More Mergers Expected for Orange County Companies
Frank Feitz knows first hand how fast county businesses are growing.
His company, ABI American Business-phones Inc. in Irvine, has been selling telephone systems to small companies for the last 8 years. Customers who needed just a few phones 5 years ago are now ordering 100 or more.
“We’ve seen companies go public, we’ve seen more venture capital seed money coming into the county, we’ve seen the growth,” he said.
“Now, many companies are coming to the same crossroads we did,” Feitz said. “They have to give additional stimulation to their employees to keep them, and they need capital to grow. There are few choices but to sell.”
Two months ago, ABI was acquired in a stock swap valued at $18.8 million by a subsidiary of the Pacific Telesis Group, the San Francisco telecommunications company that owns Pacific Bell. The deal has given ABI, now called PacTel/ABI, more capital and a chance to grow faster than it could have done on its own, Feitz said.
Like ABI, many young companies incubating in the county business environment for the last decade have matured into attractive candidates for acquisition-minded firms. More county companies, in fact, were acquired in 1988 than in any previous year, those involved in putting deals together said.
And, some observers predicted, even more mergers will occur next year, especially among companies with less than $100 million in annual sales.
“Every single sign says the same thing: Next year is the year to do it,” said Richard Rodnick, chairman of Geneva Corp. in Costa Mesa, which specializes in arranging mergers and acquisitions.
Rodnick and other merger specialists expect owners who had been planning to sell their companies sometime within the next 3 years to accelerate their schedules and sell next year. A key incentive is to try to finish their deals ahead of the next recession, which many economists expect in late 1989 or 1990.
Sellers will also be motivated to arrange deals next year to avoid the likelihood of higher taxes, a possible reduction in the foreign investment that has paid for some mergers, a leveling off of prices paid for acquisition candidates and a growing reluctance by lenders to back highly leveraged buyouts.
In addition, merger specialists note that recent mega-mergers, such as the pending $25-billion acquisition of RJR Nabisco by Kohlberg Kravis Roberts, have stirred criticism that may eventually lead to restrictions.
Upcoming congressional hearings on merger activity--as well as concerns that the Bush Administration might scrutinize mergers and acquisitions more closely than the Reagan Administration--could lead to changes that will cool the market beyond 1989.
The merger mania that has gripped the nation for the last 5 years did not really take hold in Southern California, and particularly Orange County, until last year, according to figures compiled by Geneva Corp.
Two years ago, there were 47 mergers in Southern California, seven involving county firms; in the first 9 months this year, there were 158 consolidations, 61 involving county firms, said Rodnick of Geneva.
Nationally, Geneva expects 35,000 companies of all sizes to change hands next year. There were about 30,500 consolidations this year. The biggest year for mergers was 1986, when about 36,000 companies changed hands in a rush to consolidate before new tax laws wiped out some of the tax breaks associated with mergers.
County public companies involved in mergers and acquisitions this year include:
- MSI Data Corp. in Costa Mesa. MSI was acquired by one of its suppliers, Symbol Technologies Inc. of Bohemia, N.Y., which acted as a white knight to fend off a hostile bid made by an MSI competitor. The deal was valued at $142 million.
- Coleman & Grant in Newport Beach. The county’s largest certified public accounting firm was acquired by Touche Ross & Co., one of the nation’s Big Eight accounting firms. Terms were not disclosed.
- Downey Savings & Loan in Costa Mesa. Downey provided $40 million in new capital and received $281.1 million in federal deposit insurance assistance to take over and revitalize insolvent Butterfield Savings & Loan in Santa Ana.
- Citizens Holdings in Newport Beach. Citizens bought El Camino Bank in Anaheim for $17.5 million in cash.
Other deals are pending, including the proposed purchase of General Automation Inc. in Anaheim by Alpha Microsystems Inc. in Santa Ana and the pending transfer of insolvent American Savings & Loan, which is owned by Financial Corp. of America in Irvine, to the Robert M. Bass Group of Ft. Worth.
While county companies tend to be takeover targets rather than corporate buyers, analysts expect county firms increasingly to initiate deals.
County firms have been involved in a few highly publicized hostile takeover bids. Prime Computer of Natick, Mass., is fighting off a $970-million bid made by MAI Basic Four Inc. of Tustin. And in what may turn into a hostile attempt, Micro D in Santa Ana last week rejected a $37-million buyout offer from its majority shareholder, Ingram Industries Inc. of Nashville.
“You’re going to see continued strong demand across the board for acquisitions,” said James J. Mahoney, owner of Tweed Publishing Co. in Tiburon, which publishes a weekly newsletter on mergers and acquisitions. “There seems to be a lot of money out there.”
The continuing glut of mergers is caused by a number of forces: a strong national economy, tax advantages and a weak market for initial stock offerings in the aftermath of the October, 1987, stock market collapse.
In Orange County, the pressure to merge has been spurred by the large number of companies that have matured into solid, steady performers, said Alan W. Pettis of Irvine, a leading mergers and acquisitions lawyer.
“All these development-stage companies that we represented in the late 1970s and early 1980s are now acquisition targets,” Pettis said. “And we see many small companies starting up, which will support this economy for many years to come.”
The expectation that the county will continue to be a breeding ground where small companies form and grow has made some merger and acquisition officials bullish about the prospects for future consolidations, even if a recession materializes in the next 2 years.
Jeffrey Kilpatrick, a Costa Mesa stockbroker who also acts as an investment banker, said because of the diversity of county companies and because many of them are worldwide or national leaders in their businesses will make the county’s merger market “big time” for 3 to 4 years, particularly for high-technology and bio-technology firms.
But other merger matchmakers, including Richard Torre of Torwest Cos., an Irvine-based mergers and acquisitions firm, see a softening in late 1989 or 1990.
“The magic word is interest rates,” Torre said. “Interest rates will go up, and we’ll see a lot of deals killed because of that. It’ll take the steam out of this business.”
As interest rates climb, he said, “financial buyers” will stop gobbling up companies, leaving the market to “strategic buyers.”
Du Pont, for instance, made a strategic acquisition early this month by buying NDT Instruments Inc. in Huntington Beach. Du Pont bought NDT, along with another California company, to give it new technologies and products compatible with its existing ones.
Financial buyers are those who buy with the idea of reselling later at a huge profit, a plan that tends to make economic sense only when interest rates are favorable, Torre said.
The prices being paid for companies seem already to have reached a limit and are remaining level or even falling slightly, Rodnick and Torre said.
Prices are remaining relatively high, though, partly because foreign money is still flowing into U.S. companies and should increase if the value of the dollar stays low in relation to foreign currencies. Foreigners have played a growing role both in investing in U.S. firms and in financing mergers and acquisitions, Torre said.
Foreign financing has become more popular, he said, because some major U.S. insurance firms have reached a limit on the amount of money they can lend to help pay for highly leveraged buyouts.
But Rodnick said foreign investments tend to be limited to acquisitions of companies with more than $100 million in sales. And those investments could fall off as buyout candidates in other areas, especially Europe, begin to look more attractive, he said.
Besides, he noted, laws Congress adopts to curb merger mania will probably include restrictions on foreign investments.
SOME 1988 MERGERS AND ACQUISITIONS INVOLVING ORANGE COUNTY COMPANIES
ABI American Businessphones Inc., Irvine, was acquired by PacTel Corp., a subsidiary of Pacific Telesis, in a stock swap valued at $18.8 million.
MSI Data Corp., Costa Mesa, was acquired by one of its suppliers, Symbol Technologies Inc. of Bohemia, N.Y., which acted as a white knight to fend off the hostile bid by an MSI competitor. The deal was valued at $142 million.
Coleman & Grant, Newport Beach, the county’s largest certified public accounting firm, was acquired by Touche Ross & Co., one of the nation’s eight largest accounting firms. Terms were not disclosed.
Downey Savings & Loan, Costa Mesa, provided $40 million in new capital and received $281.1 million in federal deposit insurance assistance to take over and revitalize insolvent Butterfield Savings & Loan in Santa Ana.
Citizens Holdings, Newport Beach, bought El Camino Bank in Anaheim for $17.5 million.
Eldorado Bancorp, Laguna Hills, bought American Merchant Bank in Newport Beach in a stock-and-cash deal valued at $4 million. Eldorado also has a deal pending to buy Landmark Bank in La Habra in a stock swap valued at $16.6 million.
AFG Industries, formerly of Irvine, was bought by Clarity Industries, a holding company formed by Chairman R.D. Hubbard to take the company private. The cash deal was valued at $940.9 million. AFG later relocated to Ft. Worth.
Van Doren Rubber Co., Orange, a family-owned manufacturer of sneakers, was sold for $70 million to McCown De Leeuw & Co., a venture-capital firm in Menlo Park.
Scantron Corp., Tustin, a manufacturer of test-scoring equipment and forms, was merged into John Harland Co., an Atlanta-based check printer, in a stock swap valued at $66.2 million.
VLI Corp., an Irvine personal-products maker, was bought by American Home Products Corp. for $78 million.
Source: Geneva Corp. and Los Angeles Times files
