Companies seeking refuge from a dismal market for initial public offerings didn’t find much comfort in mergers and acquisitions in the past year.
Sure, deals were more plentiful than public offerings in the past year, but that’s not saying much.
What is surprising is that there weren’t more mergers and acquisitions, given Wall Street’s downturn.
Blame it on tougher financing, hesitancy among prospective buyers and fewer companies willing to sell at lower prices.
With deals taking six to 12 months to complete, potential buyers are nervous about financing holding up or acquisition targets holding their own during the recession.
The way things are going, a buyout candidate’s valuation and profits today could be lower just a few months from now.
“This is sometimes referred to as the ‘catching the falling sword’ problem,” said Murray Rudin, a partner in the Irvine office of Los Angeles-based private equity firm Riordan, Lewis & Haden Inc.
This fear has permeated the mergers and acquisition market, driving down already declining company valuations.
Generally speaking, valuations fell during the past year to sale prices of five times a company’s earnings before interest, taxes, depreciation and amortization, from about eight times EBITDA.
Large Deals Stall
That kind of drop has scared off a lot of lenders from funding large acquisitions.
In recent years, big private equity firms made huge, leveraged deals in hopes of breaking up companies or portfolios and selling off the pieces at a profit.
But a lack of credit has stalled big deals, leaving a focus on smaller dealers where using all cash is an option.
“You have to have a lot of cash to do deals,” said Greg Presson, a senior managing director with Los Angeles-based investment bank B. Riley & Co., which has an office in Newport Beach.
B. Riley recently picked up a couple local healthcare companies as clients. Healthcare is the only market still seeing a number of big-dollar deals because of the relatively steady nature of the industry (see story, page 19).
In a slow market, B. Riley typically takes on merger and acquisition clients that are in desperate situations, Presson said.
Some industries, like retail and energy, have been hurt worse than others.
Stronger companies are found in healthcare, defense, technology and food and beverage.
Aerospace, which has been fairly stable so far, may be on the cusp of a downturn as production rates from heavyweights Boeing Co. and European Aeronautic Defence and Space Co. slow, according to industry watchers.
“It’s a glum attitude out there, but it’s not dead” said Hector Cuellar, president of Costa Mesa’s McGladrey Capital Markets LLC, a unit of Kansas City, Mo.-based H & R; Block Inc.
McGladrey let go more than 30 workers during the past six months to handle the downturn. It now has about 65 here.
Buying Activity
But Cuellar, whose company does 10% to 15% of business locally, said he still sees a number of buyers lining up for companies.
“The middle market has a floor,” he said. “We’re still seeing activity.”
Buyers are being more careful in their analysis of companies, spending more time and money to research potential acquisitions.
“What used to take 90 days is now taking up to 150 days,” Cuellar said.
Before making a bid, buyers look at a number of things including financial health and management quality.
But some investors say they’re just as disciplined as before.
“Fundamentally, I don’t think it should be different. I would hope that investors did not ignore those factors when the credit markets were loose,” Rudin said.
Hoarding Cash
Many local companies are trying to hold on to their cash as a reserve and aren’t as focused on growth, said Steve Perry, managing director for Janes Capital Partners, an investment bank in Irvine.
That’s also contributed to a slowdown in deals.
Foreign buyers, which were behind some of the county’s largest deals last year, still are showing strong interest in the market, according to local watchers.
Although the dollar has gained in value against many key trading partners, foreigners still are intrigued by the lower valuations of companies, Cuellar said.
More favorable exchange rates for Japan-ese investors have sparked some of the strongest interest.
About a third of McGladrey’s business was with foreigners last year. Cuellar says he wants to grow that.
