Field opens for strategic players as private equity is sidelined.

At first glance it didn't appear that it was an opportune time for Micro Memory LLC to be on the block.

The Chatsworth manufacturer of computer storage devices was up for sale this summer as lenders starting getting queasy over the state of the U.S. subprime loan market.

But the pitfalls of making a deal amid a credit crunch didn't faze Christian Jebson, chief executive of Vmetro asa, an Oslo, Norway-based maker of computer components for the defense and aerospace industry.

Jebson plunked down $16.3 million for Micro Memory and its experienced ChiP design team, which he said will get the Norwegian company "a more complete product portfolio at a lower combined cost." In fact, the credit squeeze likely played in Vmetro's favor.

"For the past two years strategic acquirers might often get outbid by a speculative private equity investor who had access to cheaper capital--that's gone," said Ed Villeneuve, Los Angeles managing director of Goldsmith Helms, a Minneapolis-based investment bank.

And not only is the direct competition from private equity firms fading away, but local, middle market companies looking to either acquire or be acquired are finding themselves in a rare sweet spot.

"We're a small-business town with the vast majority of deals under $100 million," Villeneuve said. "Say I'm doing a $75 million deal that needs $50 million financing--all that takes is a call to couple of banks. That kind of deal can get done much easier than one where you have to line up 12 banks."

That ability to make smaller deals here is reflected in the numbers. Goldsmith Agio Helms, which tracks monthly M&A activity for the Business Journal, has counted 482 deals to date as of July, only 5 percent below last year's unusually heavy deal volume.

In contrast, there's some $340 billion nationwide in outstanding buyout-related debt for bigger deals being held up by the lack of a secondary market to spread the risk, Villeneuve said.

"It's like a pig in a python. Until those deals work their way through the system, or come undone, it give the edge to the strategics that don't need to syndicate their financing to get a deal done," he said.

Market flux

Investment banker Lloyd Greif, whose Los Angeles-based Greif & Co. specializes in matchmaking for small- to medium-sized companies, seconded the idea that business owners willing to sell to a strategic buyer will have the easiest time attracting bidders.

"You have a market in flux, nobody knows where it's going to end, so that means everybody is recalibrating," Greif said. "The guys who wanted to keep a piece of the rock, and thought they could do that by going with a private equity firm are going to have to rethink their priorities or be willing to take less money."

Indeed, it's the larger private equity-based deals in L.A. that have seen their chances of being completed under the original terms come under most scrutiny.

That includes the $2.1 billion bid by Bain Capital Partners' to take private Westlake Village-based Guitar Center Inc., the nation's largest music retailer. Bain was part of a buyout partnership that last month renegotiated a lower price to acquire Home Depot Inc.'s wholesale supply business.

Guitar Center shares are trading around 10 percent below Bain's $63 a share original bid, a sign that Wall Street thinks that deal also is ripe for renegotiation.

Ironically the largest deal the Los Angeles market has seen in more than two years--investment company Blackstone Group's $26 billion pending acquisition of Hilton Corp.--is seen as more of a strategic deal than a private equity transaction.

Blackstone, a private equity and hedge fund manager, became a hospitality industry player when it began buying up hotels after the post-9/11 travel slump made hotel flags distressed and cheap. Five large investment banks have agreed to finance up to an estimated $21 billion of debt to make the deal happen.

Another difference: Hilton reported a 15 percent increase in second quarter net income, while Guitar Center's fell 29 percent. While the musical instrument retailer still has stable cash flow, those kinds of financials can make potential investors nervous about its ability to pay off any leveraged debt.

Little surprise then that Hilton shares are trading only 3 percent below Blackstone's $47.50 a share bid, a more typical spread reflecting market sentiment that Blackstone is unlikely to give up on the deal.

"You might still see some haggling over the Hilton deal, but not to the extent that happened with Home Depot," said Tom Taulli, a Southern California-based M&A consultant and author. "That's the kind of deal where being as big as Blackstone can actually help get the deal done."

By DEBORAH CROWE

Staff Reporter