Increased M&A activity appears on horizon.

Investment banks are finally back in a hiring mode, anticipating an upswing in merger activity in 2005 after three dismal years of layoffs and cost cutting.

Though Wall Street firms remain cautious, boutique investment banks focused on the middle-market--the bread-and-butter of deal-making in Los Angeles--are searching for analysts and associates with the expectation of an expected economic rebound next year.

Bankers say several factors are driving M&A activity. Public companies and private equity firms are flush with cash. Borrowing remains cheap. And higher valuations are attracting more companies to sell or recapitalize.

John Mavredakis, senior managing director at Houlihan Lokey Howard & Zukin in Century City, said his firm has made 187 new hires this year and now has 700 employees, although some haven't yet started. Hiring is strongest for junior-level analysts and associates straight out of college, with 55 new hires set to join the firm next summer, about half of them in Los Angeles. But demand remains weak for mid-level investment bankers.

"We're very optimistic about the mergers-and-acquisitions market for next year because lots of cheap money is driving investment banking," Mavredakis said.

Andy Gordon, co-head of investment banking and global media at Goldman Sachs Group Inc. in Los Angeles, said the company is taking a cautious approach to hiring even though the business climate seems to be on the rise.

"The opportunity for investment growth is Mergers: Investment Bankers Expect Rebound in 2005 as high as it's ever been in Los Angeles because the middle-market is fertile," he said, adding that entertainment, defense and biotech sectors are ripe for mergers and new start-ups.

Gordon said the hiring last month of ABC television network Chairman Lloyd Braun to run Yahoo Inc.'s media and entertainment group in Santa Monica suggested that Los Angeles remains the most important arena for content creation. "We are clearly bullish on Los Angeles as a commercial and economic market," he said.

Industries in spotlight

Besides entertainment, industries ripe for takeover activity include computer software, broadcasting, and leisure and publishing, according to FactSet Mergerstat LLC in Santa Monica.

Many of the deals next year will reflect the growing dominance of private equity firms and hedge funds, and the return of strategic buyers. Mega-deals also are making a comeback, reflected by the $11.5 billion marriage of Sears Roebuck & Co. and Kmart Corp.

Investment bankers point to a strengthening deal flow so far this year. The number of mergers and acquisitions announced in the third quarter jumped 20 percent from the year--earlier period, while the value of deals soared 70 percent nationwide to $530.2 billion, up from $312.4 billion in the third quarter of 2003.

Robert A. Wagner, senior client partner at Korn/Ferry International in Century City, conducts searches for a range of financial services company senior positions, including bankers and bond traders. After a three--year slump, Wagner sees a pick-up in hiring of fixed income, structured finance and investment banking professionals.

"For several years, companies have asked people to double-up and do more work and they've let retirements go unfilled," he said. "At some point you have to start hiring people again. It has picked up. There's a quiet groundswell of business activity happening."

Several local firms are diversifying into new markets as a hedge against both the cyclical nature of the stock market and M&A activity.

MDB Capital Group LLC in Santa Monica is ramping up hiring since it developed a new proprietary database that analyzes intellectual property as a predictor of a stock's future performance. MDB's clients include an array of mutual funds, investment managers and hedge funds. The company recently opened a four-person office in New York and hired another dozen professionals in Los Angeles, including sales staff, analysts and traders.

"The hiring backdrop is a concern because of the drop in the dollar and the potential that we're going into an inflationary cycle, which is never good for the stock market," said Christopher Marlett, managing principal of MDB Capital. "But we've found that the tougher things are the better deals you get."

Imperial Capital LLC, an institutional securities brokerage firm and investment bank in Beverly Hills, ended the year with 95 employees, a 25 percent increase from 2003. It expects similar growth next year. Imperial, which specializes in high-yield and distressed debt sales and trading, is branching out into bank debt and equity trading.

"We've avoided bringing in loads of midlevel managers," said Randy Wooster, co-president of Imperial Capital. "We want either experienced people with certain relationships in place or younger people to build our bench."

Even companies that have had no presence in L.A.'s investment banking scene are trying to build their business here. KPMG Corporate Finance LLC, a spin-off of the accounting firm, now has a staff of seven, up from just two in February, said Nick Desai, a KPMG vice president.

Also jumping into the investment banking market in Los Angeles is FTI Capital Advisors, a newly created investment banking subsidiary of FTI Consulting Inc. Last month, FH hired two longtime investment bankers in Los Angeles: Robert M. Werle, a former managing director of Jefferies & Co., and Jay Sherwood, a former managing director at Seidler Cos.

"We're still recruiting and we expect to beef up the number of bankers we have on our team," said Freddie Reiss, senior managing director at FFI Consulting. "We were referring too much work to others so now we're going to do it ourselves."