Buyers were hungry for acquisitions in Los Angeles, but sellers weren’t serving up enough to satisfy that appetite this year.
That’s why the number of local companies bought and sold was down this year after gains in 2010 and 2011. Those earlier gains had resulted from pent-up demand by private-equity firms and corporations seeking to spend cash as the recession eased.
This year, would-be buyers were still in the hunt for targets, but financial professionals say there weren’t enough attractive, interested sellers.
That led to a 4 percent dip in the number of local deals, from 1,667 last year to 1,602 this year, according to S&P Capital IQ, a financial data and analysis firm in New York that compiles numbers for Los Angeles and Orange counties for the Business Journal.
James Freedman, chairman and managing director of Intrepid Investment Bankers LLC in West Los Angeles, said the decline was the result of lack of available opportunities.
“There’s plenty of capital and there’s a lot of demand for good businesses,” said Freedman. “But the supply is not fantastic. That’s why you see this imbalance.”
Corporations and private-equity firms are still flush and looking to invest. But they remain cautious in their approach, looking only for companies with solid fundamentals and growth prospects. However, those companies in many cases aren’t seeking to sell because they have access to plenty of capital, said Matt Spencer, a vice president in the mergers and acquisitions group at Century City investment bank Houlihan Lokey.
“If companies needed cash, they could obtain financing through the debt capital markets very cheaply and easily,” he said. “When money is readily available to companies through alternative sources, it can have an impact on the number of M&A deals brought to market by sellers.”
Bigger deals
While the number of deals was down this year, the size of deals actually increased. S&P Capital reported this year’s deals were worth $220 billion, up from $184 billion last year. Those figures include traditional mergers and acquisitions, as well as large stock purchases and sales by institutional investors and funds. They include deals in both counties.
Scott Dunfrund, co-head of Houlihan Lokey’s M&A group, said the dearth of sellers means buyers scramble for the best targets, driving up the value of deals.
Deals were done this year across every industry in the local economy, from health care and biotech to entertainment and aerospace. In some of Los Angeles County’s biggest transactions of the year, companies found themselves forced into a sale to resolve past issues.
Earlier this month, New York insurance giant American International Group Inc. announced that it would sell an 80 percent stake in Century City aircraft leasing company International Lease Finance Corp. to a Chinese investor group for $4.2 billion. AIG needed to sell the company to help pay back federal bailout money.
San Antonio’s Tesoro Corp. bought a Carson oil refinery and 800 gas stations in California and the Southwest for $1.2 billion from London’s BP PLC, which needed cash toward the cost of spill cleanup and legal settlements related to 2010’s Deepwater Horizon disaster.
In perhaps the best-known deal of the year, Frank McCourt was forced by Bud Selig, commissioner of Major League Baseball, to sell the Los Angeles Dodgers. Investment group Guggenheim Baseball Management LLC, which includes investors Earvin “Magic” Johnson and Mandalay Entertainment Chief Executive Peter Guber, bought the team in March for $2.15 billion.
Growing out
For companies looking to increase market share amid a stagnant economic recovery, an alternate strategy is to grow by acquisition.
“Big companies are out looking for acquisition candidates to put money to work,” said Bryant Riley, chairman of investment bank B. Riley & Co. LLC in West Los Angeles. “You’re going to pay off debt you already have, you’re going to buy another company or buy your own stock. But mostly it’s used for acquisition.”
Amgen Inc. and Walt Disney Co. are case studies in that approach.
In one of the year’s biggest deals, Burbank’s Disney announced in March it would buy Lucasfilm Ltd. for upwards of $4 billion, adding the lucrative “Star Wars” franchise to its stable. Disney paid about the same price in 2009 for Marvel Entertainment, a move that resulted in this summer’s blockbuster film “The Avengers.”
In Thousand Oaks, Amgen made four big acquisitions this year: Rockville, Md., cancer therapy developer Micromet Inc. for $1.16 billion; Turkish drug maker Mustafa Nevzat Pharmaceuticals for $700 million; Icelandic company Decode Genetics for $415 million; and South San Francisco kidney drug maker KAI Pharmaceuticals for $315 million.
“Shareholders don’t want you to sit on a pile of cash,” Riley said. “Any deal is accretive when you’re replacing it with cash getting low or no interest.”
Year ahead
That continued appetite for deals, combined with this year’s higher deal values, could drive more M&A activity in 2013 as potential targets see they may fetch a good price, said Houlihan Lokey’s Dunfrund.
“They’re looking at the outcome of deals and saying, ‘That company traded at a very attractive valuation,’” he said. “We’re seeing more people wanting to meet with an adviser to take action in 2013.”
Already, a spike in activity showed up late this year. Intrepid’s Freedman said his firm has worked on a spate of deals in the past few months as owners try to take advantage of historically low capital-gains tax rates that might rise in the new year.
Riley said the current quarter is on track to be the best ever for his firm’s advisory practice. The year started slow and remained that way nearly through the election, but activity has since picked up.
Assuming tax rates change next month, Riley said he expects deals to slow down for a while, but might pick back up again in the middle of next year.
“We may or may not like the tax policy, but at least you know what world you’re operating in,” he said. “You’re going to see a slower start, especially on the private side, then a robust second half.”
