This summer has been the best for corporate lawyers in the past two years with a rash of deals heating up a previously frozen mergers and acquisitions market.
Local lawyers saw a number of deals struck or closed in August, typically a slow month.
“Lawyers don’t usually look to August thinking it’s going to be a big month for deals,” said John Williams, partner at the Irvine office of Los Angeles-based Gibson, Dunn & Crutcher LLP. “But it certainly was this August.”
Deals worked on last month include the acquisition of Costa Mesa’s Paul Frank Industries Inc. by Los Angeles-based Saban Brands LLC, Palo Alto-based VMware Inc.’s acquisition of Irvine software maker Integrien Corp. and San Clemente-based vitamin maker Metagenics Inc.’s buy of Catalina Lifesciences Inc. of Irvine.
Some deals struck earlier also closed last month, including Alcon Inc.’s acquisition of Aliso Viejo-based LenSx Lasers Inc. and the buyout of Carpinteria-based CKE Restaurants Inc., which has operations in Anaheim, by New York private equity firm Apollo Management LP.
“We have been very busy in the last few months,” said Scott Shean, office managing partner at the Costa Mesa office of Los Angeles-based Latham & Watkins LLP, which worked on the Paul Frank deal. “And it seems that the M&A market is, at least locally, looking pretty robust.”
The summer uptick ended nearly 18 months of slow going for corporate lawyers.
“You’ve gone from an environment of two years ago, when everything was essentially frozen, to a more normalized environment,” said Jim Scheinkman, partner at the Costa Mesa office of Phoenix-based Snell & Wilmer LLP.
The question for corporate lawyers now is whether the uptick will last.
Views are divided on whether the surge is an anomaly or a sign of a lasting recovery for the deals market.
Some aren’t ready to call it a real recovery.
“It was nice to see the recent spate of deals, but I’m not holding my breath waiting to see if this is going to continue,” Gibson Dunn’s Williams said. “I’m not sure if it’s a trend yet because it’s too early to tell.”
Others forecast strong deal activity through the end of the year and probably into 2011, albeit with fewer deals done and at a slower pace than in recent months.
“There is greater confidence in the recovery and willingness (of) clients’ business and acquisition plans,” Latham’s Shean said. “It’s helped by the debt market loosening up a little bit as clients are seeing more opportunities to finance deals.”
A number of other factors are behind the recent deals, including a recovering economy, attractive valuations, favorable capital gains taxes and baby boomer business owners looking to cash out, according to lawyers.
A majority of recent deals are by large companies with ample cash reserves.
“We’ve known for some time there is an enormous amount of cash on corporate balance sheets,” Williams said.
Price multiples—what a company pays for an acquisition based on cash flow—have stabilized, according to lawyers.
“Those (favorable) multiples aren’t going away anytime soon because we are in a lower growth environment,” said Mike Mulroy, partner at Newport Beach-based Stradling Yocca Carlson & Rauth LLP, which worked on the CKE and LenSx deals. “A number of companies are aware they can’t wait for multiples we witnessed during 2007 and the early part of 2008.”
Strategic deals appear to be the focus for many companies that have cut costs and now are looking to acquisitions as a way to boost revenue.
“If a company has slowing organic growth, the best way to support and increase your bottom line is go and do an acquisition,” Williams said.
Tax Factor
Some lawyers said they expect to see more big deals in 2010, in part because of concerns that Congress will allow Bush administration tax cuts to expire at the end of the year.
For sellers, expiration would mean higher capital gains taxes on a business sale in 2011.
The expiration stands to raise the current 15% capital gains tax to 20% for those in higher brackets.
Another driver appears to be baby boomers looking to sell after weathering the downturn.
“There are some long-term demographics going in favor of M&A markets as more baby boomers are looking at retirement and wanting some type of exit or to take some chips off the table,” Snell’s Scheinkman said.
The technology market appears to be one of the first industries to rebound, thanks to big cash piles at many of the industry’s top companies.
“It looks like technology will be the biggest beneficiary of the deal activity at present,” Williams said.
Healthcare, where activity held steady during the downturn, appears ripe for more deals as big drug and medical device makers turn to smaller ones to drive growth.
One of August’s notable deals was the estimated $50 million buy of clothing designer Paul Frank by media mogul Haim Saban and an arm of his Los Angeles-based Saban Capital Group.
The Irvine office of Gibson Dunn represented Paul Frank. The Costa Mesa office of Latham & Watkins represented Saban.
“Saban was very impressed with the brand, and the sellers were obviously very proud of their company,” Shean said. “That deal was hopefully a return to normal as it was a typical deal in terms of the process.”
