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Monday, May 29, 2023

Letter Lucente



For the last three years, a continuing refrain has been sung about the U.S. mergers-and-acquisitions market: “This is the hottest year ever. I don’t see how it can get any hotter than this.”

Then the heat is turned up another notch. As evidenced by the recent British buyout bid for Atlantic Richfield Co., the merger mania is clearly extending far beyond U.S. borders, with Europeans buying here, and many Asian companies being shopped as low-cost bargains.

In the first quarter of 1999, U.S. deal makers announced $357.9 billion worth of mergers, nearly double the $185.8 billion worth of deals disclosed in 1998’s first quarter. In terms of numbers of deals, there were 1,974 disclosed in the first quarter, almost unchanged from the year-earlier period, according to Mergerstat, an arm of the Century City-based investment bank Houlihan Lokey Howard & Zukin.

Those first-quarter merger numbers reflect only deals for which terms were publicly disclosed, and include transnational deals, if either buyer or seller is based in the United States, according to Houlihan spokeswoman Marie Ali.

The typical company sold in a deal involving a U.S. company went for about 24 times earnings, reported Mergerstat.

Local deal-making experts say Southern California is participating in the merger trend at full tilt, although L.A.’s complex of smaller, and largely private, companies does not command the premiums of larger, publicly held enterprises.

“You’re going to find prices more toward three to five times earnings on smaller private companies,” although that figure is often diminished by the fact that “earnings” on such deals typically include certain expenses such as interest, depreciation and owner’s draw, said Larry Hurwitz, president and founder of Lawrence Financial.

Money to finance a buyout has gotten progressively cheaper in the ’90s, with interest rates running from 1 or 2 percent over the prime rate eight years ago to 1 or 2 percent under prime now, said Hurwitz.

The confluence of cheap money and high asset prices has motivated both buyers and sellers, said Jim Freedman, managing director of Barrington Associates Inc., one of the most active middle-market merger advisors in Southern California. “We closed nine M & A; deals in the first quarter, all companies in Southern California, which was a record for us, and the backlog is terrific,” said Freedman. “We have a database of more than 800 investment groups, each with at least $200 million in capital ready to deploy to buy businesses. The demand is there.”

Freedman added that he now commands a staff of 22 professionals, but “we always seem to need more talented people to work for us.”

Bank by the sea

One enterprise that definitely hasn’t been sold or merged is Farmers & Merchants Bank of Long Beach, the $1.8 billion-in-assets independent bank founded in 1907 to issue loans to L.A.’s then-abundant farm, dairy and merchant community.

The publicly traded bank is extremely well capitalized, said Jack Norberg, president of the Standard Investment Charter brokerage in Tustin. But take a deep breath a single share of Farmers & Merchants, if you can find it on the over-the-counter bulletin board, will set you back $2,800.

“This is a thinly traded stock, with about 35 percent held by family insiders,” said Norberg, who specializes in handling publicly held stocks that are not listed on the major exchanges.

So thinly traded are the 163,000 shares that investors wanting to acquire more than $100,000 worth are advised to enter the market in stages, said Norberg.

But that illiquidity has a potential upside for investors: Where most good-quality banks are selling at two to three times book value, F & M; is trading at one times book. Institutional buyers are leery of unusual stocks, preferring instead shares they can sell in a hurry if things don’t break as expected.

Assembling a meaningful stake in F & M; (nowadays, “meaningful” probably means more than $1 million), would take months of diligent work most institutions would simply rather buy a BankAmerica Corp. or Washington Mutual Inc. than get involved in sticky stock that could go sideways like any other stock. But even with its liquidity problem, F & M; stock is up 56 percent from $1,800 a share in yearend 1996, according to Lafayette, Calif.-based Walkers’ Manual LLC, which tracks prices of unlisted securities.

Making matters especially interesting for investors is the fact that F & M; has several generational issues to resolve. The family insiders of F & M; are the Walkers (no relation to Walkers’ Manual.) Kenneth Walker, 75, chairman, and other senior Walkers have to consider how to pass on shares or wealth to younger family members. Oftimes, estate counselors recommend diversifying assets, and that often requires a sale of the family business.

Estate taxes can eat up enough of the family fortune that outsiders, who buy stock sold by family members to pay Uncle Sam, can gain a say in formerly closed operations, noted Norberg.

“This bank has a very good market niche,” he said. “It would make a nice acquisition for another bank. It’s not a short-term situation, but it bears watching.”

Quick takes

Worth magazine, the glossy monthly financial, says that Burbank-based Walt Disney Co., a laggard performer for several years on Wall Street, is a good long-term buy. The entertainment giant is investing in new technologies and limiting risks on new movies (by lowering production costs). Too, world economies are maturing to a point where consumers have a little money left over and want to spend it on entertainment. Disney now gets 21 percent of its revenues from overseas, but that could balloon in next century. … Kennedy-Wilson Inc., the Beverly Hills-based property management and auction firm, has filed to raise $20 million in a secondary offering, lead managed by Friedman, Billings & Ramsey & Co. Inc., the Minneapolis-based securities firm. The company plans to pay down debt with the proceeds, including $10.25 million in IOUs to East-West Bank of Los Angeles. Kennedy-Wilson stock traded as low as $3.67 a share in the first quarter of 1998, but was back to the $9-a-share range last week.

Contributing Reporter Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at sevencontinents@mindspring.com.

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