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Business Services Industry

Deal volume continues freefall, rebound prospects still distant

Los Angeles Business Journal, Feb 17, 2003 by Conor Dougherty

Local merger and acquisition activity fell 10 percent in the fourth quarter of 2002 compared with a year earlier, capping off an abysmal year in which deal volume fell each quarter.

Though investment bankers don't expect a strong turnaround anytime soon, many believe that M&A activity is finally at rock bottom.

There were 90 deals announced in the last three months of the year that involved an L.A. County-based buyer or seller, down from 99 in the fourth quarter of 2001, according to Mergerstat.com.

All told, 402 local deals were announced in 2002, down 16 percent from 477 in 2001. Of those 402, prices were disclosed for 156, for an aggregate value of $29 billion. That's down from $35.9 billion in 2001.

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"I don't see a big pickup in activity coming soon," said James Freedman, a managing director at Barrington Associates, an investment banking firm in Los Angeles. "But there needs to be a certain amount of deals. Some people have to sell their business, so I can't imagine it's going to get much worse."

There is no shortage of explanations for the dearth of investment banking activity. For more than a year, bankers have pointed to the ailing economy, stingy lending institutions and lagging stock market as deal killers. Now, the threat of war with Iraq makes the economic climate that more difficult.

"Until we get a better sense of what's going on with this war, the market will be apprehensive," said Jeff McKenzie, managing director at Los Angeles investment bank Houlihan Lokey Howard & Zukin.

The local falloff mirrors a national trend.

There were 7,411 domestic and cross-border deals announced in 2002, according to Mergerstat, down 13 percent from 8,545 in 2001. Aggregate value for the deals in which price was announced was $441.6 billion, down from $683 billion in 2001.

The Mergerstat data covers publicly announced mergers and acquisitions involving businesses with deals of $1 million or more, and 10 percent or more equity sought. The figures reflect only the base equity price of the transactions and not the liabilities, and they exclude the exchange of business assets, private placements, spin-offs and open market transactions.

Dodging the bullet

Despite a falloff in both the number and value of local deals, investment bankers said Los Angeles has weathered the storm better than other regions, in part because of its healthy supply of private companies.

"At private companies you generally have entrepreneurs who own a very large percentage of the business, so they tend to sell when they want to retire, more so than they think it's the ultimate time," McKenzie said. "Public companies feel they need to sell somewhere near a historical high."

Of the 402 L.A. deals in 2002, only four were worth north of $1 billion. The two biggest involved defense giant Northrop Grumman Corp.'s pursuit of TRW Inc.

Northrop's $6.7 billion acquisition of TRW closed in early December, and was preceded by Northrop's announced $4.7 billion sale of TRW's automotive unit to Blackstone Group. That deal has not yet closed. (While the two deals involve the same business unit, they are counted as two deals since both are commissionable transactions for investment bankers.)

The TRW deals accounted for 40 percent of the year's total deal value.

The next biggest deal was Los Angeles Spanish-language broadcaster Univision Communications' $3 billion purchase of Hispanic Broadcasting Corp., based in Dallas. That deal is expected to close, but it faced significant regulatory hurdles in its early stages. The only other billion-dollar deal was Dole Food Co. Chairman David Murdock's $1.4 billion offer to take Dole private, which has been approved by shareholders but has not yet closed.

Currency declines

As the fall off in stock prices takes many public companies off the block for the time being, it also has hindered public companies' acquisition efforts. That's because public companies often issue some stock when making acquisitions, and with many companies trading at or near historical lows, a stock-driven deal could further dilute share values.

And with the steady decline in share values over the last couple of years, target companies are seen as skittish about taking those shares.

"When the market is down, everyone feels less comfortable using stock as currency," McKenzie said.

Investment bankers said larger deals are becoming a rarity not only because of the falling stock market, but because a generally weak economy has cut into most companies' returns. Now, bankers are sorting deals into two piles: strategic buyers, such as a rival companies, and financial buyers, such as private equity funds.

"On the strategic side, a lot of buyers have had problems and so they've retrenched until they get their own house in order," Freedman said. "On the financial side, we're getting calls every day."

Regardless of buyer, even an average deal can be more difficult these days. Banks are more stringent about how much they will lend, and as profit margins slip many bankers are second-guessing deals once they have been initiated.

Business Services Industry

Deal volume continues freefall, rebound prospects still distant

Los Angeles Business Journal, Feb 17, 2003 by Conor Dougherty

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