Is MCA Smart to Sell Now . . .
Lew R. Wasserman may have a message for other Southland business executives: If you’ve been thinking about selling your firm, now’s the time. The risk of waiting is that prices will get far worse over the next few years.
The MCA Inc. chief’s agreement to sell the entertainment giant to Japan’s Matsushita is a wake-up call for other aging business owners, particularly of small and mid-size firms, investment bankers say. In fact, some experts now see a growing likelihood that a glut of corporate assets will be dumped on the market early in 1991.
Wasserman didn’t get the $80 to $90 a share price he purportedly wanted for MCA. He had to settle for $66 a share in cash and perhaps $5 in stock. Whether $90 a share was even remotely realistic for MCA is debatable. Nonetheless, it’s clear that Wasserman got less than what he might have gotten a year ago. And the only rational explanation for the deal is that Wasserman saw little chance of getting a better bid in the near future, given the new economic realities.
For executives at private businesses, Wasserman’s view may carry substantial weight. In Southern California, there are countless successful private companies that were founded by GIs returning home after World War II, investment bankers say. These companies grew dramatically with the booming Southland economy.
Today, many of those entrepreneurs are in their 60s and 70s. If they don’t have an heir for the business, they are faced with the prospect of selling. But since the merger and takeover market began to crumble a year ago--as financing dried up--prices for companies have been sliding. Many private-company owners have been reluctant to put their firms on the market in 1990 because they expected prices to rebound.
Now, deals such as MCA’s suggest that there will be no recovery in prices soon. Younger business owners needn’t be fazed by that outlook. But for older owners--such as Wasserman--who don’t have the option of waiting three to five years, the price situation is distressing and demands a quick decision. “If they (business owners) didn’t believe that before, they now have an opportunity to see it in a very visible transaction” in MCA, says Lloyd Greif, corporate finance chief at investment banker Sutro & Co. in Los Angeles.
Greif’s firm has closed only about a dozen deals this year, he says. But in the last week alone, two more company owners have given the green light to Greif to find buyers, he says.
Clearly, the new sellers will be dealing with the first true “buyer’s market” since perhaps 1983, investment bankers say. As easy money became the rule in the late-1980s, the number of potential buyers for a company skyrocketed. Corporate sellers often set off bidding wars among buyers. Prices soared.
But that era ended late in 1989 with the collapse of the junk bond market and the surge in banks’ problem loans. With financing now difficult and often impossible, and the global economy weakening, potential buyers are taking “a much more practical view of the world,” says Michael Tennenbaum, senior managing director at Bear, Stearns & Co. in Los Angeles.
The buyers’ hardened attitude toward price could get much worse in the new year, if the economy continues to slump. As Foothill Group President John Nickoll notes, “A price that would seem cheap now might become expensive in a recession.” Every buyer will be factoring that probability into its willingness to bid.
Just last week, L.A.-based investment group Trefoil Capital walked away from its bid for toy retailer Child World, symbolizing the concern buyers have about the economy’s decline.
Aging sellers of private businesses might not have to worry as much, were it not for other assets likely to be competing with theirs. A big worry: The market also will have to absorb a growing inventory of assets from distressed sellers--generally, deeply indebted companies that are desperate to raise cash via sales of product lines or entire divisions.
That is why many experts see an “asset glut” burgeoning in 1991, and thus the threat that prices will continue to slide. They point with concern to investors’ growing reluctance to bid for hard assets. For example, a recent survey of pension fund managers by Institutional Investor magazine showed that 65% now have investments in real estate, but fully 70% of those managers say they have no intention of buying more real estate in the next two years.
As difficult as the market has become, however, companies still are being sold. In fact, owners of healthy small- and mid-sized firms have found that, at least so far, there is no shortage of lookers if the offering price is realistic.
Through the first nine months of this year, Merrill Lynch & Co.’s Mergerstat Review tallied 725 corporate acquisitions for which financial data were available. Deals worth more than $100 million were down 39% from a year earlier. But deals priced under $50 million were off just 3%: 467 transactions versus 482 in 1989.
Is that window of opportunity closing? Sutro’s Greif says there still are many larger companies out hunting for strategic acquisitions of smaller firms. “They’re looking for a fit--a situation where one plus one equals more than two,” he says. While some of those buyers may decide to wait for sellers to drop their prices even more in 1991, Greif says larger companies have to weigh the waiting game with the chance that a competitor could come along and snatch a good business early.
Meanwhile, foreign corporate buyers, like their American counterparts, are taking a more cautious view of companies for sale, says Tom Tanaka, president of Bank of California’s capital services unit. But foreign buyers, and in particular the Japanese, still are interested, he says--especially given the dollar’s weakness, which has automatically reduced the prices of U.S. assets.
Sellers who want to cash out of their business and retire, however, will find Japanese buyers much less willing to bid, Tanaka warns. “That’s hard to sell to the Japanese,” Tanaka says, because they generally want current managers to stay on board for at least three years after the purchase.
All told, whether the pool of foreign and U.S. buyers will be enough to soak up the expected 1991 surge in corporate assets for sale remains one of Wall Street’s great unknowns--and it remains the greatest element of risk for business owners who have reached the end of the line.
For buyers, Tanaka says, “there is a feeling that there is no need to rush into a decision.”
Bear Stearns’ Tennenbaum, however, notes that “the market is an amazing creature. When things get to be good prices, people somehow drum up the dough.”
How Deals Are Getting Done Companies still are being sold, but the difficult financing environment has made it much tougher to complete a transaction. The good news: Smaller deals so far have been crimped far less than big deals. The following deal tally for the first nine months of 1989 and ’90 is for transactions for which price data were disclosed. 1989 Company purchase price Under $50 million: Change: -3% $50 million to $100 million: Change: -33% Over $100 million: Change: -39% 1990 Company purchase price Under $50 million: Change: -3% $50 million to $100 million: Change: -33% Over $100 million: Change: -39% Method of Payment 1989 Cash/stock combination Debt securities 1990 All-cash Stock Cash/stock combination Debt securities Source: Merrill Lynch & Co.’s Mergerstat Review
