Investment Bankers Prepare For Rise in Takeover Action.

THERE are now 40 investment bankers in the West Los Angeles offices of UBS Warburg, who are eyeing what can be done in the nation's M&A and restructuring markets, said veteran banker Warren Woo, managing director and head of the office. "Given where we are in the economy, with the previously strong access to capital but the lack of it now, a lot of companies are over-leveraged, and need to be sold or to be restructured," said Woo.

The UBS Warburg office is, of course, to where many former Donaldson, Lufkin & Jenrette bankers decamped, after international finance giant Credit Suisse First Boston bought DLJ last year.

Former DLJ head of corporate finance in Century City, Ken Moelis, is now in charge of investment banking for UBS Warburg nationwide, and also works in West Los Angeles.

In days of yore, an investment banking shop might be generally associated with one style of banking. (For example, a brokerage would be a junk-bond shop, or be more known for early-stage financing and initial public offerings for emerging companies.) What Moelis did at DLJ in the late 1990s was to migrate his shop from one form of banking (high-yield finance) to another (early-stage financing of tech companies).

Woo indicated UBS Warburg will also be a capital markets chameleon. "You have to go where the opportunities are, and what forms of financing the market is accepting," said Woo.

Of course, not every shop could pull off such financial cross-dressing. It helps that Moelis, Woo, and UBS Warburg head of West Coast M&A action Jeff Raich all have decades of experience, extending back to the days when Drexel Burnham Lambert ruled the high-yield seas.

In a sense, however, the good old days are back for Moelis, Woo and the troops. Many clients, indicates Woo, are hunting for acquisition targets, and their preferred strategy is to initiate the process by acquiring a controlling debt stake in a struggling company.

In short, the corporate takeover -- the old Drexel forte -- is back.

"There is no best way to take over a (struggling) company; you can do it through controlling the debt, or out of bankruptcy court. But many people are looking to acquire assets this way in this economy," said Woo.

Red, White and Green

Venture equity and startups may be the raw, cutting edge of capitalism, but old Uncle Sam is holding hands with at least two venture outfits in Los Angeles: David Nazarian's Smart Technology Ventures in Beverly Hills, and Frank Kline's Kline Hawkes & Co. shop in Brentwood.

How's that?

The feds have a program that allows certain financiers to become official Small Business Investment Companies, or SBICs.

The program is intended to help funnel money to small companies, which are ever at a disadvantage in capital markets. Roughly speaking, once a venture shop has proven itself kosher to fed finance inspectors, it can get up to two-to-one matching dough into its fund from D.C.

The federal government considers the money it has extended to be a loan, but it also wants a capped equity participation on the equity side.

The allure is in the fact that the feds are willing to accept capped profits on the equity side, usually at around 10 percent to 15 percent of its investment. (In other words, if Uncle Sam lends $1, it wants interest, and 10 to 15 cents in equity profit, should the investment work out).

The beauty for the VC chief is in the additional leverage, say Nazarian and Kline.

"Let's say you make an investment that makes four times its money, but with the leverage, you can make six times your money," says Nazarian.

Of course, like all government programs, there are drawbacks. There is paperwork, and there are restrictions on investments.

"In each industry, there is a definition of what is a 'small' company," says Nazarian. "And you cannot invest in real estate, in movie production or gambling, among other restrictions."

Just getting approved as an official SBIC is a year-long process, says Kline. And then there are annual audits.

By the way, while the days of instant home runs may be over, Nazarian says it is a superb time for long-term oriented venture investing.

"Business values are way down, and you can hire talent today. If you are willing to work with a company, add value, and look ahead four or five years, it is actually better now than before," Nazarian says. "It's like the old days again. A lot of hard work."

Quick Takes

The industry "roll-up" -- the acquisition of many, sometimes even dozens of similar companies within one industry -- was a favorite M&A strategy of the mid- to late-1990s. The tactic lost favor when too many roll-ups didn't do enough due diligence on what they were buying.

But Greg Falvo, president and CEO of Long Beach-based water filter company Hydromax International Inc., says there is life in the old expansion model yet.

"We are looking to make maybe a dozen acquisitions, in the $5 million to $50 million range, in the next several years," he says.

Hydromax sells water purification systems to residences, designed to cleanse water for the whole house. The arsenic scare and increasing concerns about drinking water are heightening consumer and investor interest in the water field, says Falvo. "And so many people got burned in the dot.com meltdown, now some are looking for something more solid," he says. "You can't get too much more basic than water." ...

Shareholders in Manhattan Beach-based Center Trust Inc. just got slammed, when the REIT's stock sank from over $6 to under $4, following a late March announcement of a dividend cut. The company cut the dividend to retain capital for growth, but "a lot of investors are in a REIT for the dividend, and they weren't too happy when we cut it," said Edward Fox, Center Trust chairman and CEO.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [e-mail].