Deal volume continues freefall, rebound prospects still distant. (Banking & Finance: Special Report - To Deal or Not to Deal).

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.

"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.

"Let's say you're going to buy somebody's business and the guy says I'm going to make $100 million this year. But then as you watch every month, it becomes evident he's going to make $60 million. That makes you start to rethink the metrics, or even if you want to do the deal at all," said Peter Nolan, a managing partner at Los Angeles private firm investor Leonard Green & Partners.

Local M&A Activity

Top 50 mergers and acquisitions announced in 2002 involving L.A.
companies, based on deal size.

                       Deal Size (base)
Announced   Closed    (equity millions)  Buyer

22-Feb-02  11-Dec-02       6705.01       Northrop Grumman

19-Nov-02                  4725.00       Blackstone Group

12-Jun-02                  2961.04       Univision Communications

22-Sep-02                  1438.80       Private Group Led By
                                         David H. Murdock
03-Jun-02  17-Jan-03        754.76       USA Interactive

31-May-02  29-Jul-02        742.00       Macerich

14-Jun-02  02-Jan-03        729.40       Cardinal Health

02-Apr-02                   691.58       Quest Diagnostics

11-Apr-02  31-Aug-02        635.25       Golden Gate Capital/
                                         Whitney & Co.
13-Dec-02                   620.33       Computer Sciences
13-Dec-02                   537.27       SAVIA SA de CV/
                                         Fox Paine & Co.

31-Jan-02  22-Aug-02        484.84       Lyondell Chemical


09-Jul-02                   385.00       Staples


20-Aug-02  31-Oct-02        365.68       Unocal

27-Nov-02  23-Jan-03        350.00       Evercore Partners


02-Jan-02  02-Jan-02        282.50       First Data

04-Nov-02  09-Dec-02        250.00       General Electric


19-Jul-02  02-Aug-02        250.00       First Data


06-Nov-02  31-Jan-03        215.76       Pan Pacific Retail
                                         Properties
01-May-02  01-May-02        160.07       Hilton Hotels

16-Sep-02                   157.45       Goldman Sachs Group

28-Mar-02  19-Apr-02        146.30       On Assignment

24-Dec-02                   139.02       Entravision
                                         Communications
14-Feb-02  26-Jul-02        133.55       Private Group Led By
                                         Haimovitz./Capital Comm.

12-Sep-02  28-Oct-02        130.00       L-3 Communications



19-Mar-02                   130.00       GUS PLC


11-Mar-02  23-May-02        121.41       ValueClick

18-Oct-02  18-Oct-02        100.00       Leonard Green & Partners

25-Oct-02  25-Oct-02        100.00       ITLA Capital



18-Mar-02  18-Mar-02         81.00       International Rectifier


06-Sep-02  06-Sep-02         78.00       Walt Disney


16-Dec-02                    75.84       K2

20-May-02  20-Jun-02         72.50       Pactiv

20-Mar-02  23-Aug-02         72.27       Hawthorne Financial

06-Aug-02  01-Nov-02         66.33       UnionBanCal

16-Jul-02  03-Sep-02         59.80       Catapult Communications


02-Aug-02  02-Aug-02         59.30       Group 1 Automotive

22-Oct-02  06-Dec-02         58.50       BAE Systems


18-Jan-02  27-Mar-02         57.42       Converge Global

26-Aug-02  26-Aug-02         57.20       Riverdeep Group


11-Jul-02  11-Jul-02         57.00       Nationwide Health
                                         Properties


09-Feb-02  28-Oct-02         55.42       JAKKS Pacific

28-Jan-02  28-Feb-02         53.84       Curative Health Services

15-Apr-02                    50.10       International Rectifier



28-May-02  21-Jun-02         49.00       ARAMARK



03-Jan-02  28-Jan-02         47.63       Digital Insight


13-Feb-02                    47.50       Entravision
                                         Communications

07-Oct-02  07-Oct-02         46.00       John Wood Group


11-Oct-02                    46.00       Elementis


19-Jun-02  03-Jul-02         45.56       Globe International



Announced         Buyer City         Seller

22-Feb-02        Los Angeles         TRW Inc.

19-Nov-02          New York          Northrop Grumman Corp.

12-Jun-02        Los Angeles         Hispanic Broadcasting
                                     Corp.
22-Sep-02                            Dole Food Co.

03-Jun-02          New York          Ticketmaster

31-May-02        Santa Monica        Westcor Realty

14-Jun-02        Dublin, Ohio        Syncor International

02-Apr-02      Teterboro, N.J.       Unilab

11-Apr-02       San Francisco        Herbalife International

13-Dec-02         El Segundo         DynCorp.
13-Dec-02         San Pedro          Seminis
             Garza Garcia, Mexico

31-Jan-02          Houston           Occidental Petroleum
                                     (Equistar Chemicals)

09-Jul-02     Framingham, Mass.      Freeman Spogli
                                     (Medical Arts Press)

20-Aug-02         El Segundo         Pure Resources

27-Nov-02          New York          Weider Health & Fitness
                                     (Weider Publications)

02-Jan-02  Greenwood Village, Colo.  Cardservice International

04-Nov-02      Fairfield, Conn.      Metro-Goldwyn-Mayer
                                     (Bravo)

19-Jul-02  Greenwood Village, Colo.  PayPoint Electronic
                                     Payment Systems

06-Nov-02           Vista            Center Trust

01-May-02       Beverly Hills        Hilton Waikoloa Village

16-Sep-02          New York          National Golf Properties

28-Mar-02         Calabases          Health Personnel Options

24-Dec-02        Santa Monica        Big City Radio
                                     (KSYY-FM/KLUU/FM/KVYY-FM)
14-Feb-02                            Clark (Dick) Productions.


12-Sep-02          New York          Northrop Grumman
                                     (displays/electronic
                                     devices)

19-Mar-02    Manchester, England     Homestore Inc.
                                     (ConsumerInfo.com)

11-Mar-02      Westlake Village      Be Free

18-Oct-02        Los Angeles         Phoenix Scientific

25-Oct-02          La Jolla          Imperial Credit
                                     Industries
                                     (Lewis Horwitz)

18-Mar-02         El Segundo         European Semiconductor
                                     Manufacturing

06-Sep-02          Burbank           Forward Broadcasting
                                     (WEVD-AM)

16-Dec-02        Los Angeles         Rawlings Sporting Goods

20-May-02        Lake Forest         Winkler Forming

20-Mar-02         El Segundo         First Fidelity Bancorp.

06-Aug-02       San Francisco        Valencia Bank & Trust

16-Jul-02       Mountain View        Tekelec (Network
                                     Diagnostics)

02-Aug-02          Houston           Miller Automotive Group

22-Oct-02           London           Condor Pacific
                                     Industries

18-Jan-02        Santa Monica        TeleWrx

26-Aug-02      Dublin, Ireland       Gores Technology
                                     (Broderbund)

11-Jul-02       Newport Beach        American Retirement
                                     (5 assisted living
                                     centers)

09-Feb-02           Malibu           Toymax International

28-Jan-02      Hauppauge, N.J.       Apex Therapeutic Care

15-Apr-02         El Segundo         Koninklijke Philips
                                     Electronics
                                     (TechnoFusion)

28-May-02        Philadelphia        Hilton Hotels
                                     (Harrison Conference
                                     Centers)

03-Jan-02         Calabases          Virtual Financial
                                     Services

13-Feb-02        Santa Monica        Emmis Communications
                                     (KXPK, Denever)

07-Oct-02     Aberdeen, Scotland     Bender Machine/Thomason
                                     Mechanical

11-Oct-02      Staines, England      Occidental Petroleum
                                     (Chromium Chemicals)

19-Jun-02      Port Melbourne,       Kubic Marketing
                  Australia

Source: Mergerstat.com

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