Investment Bankers Surge From Down Under to Do Takeovers

With little fanfare, Australian companies came, saw and acquired U.S. firms at an accelerating pace between 1987 and 1988.

However, this quiet invasion may have been officially signalled when an Australian investment bank called Capel Court Pacific established U.S. operations by planting its corporate flag in Los Angeles. Indeed, the presence of Capel Court is a sign of the times: Increasingly, firms from “Down Under” are aiming to take over.

Capel Court, which provides Australian firms with acquisition strategies, became the first Australian investment banker to establish a U.S. presence when it opened the Los Angeles office in November, 1986. The firm--it’s part of an Australian conglomerate called Capel Court Group--recently sent a corporate director to manage the office, a move designed to bolster the operation.

The presence and the upgrading of an Aussie investment bank in the United States was an important development in business relations between Australia and the United States, according to Denis Hardiman, president of the Australian American Chamber of Commerce of Los Angeles.

“I think it’s a very significant thing,” said Hardiman, a senior vice president at the Los Angeles offices of the Melbourne-based National Australia Bank. “To me, it suggests there will be heavier investment.”

Capel Court’s presence is a sign of the expanding role of Australian companies in the world economy, according to Julie Bayliss, a commissioner at the Los Angeles-based Australian Trade Commission.

Sign of Development

During the first and second year of its operation in the United States--1987 and 1988--Capel Court helped arrange six deals, transactions totaling about $500 million. For example, it helped the Sydney-based QBE Insurance acquire Sequoia Insurance Co., a Menlo Park, Calif.-based property and casualty insurer in 1987. One of its larger deals--Sydney-based Paul Ramsey Group’s 1987 acquisition of Health Care Services of America, a Birmingham, Ala.-based hospital chain--involved about $130 million.

“It shows that the Australian investment community is casting farther afield,” Bayliss said. “It’s a sign of the growth and development of Australian companies and evidence of the importance of overseas markets.”

This expansion was prompted partly by the Australian government, which concluded that Australian companies could only continue to grow by boosting exports and by acquiring other firms, according to Gerald H. Watkins, senior commissioner at the Australian Trade Commission.

The government early this decade encouraged acquisitions because some Australian export products can obtain only small shares of certain foreign markets, Watkins said. Some markets have high tariffs or other trade barriers, and other markets--like those in the United States--are already saturated with a large supply of competitively priced products, Watkins said. “Australian firms . . . quickly outgrow the domestic (Australian) market of 16 million people, and the U.S.--with a free and open market--is very attractive,” Watkins said.

Australian firms responded by investing $10.5 billion in the United States between 1981 and 1986--much to the glee of U.S. investment bankers who collected large fees for preparing takeover strategies and arranging financing.

Comfortable With Area

Capel Court executives monitored the spree and decided it was their turn to respond, according to David McDougall, the Capel Court Group director now overseeing operations at the Los Angeles office. Top executives at Capel Court Group decided to establish a U.S. presence to develop a special relationship with acquisition-minded Aussies, McDougall said.

Capel Court opted for a Los Angeles office because Southern California is a major financial center and for geographic reasons, McDougall said. California is the first scheduled stop for many executives departing Australia en route to various destinations in the United States. Culturally, Australians are more comfortable in sunny, ocean-rimmed environments where people are relatively informal--characteristics of California, according to McDougall.

“Management saw it as an opportunity to create for Capel Court a niche that no other investment bank had,” McDougall said. It was an opportunity to get in on the ground floor because we could see significant investment and we wanted to be a part of that.”

As Capel Court expected, the pace of activity has accelerated. Australian firms spent at least $2.4 billion--about 35% of their total foreign investment--on just corporate mergers and acquisitions in the United States in 1987. The tally excludes real estate deals and investments in stocks and bonds. That investment level surpassed the $1.5 billion--again, excluding investments in land and the money market--in reported merger and acquisition spending by the Japanese in the United States in 1987.

Japanese firms surged ahead of the Australians in 1988, investing a whopping $11.9 billion for mergers and acquisitions in the United States. Still, Australian spending more than doubled--reaching $5.4 billion in 1988. In contrast, Australian firms invested only about $305 million for the 12 months ending in July, 1979.

Now that the stakes are higher, Capel Court actually stimulates the process by proposing matches or takeover targets for Australian companies. The firm helps with negotiations and is willing to find financial backers. Recently, Australians have tended to invest more heavily in the states of Georgia, New York, Texas and California, according to McDougall. Statistics show they often invest in manufacturing, mining and in companies involved in construction and the production of building materials.

There have been blockbuster transactions. Two of the more publicized big deals involved News Corp. Ltd., which acquired Metromedia Inc. for $1.5 billion and 20th Century Fox for $575 million--both in 1985. There was also Bond Group’s acquisition of G. Heileman Brewing Co. for $1.2 billion and BHP Co.’s purchase of Monsanto Oil Co. for $745 million--both in 1987.

However, Australian companies tend to acquire small-to-medium-sized firms. For example, 86% of the Australian acquisitions in the United States in 1987 were for less than $100 million, according to Capel Court. About 71% of the 1988 Australian deals in the United States were for under $100 million. In contrast, only 44% of the Japanese acquisitions in the United States were for less than $100 million in 1988, according to Capel Court.

Because so many Australian acquisitions involve smaller operations, they often go unheralded, according to James Reno, vice president at Capel Court Pacific. Reno, an American who joined Capel Court in 1987, said Capel Court is positioned primarily to help Australian firms interested in acquiring medium-sized U.S. firms. “There are a lot of middle market firms--companies worth between $20 million to $200 million--in the U.S.,” Reno said. “I think that’s where you see the best opportunities. That’s where you find the best undervalued operations.”