Mergers Slow From Stricter Bank Lending.

Mergers-and-acquisitions activity slowed in Los Angeles County during the second quarter, reflecting an ongoing national slump and a corresponding reluctance on the part of bankers to finance buyouts.

The bankers' tightfistedness stems from their steadily deteriorating L.A. loan portfolios, as commercial borrowers go into default. To contain that problem, bankers have been raising their credit standards and requiring borrowers to put more equity into deals. That means fewer acquisition-minded companies can qualify for the financing they would need to undertake a buyout, resulting in fewer deals.

"We saw the slowdown hit earlier on the East Coast, starting in the third and fourth quarter last year, and it started hitting the West Coast in the first quarter (of 2001)," said John Mavredakis, managing director of Houlihan Lokey Howard & Zukin, a Los Angeles investment banking firm and co-owner of Mergerstat LP, a Los Angeles-based research firm.

There were 138 M&A deals involving L.A.-based companies announced during the second quarter, down from 151 in the first quarter and 186 in the second quarter of 2000, according to Mergerstat.

Because many M&A deals involve private companies, values are often not disclosed. But a look at the deals for which values were disclosed supports the general trend of fewer but larger deals being transacted.

Of the 138 L.A. deals announced in the second quarter, values were disclosed on 50 of them, with an aggregate value of $9.7 billion, Mergerstat reported. That value far exceeds the $3.5 billion of 52 disclosed-value deals announced in the first quarter, and $5.7 billion of 65 disclosed-value deals announced in the second quarter of 2000.

One reason that larger deals are getting done is the comeback of the high-yield debt (junk bond) market that larger companies can tap to finance acquisitions. Smaller companies generally must rely on tough-to-get bank financing.

Several large L.A. companies that have taken on high-cost junk debt to feed their voracious appetites for growth are now themselves teetering on the financial brink, according to finance industry sources. In that weakened condition, such companies become ripe takeover targets.

At this point in the business cycle, most M&A deals in Los Angeles, and nationwide, involve distressed companies. As a result, companies specializing in acquiring such assets -- and with access to sufficient capital -- have gotten active. This includes West L.A.-based Gores Technology Group, which is negotiating to buy a $500 million (revenues) L.A.-area company and a $1 billion-plus company based elsewhere, revealed David McGovern, the firm's executive vice president of mergers and acquisitions. McGovern declined to identify the acquisition targets.

In the second quarter, Gores bought two companies: Micron PC Inc. of Nampa, Idaho, for $100 million, and VeriFone Inc., which Gores bought from Hewlett-Packard Co. for an undisclosed price. (Gores is best known for its fall 2000 purchase of Learning Co. from Mattel Inc.)

"Given the situation in the tech industry, a lot of people are making cuts and trying to divest underperforming businesses," McGovern said. "We are focused on buying noncore businesses from these tech companies, especially in the hardware area."

Strengthening Gores' hand is that it is self-funded -- cutting deals with its own capital and bank financing, rather than having to rely on institutional money that often carries restrictions. And with plenty of distressed tech assets being shopped around, Gores faces far fewer competing bidders for those assets.

"If you think the economy is going to stabilize and recover, the opportunity is there to make cheap acquisitions of solid businesses that will perform," McGovern said.

The current buyers' market is in stark contrast from the sellers' market that characterized Los Angeles up until a few months ago.

The second quarter's largest local deal typifies a general trend in which L.A. businesses are born, nurtured to adolescence or early adulthood, and then sold. It involves biotech entrepreneur Alfred Mann's decision to sell his Northridge-based MiniMed Inc. to Medtronic Inc. for $3.1 billion. Mann wants to refocus his attention on building his earlier-stage biotech companies.

"We are a net exporter of large companies in Los Angeles, which is a compliment to the local business community," said Mavredakis. "This area is entrepreneur-driven - a lot of people create wealth and then recognize that wealth creation (by selling out), rather than directing it into perpetuating long-term institutions."

Expect L.A.'s overall level of M&A activity to heat back up by the first quarter of next year, simultaneous with a national recovery, Mavredakis predicted. An increasing number of technology and telecom companies will likely be sold -- those that had been promising enough to get another round of venture funding after the dot-com collapse but are now unlikely to get any more.

Biggest 2nd-Quarter L.A. Deals *
Buyer                            Company Acquired
1. Medtronic Inc., Minneapolis   MiniMed Inc., Northridge
2. Northrop Grumman Corp.,       Newport News Shipbuilding Inc.,
   Los Angeles                   Newport News, Va.
3. Societe Generale, Paris       TCW Group Inc., Los Angeles
4. Harrah's Entertainment Inc.,  Harveys Casino Resorts
   Memphis, Tenn.                (owned by TCW Group, L.A.)
5. Medtronic Inc., Minneapolis   Medical Research Group Inc.,
                                 Sylmar
                                 Price
Buyer                            (millions)
1. Medtronic Inc., Minneapolis   $3,107.2
2. Northrop Grumman Corp.,        2,389.3 **
   Los Angeles
3. Societe Generale, Paris       872.8
4. Harrah's Entertainment Inc.,  625.0
   Memphis, Tenn.
5. Medtronic Inc., Minneapolis
                                 420.0
(*)Excludes deals for which the
values were not disclosed.
(**)Still in negotiation.
Source: Mergerstal LP