Dealmaking Drought Worsens Amid Widespread Uncertainty
By KATE BERRY
The bottom just keeps falling.
Dealmaking in Los Angeles hasn’t dried up completely but the number of first quarter mergers and acquisitions has dropped sharply from the like period a year ago and the total value of deals has plummeted, according to industry tracking firm Mergerstat.
“Strategic buyers who were aggressively pursuing deals in 2001 and 2002 have pulled in the reins,” said David Barnes, a director at Los Angeles-based investment banker Houlihan Lokey Howard & Zukin.
The downward trend that started more than a year ago showed no sign of abating in the first quarter, and has even accelerated, as financiers and investment bankers, like everyone else, have been caught up in the uncertainty that’s been gripping the global investment scene.
In the first three months of 2003, there were 66 deals involving locally based companies, compared with 94 announced during the like year-earlier period, according to Mergerstat, a unit of Greenwich, Conn.-based FactSet Research Systems Inc.
The announced value of deals also fell drastically, to just above $1.2 billion in the first quarter, compared with $6.8 billion in the like year-earlier period. Last year’s total was skewed by Northop Grumman Corp.’s $5.9 billion hostile offer for TRW Inc. launched in January 2002. TRW eventually agreed to a sale and was acquired by Northrop last year.
Too many bankers chasing too few large deals have caused more firms to focus on the middle market, where deals are valued between $50 million and $500 million. Some financiers even suggest a greater willingness to tackle the vibrant market under $50 million.
“Two years ago, no one would look at a $50 million deal, but now they’re pursuing a fit rather than just size,” Barnes said.
Valuing activity in that range is difficult. Fewer than half of the deals announced in the first quarter had the transaction prices disclosed.
Investment bankers admit that the war in Iraq, a troubled economy and volatile stock market have kept deals on the sidelines.
“There’s just no big public market,” said Mark Vidergauz, managing director of Los Angeles-based investment banker Sage Group LLC. “You can’t raise capital, there are no public offerings, so the market has closed down.”
In California, Mergerstat tracked 356 transactions announced in the first quarter, compared with 434 in the year-earlier period. The value of those deals plummeted to $8.2 billion from $20.7 billion.
Nationwide, there were 1,572 deals worth a combined $71.9 billion announced in the first quarter of 2003, versus 1,972 deals worth $83 billion in the year-earlier period.
Broadcast properties continue to be one of the strongest sectors for mergers and acquisitions because Los Angeles is the No. 1 Spanish-language market in the country. Deals announced in the first quarter included the $35 million sale of KMXN-FM (94.3) in Orange County to Burbank-based Liberman Broadcasting Inc., which switched the station from alternative music to Spanish-language hip-hop and country music. Univision Communications Inc. agreed to buy Albuquerque, N.M.-based KAPX-TV from Paxson Communications Corp. for $20 million in cash.
“Anyone in the business is interested in accumulating any properties and when they come up for sale, multiple parties are interested,” said David Haymore, vice president and general manager of Santa Monica-based Entravision Communication Corp.’s six local Spanish-language radio stations.
The battered telecommunications sector is another area where buyers are shopping for distressed assets.
Private investment firm Gores Technology Group announced three deals in the first quarter. The company bought the common shares of Resonate Inc., of Sunnyvale, Va., and took the company private. It also bought the stock and senior debt of Britain’s Anker BV and Philips Business Communications of Amsterdam.
“If you’re focused like we are on buying operationally-challenged technology or telecom companies, this is the time,” said Dan Gray, Gores’ director of business development. “There are a lot of opportunities with companies trading below their value.”
Gray said some investors are jumping at the opportunity to buy distressed debt in tech companies at such a deep discount. The debt can then be rolled into equity and existing applications can be developed and marketed to other industries.
Investment bankers aren’t the only ones nervous that business has dried up. A typical business owner who has spent years building a business and might be looking for an exit strategy now faces valuations that are 20 percent to 30 percent lower than the market was willing to pay a few years ago.
“When you’re dealing with the CFO or controller of a publicly-traded company, there’s no emotion involved,” Vidergauz said. “But for smaller family-owned businesses you really have to build strong relationships and it doesn’t happen quickly.”