The window for bargains on mergers and acquisitions could be closing amid signs that private equity and corporate buyers are deploying stockpiles of cash amassed during the recent recession.
That’s fueled higher prices for companies that worked their way through the downturn with fundamental strengths intact.
The ramp-up has played out here in recent weeks, with Orange County companies involved in three blockbuster deals.
Recent Deals
Two local sellers and one buyer combined for $18.5 billion worth of action on deals that are awaiting final approvals. The three deals are about double the combined total for the top 10 of 2010.
The most recent of the big deals is Irvine-based Western Digital Corp.’s bid to buy San Jose-based competitor Hitachi Global Storage Technologies Ltd. for $4.3 billion in cash and stock (see story, page 1).
That came on the heels of Newport Beach-based healthcare real estate investor Nationwide Health Properties Inc.’s pact to sell to Chicago healthcare real estate investor Ventas Inc. for $7.4 billion.
A few weeks earlier, Brea-based medical products maker Beckman Coulter Inc. settled on a $6.8 billion bid from Danaher Corp., a Washington, D.C., conglomerate.
The Nationwide deal is likely the highest the county has ever seen, a title Beckman Coulter appeared to hold for a few weeks.
A supply and demand imbalance is pushing up valuations for quality companies, said Hector Cuellar, president of Costa Mesa-based McGladrey Capital Markets LLC, an investment bank specializing in mergers and acquisitions.
“The low hanging fruit is probably gone,” he said.
Bargains were available six months to a year ago, when financing was a greater concern and anxiety over the economy was higher.
“A vast majority of those companies in distressed situations were snatched up or don’t exist,” said Greg Presson, a senior managing director at the Newport Beach office of Los Angeles-based investment bank B. Riley & Co. “Others fixed those problems or weathered the storm.”
The “flight to quality” is pushing some private equity groups to raise the stakes for potential acquisitions.
In the Beckman purchase, Danaher outmuscled rival suitors with a bid that was about 33% more than the company’s market value.
Beckman makes instruments and chemicals used by hospitals and medical laboratories running tests for doctors, medical researchers and drug developers.
“They were bidding in a way the private equity world couldn’t match it,” said Thomas Turpin, managing director of investment banking at the Los Angeles office of Montana’s D.A. Davidson & Co. “The market is putting enormous valuations on premiums of companies that continually deliver above average performance.”
Stockpiling Cash
Private equity firms have stockpiled cash in the past two years.
According to industry tracker PitchBook Data Inc. of Seattle, private equity firms entered 2011 with a $485 billion capital overhang—money that was raised but not invested.
“Some funds are running out of time, and they’re willing to make some aggressive bids,” Cuellar said.
The pent-up cash is driving premiums, but that will “balance itself out,” Presson said.
For now the market is trending toward an aggressive chase for quality acquisitions.
The Business Journal reported last month that Aliso Viejo-based hotel investor Sunstone Hotel Investors Inc. is spending $37.5 million for the rest of a Times Square hotel it doesn’t already own and plans to spend $1 billion buying others this year.
Sunstone and competitors are under the gun to acquire hotels before a brewing industry turnaround drives up prices.
The deal in New York follows an executive shakeup that saw former chief executive Art Buser leave because of what Sunstone said was a lack of buying on his watch.
Sunstone earlier gave a number of hotels in its portfolio back to lenders after their values dropped below what was owed on them. The move served to improve Sunstone’s balance sheet, clearing the way for acquisitions of higher-end properties.
Opening Purse Strings
Many companies have spent the past three years cutting budgets, paying down debt and hoarding cash.
The ongoing economic recovery has opened the purse strings.
“A lot of that cash has been on the sidelines the last few years,” said Ken Salgado, who leads the technology and life sciences group at the Irvine office at Moss Adams Capital LLC, a Seattle-based accounting and consulting firm.
While many of the ingredients are in place to spur the mergers and acquisitions market, corporate revenue and profits have to fall in line as well.
And there are bright spots there.
In the December quarter, 71% of companies on the Standard and Poor’s 500 Index beat analyst expectations, the largest percentage since at least 2006, according to Bloomberg.
“That’s a key driver of transaction activity,” said Rich Anderson, managing director of corporate investment banking at Moss Adams. “We’re seeing bigger strategic entities take a strong interest in transactions.”
He said there’s a long list of deep-pocketed suitors in many sectors.
Western Digital
Western Digital fits the bill on both accounts.
The disk drive maker, which had about $2.7 billion in cash at the end of 2010, is set to pay $4.3 billion in cash and stock for rival San Jose-based Hitachi Global Storage.
Western Digital said it plans to fund the deal with a combination of cash and some $2.5 billion in debt, which remains cheap for quality borrowers.
The deal, expected to close in the third quarter, is set to give Western Digital a clear lead with more than 50% of the market for disk drives, which get built into computers, servers, portable storage devices and consumer electronics.
At the end of 2010, Western Digital had 31% of the market for disk drives, according to data from El Segundo-based market researcher iSuppli Corp., a unit of Colorado’s IHS Inc.
The recent spate of big deals here could be a high-water market as the supply of private equity money is spent down, according to Murray Rudin, a managing director in the Irvine office of Los Angeles-based private equity firm Riordan, Lewis & Haden Inc.
“As the balance between buyers and sellers shifts to buyers, valuations tend to go up,” he said. “The pendulum swung to the extreme in 2008 and 2009 when credit markets were very tight. Now the pendulum is gradually starting to swing back to the middle.”
