Company valuations are on the rise after a run-up in the stock market, but that isn’t expected to deter potential buyers. In fact, it may be setting the bar higher for future deals.
“Last year was such a roller coaster,” said Tom Courtney, a Newport Beach-based investment banker. “In that environment, there was no idea of how far the market could drop. The fact that valuations have come back to more typical levels is a statement that people now believe the world isn’t coming to an end.”
Christopher Baclawski, managing partner at Newport Beach investment banker CB Capital Partners Inc., doesn’t expect the deal market to reach prerecession levels immediately, but he does see it improving.
“Banks aren’t lending as much as before the recession, but it’s coming back,” he said.
“Companies are now able to access capital. With private equity growing, that’s actually giving public companies more ammo to make strategic acquisitions.”
Private equity groups have largely been sitting on the sidelines for the past two years, which has left some companies with cash to burn, Baclawski said.
“We’re going to see a lot higher valuations and volume in mergers and acquisitions in the next year,” he said.
How pricey is today’s market? From the start of last year to Feb. 1, the 20 largest public companies in Orange County outperformed a national average in the price-to-earnings ratio, which measures what a company’s stock sells for against its earnings.
The median price-to-earnings ratio of the largest public companies here was 44, according to data compiled by Thomson Reuters Corp.
For the companies that make Standard & Poor’s 500 index, the weighted median was 42.9, according to Wilshire Associates in Santa Monica. Another key indicator compares stock prices to a company’s book value, a measure of assets. The median price-to-book ratio for the OC companies for the 13 months through January was 46, according to a separate review by Newport Beachbased Solis Capital Partners LLC.
“The S&P 500 has improved in that same period, but not nearly as much as OC companies,” said Dan Lubeck, managing director at the private equity firm. “So there’s a good deal of optimism by investors surrounding the sectors that larger OC companies participate in—technology and healthcare.”
Key Players
Even if none of the top 20 public companies here are involved in buyouts this year, their values will no doubt be used to benchmark future deals, according to Hector Cuellar, president of Costa Mesa-based investment banker McGladrey Capital Markets LLC.
“Within each of their industries, these OC companies are key players,” he said. “Their performances in the market and valuations will likely be used as part of an index of companies within each sector to help set prices for potential M&A activity in the next 12 months.”
Cuellar expects deals to be more plentiful in the next several quarters, provided the stock performance and capitalizations don’t shoot up too quickly.
But even that could have some upside.
“Rising valuations allow public companies the luxury of offering stock as part of any purchase price. So cash isn’t necessarily king anymore. Companies have more flexibility,” Cuellar said.
M&A Targets
Irvine-based drug maker Allergan Inc. is one OC company that could be in a strong position to make strategic acquisitions in the future, said Lubeck. “It’s done reasonably well through this recessionary period, despite the fact that a lot of its product is based on discretionary income,” he said. “As people get disposable income, it would make sense that it will continue to grow.”
Allergan could follow the example of Irvine-based chipmaker Broadcom Corp., which has continued to update its products through supporting purchases of smaller rivals, according to Lubeck. Part of that growth is due to Broadcom’s history of buying smaller private players, according to local investment bankers. Public companies can buy private firms and add to their market share.
“M&Adeals generally are more attractive to the acquirer as the price-to-earnings multiples go up,” said Randy Krauthamer, managing director atWaveland Capital Partners LLC in Irvine.
He pointed out that Broadcom did three deals in 2008, one in 2009 and already completed another this year when it bought San Jose-based startup Tilera Corp. Last month, Broadcom said it was taking part in a $3.5 billion, two-year effort by Intel Corp. to invest in startups.
“Broadcom has been able to gain market share and size through strategic acquisitions,”
Krauthamer said. “Since tech companies tend to be growth-oriented, rising price-to-earnings ratios probably won’t deter major tech players like Broadcom from trying to pick up smaller rivals.”
