First quarter deals lag as market turns.

Mergers-and-acquisitions activity in Los Angeles County remained at depressed levels during the first quarter, tracking a worsening national trend, according to statistics compiled by Mergerstat LP.

For the first three months of 2002, only 31 deals were completed involving locally based companies, compared with 39 deals in the like year-earlier period, according to Mergerstat.

Deal value rose to $5.9 billion, however, from $4.8 billion a year ago, as the completion of Northrop Grumman Corp.'s $2.4 billion acquisition of Newport News Shipbuilding Inc. skewed the dollar totals higher. (Mergerstat doesn't include debt in its calculations of deal values, only equity.)

"The fact that there are fewer deals done in L.A. County versus last year is consistent with what we've seen on a national basis," said Lindsey Alley, a director of mergers and acquisitions at investment banker Houlihan Lokey Howard & Zukin, which owns Mergerstat.

Alley believes a bottom was hit in February, however, saying that deal activity has picked up in the past 30-45 days. Others agree.

"We're approaching the closing of three transactions and we've signed up a number of new transactions," said Mark Vidergauz, managing director of Los Angeles-based investment banker Sage Group LLC. "We've definitely seen a very significant pick-up in activity in the last six weeks or so."

In tracking local merger activity, the number of deals is a more reliable indicator than dollar amounts, Alley said, as regional deal values can fluctuate greatly from quarter to quarter.

Nevertheless, a broad decline in deal volumes nationally has been reinforced by smaller deal size. Through late March, Mergerstat tracked 1,658 transactions announced nationwide during the first quarter, compared with 2,449 deals in the like year-earlier period. Deal value fell even more sharply, to $73.9 billion from $157.8 billion.

Even in the fourth quarter of 2001, when deal-making activity practically ground to a halt after Sept. 11, more deals were attempted than in the just-ended quarter. During the fourth quarter, there were 1,840 acquisitions announced nationwide, worth $135.4 billion.

Locally, first quarter activity was dwarfed by a single fourth quarter deal: Amgen Inc.'s agreement to buy Immunex Corp. for $15.8 billion. (In 2001, the number of deals involving an L.A. County-based buyer or seller fell to 477 from 621 in 2000, according to Mergerstat figures. The aggregate value of the deals whose values were disclosed fell to $35.9 billion from $43.3 billion.)

Defense, aerospace hot

Defense and aerospace has remained one of the strongest sectors for mergers and acquisitions. Northrop's pending hostile bid for TRW Inc., announced during the first quarter, for example, tops the list of local deals announced in the first quarter at $5.9 billion, excluding debt.

"The defense and aerospace and government technical services stocks are trading at highs, relative to historical performance," Alley said. "As a result, their stock is good currency to make acquisitions."

Alley said his firm is getting more calls from buyers and sellers in defense and aerospace than it has in the past 10 years. Large defense contractors are seeking to round out their product lines. "We are getting calls from the largest, who are acquisitive, and the smaller companies, who are interested in selling."

Other areas showing signs of life include healthcare and entertainment, said Todd Jadwin, an independent investment banker. "Any thing with cash flow is still hot, it's back to basics."

Indeed, two health-related deals were among the top 10 announced locally in the first quarter. They include the $53.8 million sale of Apex Therapeutic Inc., of Los Angeles, to Curative Health Services of Hauppage, N.Y, and the purchase of Cincinnati-based Health Personnel Options Corp. by Calabasas-based staffing firm On Assignment Inc. for $150 million.

One buyer finding strategic opportunities in the media-and-entertainment field is CDP Capital Entertainment, based in Hollywood. CDP Capital is a joint venture of CDP Capital Communications, an arm of Canadian fund manager Caisse de depot et placement du Quebec, and the fund's managing partner, Henry Winterstern.

CDP Capital Entertainment put together the $134 million deal to take Dick Clark Productions Inc. private during the first quarter. CDP approached Clark, Winterstern said, because they were looking for a television content property to complement and enhance its existing alliances in talent management and production. Consolidation in the media industry has created opportunities for investors such as CDP to bring capital to entertainment companies that need it to navigate the new environment, Winterstern said.

Distressed firms sought

Other partners in that deal were veteran television executive Jules Haimowitz, who brings operational expertise, and Mosaic Media Group Inc., a talent management firm in which CDP also has an investment.

Bankers said telecom and technology deals have been getting done during the downturn, but they've mostly been deals where the buyer is essentially shopping for assets of distressed firms. "The companies that are healthy or semi-healthy are still reluctant to commit their balance sheets or their future at this point," Jadwin said.

Elsewhere, a number of factors have contributed to an increasing willingness to do deals recently, Vidergauz said. People are more optimistic about the state of the economy, and there's been a general adjustment of expectations on the part of sellers and on the part of private equity investors, who can't rely on generating the same returns they did during the late 1990s, he said.

Private equity firms were accustomed to using bank debt to leverage their deals and produce higher profits, but those lenders are still reluctant to take risks. Now private equity firms are willing to accept a lower profit structure, Vidergauz said.

Finally, large NYSE-listed companies must make strategic acquisitions if they are to continue to meet Wall Street expectations for rising profits. "Their issue is they can't grow internally," Vidergauz said.

Ten Largest L.A. County Mergers Closed in the First Quater

Buyer                           Location


Northrop Grumman Corp           Los Angeles
Wellpoint Health Networks Inc.  Thousand Oaks
DR Horton Inc.                  Arlington, TX
Apartment Invest. & Mgmt. Co.   Denver, CO
Hovnanian Enterprises Inc.      Red Bank, NJ
City National Corp.             Beverly Hills
International Rectifier Corp.   El Segundo
Curative Health Services Inc.   Hauppauge, NY
WestCoast Hospitality Corp.     Spokane, WA

Digital Insight Corp.           Calabasas

Buyer                           Seller


Northrop Grumman Corp           Newport News Shipbuilding Inc
Wellpoint Health Networks Inc.  RightCHOICE Managed Care Inc.
DR Horton Inc.                  Schuler Homes Inc.
Apartment Invest. & Mgmt. Co.   Casden Properties Inc.
Hovnanian Enterprises Inc.      Forecast Group LP (The)
City National Corp.             Civic BanCorp
International Rectifier Corp.   European Semiconductor
Curative Health Services Inc.   Apex Therapeutic Care Inc.
WestCoast Hospitality Corp.     Hilton Hotels Co
                                (5 Doubletree/Red Lion hotels)
Digital Insight Corp.           Virtual Financial Services Inc

Buyer                            Deal Size
                                (millions)

Northrop Grumman Corp              $2439.5
Wellpoint Health Networks Inc.      1434.6
DR Horton Inc.                       896.4
Apartment Invest. & Mgmt. Co.          404
Hovnanian Enterprises Inc.             191
City National Corp.                  116.7
International Rectifier Corp.           81
Curative Health Services Inc.         53.8
WestCoast Hospitality Corp.           50.6

Digital Insight Corp.                 47.6

Data provided by Mergerstat LP

RELATED ARTICLE: Truth in Earnings

WHAT might some day prove to be the best thing to come out of the Enron Corp. scandal is off to a promising start.

It's the truth-in-corporate-earnings campaign stirred up by Enron's downfall. If the battle for better disclosure develops as much impetus as appears possible, Newport Beach bond-fund manager Bill Gross will be renowned for having fired one of its loudest shots.

Gross, managing director at Pacific Investment Management Co., took aim not at the fallen Enron but at a still-mighty champion of the bull-market years, General Electric Co.

Gross declared that investors should never let themselves be dazzled by the numbers from 'a conglomerate financed by a money machine." Henceforth, he said, if GE wanted Pimco's confidence it would have to do more than hit numerical targets. It would have to provide information of sufficient quantity and clarity to allow investors to see how the company arrived at whatever results it proclaimed.

Where might this movement lead? Don't get excited, some voices of experience say. The commotion will pass, and the world will lapse back into business as usual.

Then again, maybe not. Just possibly the analysts, brokers, money managers and individual investors who make the markets work will adopt higher quality-of-information expectations that issuers of stocks, bonds and other securities will have no choice but to meet. As Gross said in a CNN interview, "we're all part of the problem."

"There is plenty of blame to go around," agrees Marty Whitman, the outspoken manager of the $2.6 billion Third Avenue Value Fund, a New York stock mutual fund. "In assessing blame," Whitman writes in the fund's latest shareholder report, "it would be a shame if conventional security analysts, conventional money managers and conventional finance academics were left out of the mix."

Though accounting will always be a complicated business, the problem at hand is pretty simple, Whitman suggests. "The average investor focuses on what the operating numbers ARE rather than what all the numbers MEAN," he says.

This stems from more than mental laziness. Uncritical acceptance of numbers is also fostered by such modern systems as money management by index comparison, computer-program trading strategies and everything else that tends to commoditize stocks.

Once a community of investors developed that demanded steady, predictable earnings growth quarter-by-quarter, it was only natural for companies to feed that appetite. Some came fecklessly to live by that model while ignoring its pitfalls.

When the shortcomings -- including the all-too-easy temptation to. cheat a little, then a lot -- are exposed as vividly as the Enron case has exposed them, then comes the best chance for repentance.

OK, let's not get carried away. "We don't think that the changes in accounting will be so great that true economic earnings and reported earnings will be one and the same," say managers William Ruane and Richard. Goldfarb in the annual report of the $4.2 billion Sequoia Fund.

Nevertheless, they write, "we do believe that going forward, post-Enron reported earnings will more closely reflect economic reality. We believe the changes in behavior will be healthy for the serious long-term investor."

At first blush, we might imagine that a world of truly honest numbers would produce lower stock prices. A balloon always shrinks when you let the hot air out.

This assumes, though, that investors as a group just woke up to the tricks that can be performed with numbers -- a view as naive as the dupes it purports to portray.

Chet Currier, Bloomberg News