Who Could Play ‘White Knight’?

In any future hostile-takeover battles, analysts say, several Los Angeles private investment firms may be poised to play the “white knight” role--the last-minute friendly buyer or investor.

Private equity or “buyout” firms such as Freeman Spogli & Co., Apollo Advisors and Leonard Green & Partners, all with large local operations and flush with cash, are looking to make business acquisitions that will generate high returns for their demanding investors, most of which are large institutions such as pension funds and insurance companies.

A company seeking to fend off a hostile takeover may try to negotiate a friendly deal with another buyer--a white knight--that the target believes would be more sensitive to its corporate culture, compatible with current management and willing to pay a good price.

“It’s an ideal time to have cash--there’s no question that companies’ [stocks] are trading lower than they were six months ago,” said Brad Freeman, founder of Freeman Spogli. “In the traditional sense we haven’t been a white knight, but I would say . . . someone could put someone into play [as a target] and one firm might welcome someone like ourselves participating.”

Since 1985, 75% of hostile takeover offers have failed--frequently because a friendly buyer has emerged to thwart the hostile suitor by offering a richer price.

And because private buyout firms now have plenty of cash, some on Wall Street say they have the ability to outbid other buyers.

The buyout firms themselves often have internal prohibitions against launching hostile bids. And because their purchases often are leveraged--they borrow against the target’s assets to help fund the takeover offer--they require the cooperation and participation of the target firm’s management.

Freeman Spogli, which earlier this year raised $915 million in its latest investment fund, is looking for companies mainly in the retail and service industries, Freeman said. But the firm would also consider other sectors, such as health care.

Since its creation in 1983 by Freeman and Ronald P. Spogli, former investment bankers with Dean Witter Reynolds, the firm has invested more than $1.2 billion in 27 companies.

Nationwide, $26.7 billion in capital has been raised so far this year by buyout funds, compared with $22.9 billion for all of last year, according to Securities Data Co. With leverage, that total can fund a huge number of deals.

Institutional investors have poured capital into buyout firms hoping to reap above-average returns. Unlike many of the 1980s leveraged buyouts, in which companies were acquired and broken up, buyout firms today often look for companies they can take private, improve and eventually take public again at a higher price.

The firms also are major buyers of private companies and divisions of public companies that the parent wants to jettison.

Los Angeles is home to some of the nation’s biggest buyout firms outside of New York, and many focus on the entrepreneurial and fast-growing small to mid-sized companies that call California home.

Leonard Green & Partners just raised $1.25 billion for its latest fund--even more than Westside neighbor Freeman Spogli and in fact the largest amount ever gathered by a buyout firm based solely in Southern California.

Apollo Advisors, which has dual headquarters in Los Angeles and New York, also has raised significant amounts of cash in the last year and will also be looking for deals. Apollo raised $3.6 billion for a fund earlier this year, the firm’s fourth and its largest ever.

“Our approach is to be very flexible and to back high-quality management teams,” said Peter Copses, a partner with Apollo in Los Angeles.

Apollo is interested in buying majority or even minority stakes in various companies, and that could very well mean playing a white knight role, Copses said. The company will not launch any hostile bids, however.

“You might see us coming in, in the face of a hostile, to back a management team,” he said. “I could see ourselves in that role--it’s similar to other investments we’ve made . . . just not in the face of a hostile.”