Acquisitions, Mergers on Front Burner : Deals: Movement is reminiscent of heady days in 1980s. But an Orange County expert says there’s a difference.
FHP International Corp. in Fountain Valley acquired a competing Northern California health maintenance organization last month in a deal worth $1.1 billion.
Two months ago, the 413-bed Fountain Valley Regional Hospital and Medical Center agreed to sell out to a Tennessee hospital operator.
And Fidelity National Financial Inc. in Irvine, the nation’s fifth-largest title insurance company, is attempting to take over US Facilities Corp., a Costa Mesa medical stop-loss insurance firm, in what is for Orange County a rare hostile bid.
The buyers are part of the resurgence in mergers and acquisitions that has spread across the nation in the past year. Flush with cash--capital--raised from Wall Street and private investors, businesses are buying in a way reminiscent of the binge of the 1980s.
With that resurgence comes more business for the companies that put together the deals.
One of those companies, Eureka Capital Markets Group in Newport Beach, was started three years ago by veteran merger-and-acquisition executive Arthur D. Perrone to work mostly with privately held firms. He was vice chairman of Geneva Cos. in Irvine, once the nation’s leading catalyst for mergers and acquisitions among small and mid-size companies.
While the growing number of M&A; deals reminds some of the frenetic pace of the 1980s, Perrone says that things aren’t the same now. That is especially true, he said, for the privately held small and middle market companies--those with $5 million to $100 million in annual sales--that proliferate in Orange County.
Question: How do the mergers and acquisitions of today differ from those of the 1980s?
Answer: I think the difference today is that there’s a better focus on how capital is being invested. A lot of the deals in the 1980s were done with less equity and more debt, and they were driven by economics. We had a large number of economic buyers then, people who were buying businesses based solely upon the economic returns they could realize by selling off parts of the companies they bought or otherwise capitalizing on the values. And I think we also paid the price for that high leverage, the debt, used to finance the deals. In addition, I think that, when we had that amount of money coming in chasing too few deals, prices went up. Buyers were paying premium prices.
Q. What are we seeing now?
A. What happened was that mergers and acquisitions fell off about 1989 to ’90, and what we are starting to see now is a resurgence of capital coming in. But the focus is more synergistic, companies looking to add value to their products. The economic buyers of the 1980s that survived have put their investments into industry classifications and now are becoming the synergistic buyers in the 1990s.
Q. Where is the money coming from?
A. I’m going to define capital as private equity capital that basically comes from partnerships, from pension funds, both public and corporate, from insurance companies, from endowment funds, from banks and financial institutions and from individuals and families. They put their money in private capital funds that go out and buy or invest in businesses.
Q. How much capital is being raised for mergers and acquisitions?
A. For the first six months this year, about $8 billion was invested in these funds altogether, compared with nearly $5 billion for the first six months last year. Now, of the total amount raised each year, almost $6 billion went into acquisitions of companies the first half of this year, compared with only $2 billion for the same period last year. Just to give you an idea of what really went on in the 1980s and early 1990s, the amount of private equity capital raised last year was about $13 billion, compared to $10 billion in 1992, $7 billion in 1991, $6 billion in ’90 and almost $15 billion in 1989, $13 billion in 1988 and $18 billion in 1987.
Q. Is there anything different about who the investors are these days?
A. The bulk of it is coming from public pension funds and corporate pension funds. What we are seeing, though, is that the money is now starting to come in from individuals and family endowments. During the 1980s, a lot of wealth was created for individuals and the family endowments. They put their money in the stock market in the late ‘80s and early ‘90s because the stock market was going crazy. People talk about not having any inflation in the last four or five years, but that’s not true. Inflation has been with financial instruments. If you owned stock six years ago, you made a lot of money today. Now what’s happening, with returns in the public market being suspect, is that the money’s coming back into the private market.
Q. Are banks still shying away from financing M&A; deals?
A. No. Personally, I think the banks got out of the lending business for two or three years there. They had a lot of problems with loans, the government was looking over their shoulders, and basically they stopped lending money. That created an opportunity for a company like ours to raise debt and equity funds for a lot of small and medium-size businesses. But the banks are coming back now. Their earnings are better. They’ve cleared up the loan problems. They now are becoming more aggressive, and they’re making more capital available for acquisitions. There’s more competition. We’ve seen that in the last three to four months.
Q. How are the buyers changing from the 1980s?
A. The corporations cleaned up their balance sheets, restructured their operations, improved their earnings. Now they are really going back to basics. They’re divesting themselves of divisions that don’t fit their core business--you have (hospital supplier) Baxter International that’s now talking about a half-dozen divisions that it’s spinning off--and they are looking more toward vertical integration--"Tend to our knitting.” A corporate buyer is going to look for an add-on product or technology. They’re not usually buying it for the management team. Private investment groups are looking for $10 million to $20 million in sales, profitability and good management that will remain.
Q. Is anyone else looking for good deals?
A. Now you’ve got a third element that’s just starting to make a play again. With the lower value of the U.S. dollar, we’re seeing foreign buyers once again. For about the last six months, we’ve seen heavy groups of United Kingdom and Swiss buyers.
Q. What’s the profile of a target company?
A. Companies with sales of $10 million and above, usually with pretax earnings of $1.5-million-plus, and some growth to the industry. Now when they fit in particular industries the buyers are in, they are more attractive. For instance, we’re involved with a large company that makes ceiling fans and does about $70 million in sales. They manufacture offshore about 110 different types of fans. There’s a lot of interest from buyers in adding on consumer products.
Q. What’s the main reason owners of private companies want to sell?
A. When we analyze surveys of probably thousands of business owners over the last 12 years, we keep coming back to the number one reason: burnout and boredom. The average entrepreneur owning a business on the order of between 12 and 17 years, somewhere between the age of 52 and 65, they get to a point where it doesn’t hold the same romance for them. The second reason would be financial considerations. The third may be health. Burnout is still an overriding factor.
Q. So will we end up with another M&A; feeding frenzy?
A. Well, we’re seeing prices going up, we’re seeing money come in, we’re seeing people looking for deals. It’s a wonderful business to be in again. I think that there may be some lessons learned from the ‘80s. One is that leverage can be a real double-edged sword. So there is more equity being required now. There’s more buying for the right reasons, more synergism. I feel there is more discipline and more thoughtfulness for the marketplace today than what we saw in the ‘80s.
Q. Fidelity National has a unfriendly bid pending for US Facilities. Will there be a resurgence of hostile attempts?
A. I haven’t seen that, at least nothing close to what it was in the 1980s. I think it’s too costly. Also, companies don’t want to risk an image problem in getting involved with that. Maybe we’re a gentler, kinder group. I think the times are different. You can just sense that there is more of a professional purpose driving mergers and acquisitions today.
Q. How long is this M&A; market likely to continue?
A. I think it’ll continue as long as the money stays available, as long as corporate earnings hold up, as long as there’s renewed optimism in the economy. And I see it for a couple of years at a minimum.
The amount of investment money raised from pension funds, corporate funds and wealthy individuals rose 63% in the first six months this year from the same period of 1993. The amount raised and where it went, in millions:
1993 1994 Amount Amount % raised raised change Acquisitions $2,249 $5,689 153% Second-level financing 454 423 -7 Venture capital 1,304 1,706 31 Other 823 63 -92 Total $4,830 7,881 63%
Source: The Private Equity Analyst