Mega-Mergers Bring Valley Mixed Blessings By SHELLY GARCIA Senior Reporter Two large M & A; deals in 2003 put the San Fernando Valley on the national radar screen. That’s both good news and bad news for the region. The transactions reflect the growing size, stature and visibility of the Valley community, which has had to build back its economic base since the loss of much of the aerospace industry in the early 1990s. But with the two largest deals, as well as many of the smaller transactions that occurred this year, local companies will become part of organizations headquartered elsewhere, and that could dilute some of the benefit that often comes from a local corporate citizenry. “Even if employment stays the same, with corporate headquarters here you have that philanthropic center here,” said Daniel Blake, director of the San Fernando Valley Economic Research Center at Cal State Northridge. “So the Valley becomes first in line as the recipient for corporate philanthropy. To have the headquarters move, troubles me.” The planned acquisition of Wellpoint Health Networks Inc. by Anthem Inc. will move the corporate headquarters of the Blue Cross parent to Indianapolis, where Anthem is based. So far, officials have said they expect layoffs at the Thousand Oaks-based offices of Wellpoint to be minimal, but one of the primary goals of the merger is to streamline operations and cut costs, and in the corporate pecking order, resources typically go first to the parent company. Besides, it is likely that the top officials at the company will be headquartered in Indianapolis, largely removing the very people most likely to make decisions regarding the company’s involvement in community events and issues. That may not be the case with regard to the acquisition of Newhall Land & Farming Co. by a partnership of Lennar Corp. and LNR Property Corp., Miami-based real estate companies. The nature of real estate development requires companies to become involved in the communities where they operate. Still, the new management is likely to approach those duties somewhat differently than the home-grown managers whose children were raised and schooled on the land they developed. Both mergers are still undergoing a battery of regulatory and shareholder approvals. The Wellpoint deal, which is valued at about $16 billion, is expected to close in the spring. The Newhall sale, for just under $1 billion, could take place as early as the first quarter of next year. Shift in climate The moves were among a very few that took place during 2003, a year that saw companies remaining cautious about any large scale changes, but they also reflect a budding change in the M & A; climate, experts said. “While the M & A; river did not grow as much as we might have hoped, 2003 is likely to see the first yearly increase in terms of number of transactions since 1998,” wrote Glenn A. Gurtcheff and Jeff A. Rosenkranz, co-heads of Middle Market M & A; at USBancorp Piper Jaffray in the recently released report, Mergers & Acquisitions Insights; Middle Market M & A; Outlook 2004. “This signifies an important shift in momentum within the market that should carry into 2004.” Since 1999, which represented the height of the most recent M & A; cycle, companies have retrenched, tending to their own troubled balance sheets, a series of new reporting and corporate governance requirements and plummeting values on Wall Street. But recent reports of improvements in productivity, profits and stock market performance are leading some to conclude that the tide may be turning for the M & A; market. “M & A; is the ultimate expression of confidence,” said Steve Weisner, a partner at Zuma Capital Partners, a private investment firm in Woodland Hills. “The ultimate expression a CEO can make is to go out and buy another business, so they’re comfortable enough with their business to go out and buy someone else’s business, and you’re starting to see that.” Cautious approach So far at least, those that have ventured into the M & A; arena are treading carefully. Most of the deals are cash, not equity transactions, an indication that stock prices continue to be depressed and sellers see less value in paper transactions. And the finance market continues to be reluctant to value deals on a cash flow basis as lenders did in the 1990s. Weisner said the capital markets are still gun shy from that period, when deals made on the basis of the company’s anticipated cash flow came back to bite the lenders, and are opting instead for asset-based deals. The trouble is that many of the mid-market companies and much of the current economy is service based, with little in the way of assets on which to collateralize a loan, so a large segment of the economy is still shut out of any M & A; action. “When cash flow lenders are aggressive, the middle market improves,” said Weisner. “It’s confidence, and a willingness to believe the economy is going to gain momentum. We’re getting there. We’re not there yet, but it’s definitely getting better.”
