if all companies disclosed the prices they paid for acquisitions; prices were disclosed on only 46 transactions in the October-December period.


Nationwide, 1,498 deals were announced in the fourth quarter totaling $157 billion.


John Mapes, a partner at Aurora Capital Group, said attractive financing, particularly from bond buyers searching for higher yields, along with the stability of the economy, will make 2005 an active year for mergers.


“When you have a predictable economy, it makes it easier for companies like ours to assess value and make bets,” he said.


The surge in activity comes from two types of buyers private equity firms and strategic corporate buyers that have plenty of buying power. Private equity firms have a mandate to put their cash to work or lose it, while corporate buyers want to take advantage of their high stock prices with major indexes near three-year highs.



Investor-to-investor deals


One notable fourth quarter deal was the $60 million sale of Bell Automotive Products by Los Angeles private equity firm Brentwood Associates to San Francisco private equity firm JH Partners LLC. Such sponsor-to-sponsor transactions are becoming more common as money pours into the asset class from institutional investors.


“It’s a tough environment because you’re always a seller and always a buyer,” said Eric Reiter, a principal at Brentwood Associates. “You’re seeing a lot of fighting among peers for the great deals and even mediocre deals are getting more attention. This is certainly as good a time as any to be a seller.”


But Reiter said deals have changed dramatically in the last few years with a whole layer of intermediaries investment bankers, lawyers and consultants rushing to find entrepreneurs to put their capital to work. “It’s like being an actor,” he said. “You get a lot of rejection looking for that one company out of 500.”


Paul D. Tosetti, co-head of law firm Latham & Watkins’ global mergers and acquisitions group, said many companies held off from making decisions on deals until after the presidential election.


“We have a backlog that’s unlike anything we’ve seen before,” Tosetti said. “Many transactions were postponed or debated and then passed on because companies were reluctant to pull the trigger on anything that seemed slightly dicey. Now they’re starting to focus more on the advantages.”


Merger activity for larger deals in particular blossomed in the last two months of 2004.


The biggest was kidney dialysis provider DaVita Inc.’s $3 billion purchase of the dialysis operations of Sweden’s Gambro AB. That deal, announced in early December, doubled Torrance-based DaVita’s revenues and pushed its stock to an all-time high of $41.10 a share.


Shopping mall developer Macerich Co. agreed in December to pay $2.33 billion for Wilmorite Properties Inc., a private real estate investment trust in Rochester, N.Y., that owns 13 regional malls.


In November, Aurora Capital closed on its $1.06 billion purchase of K & F; Industries Inc., a maker of aircraft wheels, brakes and fuel tanks that it purchased from Loral Corp. Chairman Bernard Schwartz and Lehman Bros. Merchant Bank.


In addition, Britain’s BT Group PLC agreed to pay $965 million for El Segundo-based data company Infonet Services Corp., while Computer Sciences Corp. sold three units of its DynCorp federal defense contractor business to private equity firm Veritas Capital for $850 million.


“The key to the market were the large deals, particularly those above $1 billion because you have to have larger deals to spur smaller deal activity,” said Kurt Kunert, publisher of FactSet Mergerstat.



Year started slow


Kunert said 2004 actually got off to a sluggish start because private equity firms had been the only dealmakers. Strategic buyers, as corporations are called, came out in the spring but activity didn’t pick up dramatically until the third quarter.


“A lot of dealmakers were sitting on the fence not doing any acquisitions and trying to resolve internal accounting issues,” he said. “Now you have a run-up in multiples, which makes some deals too expensive for strategic buyers.”


One prevalent theme in 2005 will be the advantages of foreign suitors from Europe and Japan who can pay much higher multiples by flexing the euro’s value against the weak dollar.


“All of sudden European buyers are interested in buying dollar-based businesses and are financing them with strong currency,” said Mapes, who lost two deals to European challengers willing to pay “unbelievably high valuations.”


Internet content companies captured renewed interest, led by online apartment listing firm Rent.com Inc.’s purchase by eBay Inc. for $415 million in December.


The quarter also saw several strategic acquisitions of middle-market companies. VCA Antech Inc. acquired Carlsbad-based Sound Technologies, the nation’s largest supplier of ultrasound and digital radiology equipment to veterinarians.


Few distressed deals are in play these days but Cerberus California Inc., a unit of special situations firm Cerberus Capital Management LP of New York, agreed to buy the restaurants of Burger King franchisee Sydran Group LLC. The deal is part of Sydran’s Chapter 11 bankruptcy proceeding.

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