Merger and acquisition activity has heated up in Los Angeles County, driven by low interest rates, aggressive financing and the re-emergence of corporate buyers who are snapping up companies to grow market share.
Investment bankers are calling the current M & A; climate 'a seller's market,' an indication that companies that put themselves on the auction block are garnering high prices and multiples.
"We are seeing very robust action with 20 or 30 bidders showing up for every company that we represent," said Ed Bagdasarian, managing director of Barrington Associates, which recently hired six investment bankers to keep up with demand. "A year ago, strategic buyers were out to lunch and now they're focused on their own growth."
In August, 74 companies announced plans to either buy or sell a business in Los Angeles County, for a combined $4.7 billion, according data compiled by Goldsmith Agio Helms, an investment bank based in Minneapolis. Excluding Public Storage Inc.'s $2.49 billion hostile takeover bid for rival Shurgard Storage Centers Inc., which analysts believe is unlikely to be completed, total deal volume was $2.21 billion in August.
Ed Villeneuve, a managing director at Goldsmith Agio Helms in Los Angeles, said the number of deals is flat or slightly down compared with a year ago, when volume spiked more than 20 percent from 2003. However, the total value of deals announced in August jumped between 17 percent and 25 percent, depending on which database is used for the year-ago comparison.
"We continue to have a very strong pace of activity that should accelerate by the end of the year," he said.
At least 60 percent of all mergers are reported without a price tag, and many small deals don't even get recorded, so reports on M & A; activity are always incomplete. Goldmith Agio consulted three databases of merger activity to put together the report for the Business Journal: Capital IQ, a unit of Standard & Poor's; Factset Mergerstat LLC, and OneSource, a division of infoUSA Inc.
Some dealmakers predict 2005 will be the best year for mergers and acquisitions since the heady days of 1999-2000, before the dot-com bubble burst.
"The attitude right now is that if interest rates continue to hover at this level, the pace of activity could continue for another 24 months,'' said David Cohn, managing director at Mosaic Capital LLC. "Banks are in the financing mood and once the banks stop financing, it's like turning the faucet off on your sink, the deal flow just dries up. So sellers see this as a big window of opportunity."
There is some concern that the back-to-back bankruptcy filings of Delta Air Lines Inc. and Northwest Airlines Corp. last week could throw cold water in the face of lenders. (Hurricane Katrina isn't expected to have a large impact, although it was cited as a final straw in the two airlines' failures.)
"If lenders start pulling back because of large bankruptcies that were not anticipated, you're going to start seeing lenders become more conservative," Bagdasarian said.
One of the better-known local deals last month was the sale of the landmark Century Plaza Hotel & Spa in Century City for $293 million to Sunstone Hotel Investors Inc., a San Clemente-based real estate investment trust.
Other companies that were sold include Dermagen Inc., a Fullerton-based maker of Botox treatments; CFW Enterprises Inc., a Carson-based publisher of magazines for paintball and martial arts enthusiasts; and Allied Insurance Services, a Canoga Park-based commercial property and casualty insurance agency.
Timothy Fahringer, managing director at Kerlin Capital Group, a boutique investment bank in Los Angeles, said business services and industrial product firms are being much more acquisitive than in the past.
"Strategic buyers are a lot more thoughtful and risk-averse in ways that they weren't a few years ago," he said. "A lot of acquisitions were done out of fear of missing out, but now people are approaching them more thoughtfully."
More than a dozen technology businesses were bought or sold by Los Angeles companies last month.
The biggest tech deal was Santa Barbara-based ValueClick Inc.'s $214 million stock purchase of online advertising firm Fastclick Inc. which shocked many investors because FastClick had only recently gone public.
Both private equity and venture capital firms appear to be avoiding the dismal IPO market, which has traditionally been a favored exit strategy.
"The IPO market isn't helping anyone, and venture guys are in deals longer, so they are probably more willing to sell than in the past," said John Morris, managing director of GKM Ventures, and chairman of Tech Coast Angels, which claims to be the largest early-stage investor group in the U.S.
Other notable technology deals last month were America Online Inc.'s purchase of Santa Monica-based storage provider Xdrive Inc. and the sale of PhatNoise Inc., a Los Angeles developer of digital media systems for cars, to Harman Consumer Group, of Woodbury, N.Y.
For several years now, private equity funds have played a much bigger role in merger and acquisitions, accounting for up to 20 percent of total deal activity. Most private equity funds raise money from large institutional investors such as Calpers, the California Public Employees' Retirement System, which are looking for alternative investments that offer higher returns.
Jim Leech, a senior vice president at Teachers' Private Capital, the private equity arm of the $88 billion Ontario Teachers' Pension Plan, said the proliferation of private equity funds is creating opportunities for institutions with longer-term investment strategies.
Teachers' Private Capital was involved in two deals in August: It teamed up with Ares Management LLC of Los Angeles, to buy National Bedding Co., the maker of Serta brand mattresses, and it acquired the outstanding stock of Doane Pet Care Enterprises Inc., the largest manufacturer of private-label pet food, which was owned by a consortium of private equity firms.
"Our competitive advantage is that many management teams are looking for long-term backing, not just the 'get in, restructure, get out,' strategy," said Leech. "We have the objective of building a great business over time, and that's starting to resonate with managers."
The health care sector continues to have merger activity, fed by regulatory changes and health care's lower vulnerability to competition from Asia, compared with other sectors. A dozen health care and medical device companies changed hands last month, including Culver City-based WENR Corp.'s purchase of St. Paul Pharmaceutical, a manufacturer of generic drugs.
Another local deal was the sale of PMW Pharmacy Inc., a specialty HIV pharmacy based in Long Beach, to Allion Healthcare Inc. of Melville, N.Y. for $9.7 million in cash. The deal increases Allion's customer based in Los Angeles, through which it plans to sells HIV/AIDs medications, ancillary drugs and nutritional supplies.
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