Cheap funding was the fuel for big deals

The mergers and acquisitions market is mostly a waiting game, but three months ago Craig Bouchard felt it was time to pull the trigger. Signature Group Holdings Inc. was established as a vehicle to make acquisitions and then shield the profits from taxes using nearly $900 million in accumulated net losses from previous ventures. But the company hadn’t purchased anything since Bouchard become chief executive more than a year ago. Then in October, the Sherman Oaks company spent $525 million to buy Global Recycling and Specification Alloys, the world’s largest aluminum recycler. The deal will boost Signature’s revenues from about $44 million to more than $1.5 billion, according to regulatory filings. “This deal is transformative for Signature,” Bouchard said in a statement when the deal was announced. “This transaction fulfills a promise made to our stockholders to seek large, accretive, well-valued acquisitions.” Bouchard told the Business Journal last week he could not discuss the deal – and for a very telling reason: Signature is issuing $300 million in bonds to pay for the acquisition, and securities regulations prohibit management from talking with the press until the financing is secured. Telling, because with interest rates low and stock prices high, Signature illustrates the role capital markets have played in fueling the mergers and acquisitions market in 2014. Nationally, both public and private companies enjoyed a strong year for M&A. In November, research firm Dealogics reported 2014 was on track to set a record, with $1.4 trillion in deals announced so far. The largest transaction in the greater Valley was the $2.3 billion buyout of Conversant Inc., the Internet advertising company formerly called ValueClick, by Dallas-based Alliance Data Corp. Among private companies in the Valley, Arvixe LLC, a web-hosting firm in Calabasas and consistently one of the fastest-growing public companies on the Business Journal’s annual list, was sold to Endurance International Group, a rollup for small web hosts. Financial details were not disclosed, but EIG, which went public in November, said it paid $77 million for Arvixe and two other acquisitions. Ryan Bernath, head of investment banking at L.A. brokerage firm B. Riley Financial Inc., said availability of cheap capital through high stock prices, accumulations of free cash and low-interest debt is driving M&A activity “Strategic (corporate) buyers are sitting on lots of cash that’s earning minimal returns from interest rates,” Bernath explained. “Also, the private equity funds are sitting on cash that needs to be deployed or given back to investors. All that supports a strong M&A market.” And companies without publicly traded stock aren’t being left out in the cold, given the bond markets’ low interest rates. “If you want to go to the bank, you can get really attractive rates for debt capital,” he said. “The dynamic for sellers is favorable.” Big and small Other large public deals included Walt Disney Co.’s purchase of YouTube production house Maker Studios for $500 million and Wesco Aircraft Holdings Inc. acquisition of Haas Group Inc. for $550 million. The Disney deal gave the Burbank media company a major presence on YouTube, where its hopes to attract the millennial audience. Maker has 380 million subscribers and 5.5 billion monthly views on YouTube. In a statement, Disney said the deal would give it “advanced technology and business intelligence capability regarding consumers’ discovery and interaction with short-form online videos, including Disney content.” Wesco, the Valencia supply chain management firm for airplane parts, purchased scale with its acquisition of Haas. The West Chester, Pa. firm supplies chemicals to airplane manufacturers, a business that complements but doesn’t compete with Wesco’s business. The deal was financed with a loan from four banks led by Bank of America Corp. David Bonrouhi, managing director at boutique M&A consulting firm Calabasas Capital, said the low-interest debt market has provided a stimulus for the low-cap market. “Low interest rates allow buyers to pay more, so sellers that have been waiting on the sidelines can get the price they want for their business,” he said. Bonrouhi points to one deal he recently worked on in which ASI Entertainment in Valley Village was sold to Screen Engine in West Los Angeles. Both companies provide audience data to entertainment companies, but ASI specializes in TV viewership, while Screen Engine handles feature films. It was a natural fit motivated by the largest shareholder at ASI, who wanted to retire. “He tried to sell a few years ago but it didn’t work out, and the buyer is in aggressive growth mode,” Bonrouhi said. “Frankly, the strong debt market allowed the deal to take place.” For Bouchard, chief executive at Signature Holdings, his purchase of the aluminum recycler from Aleris Corp. in Cleveland, Ohio also hinges on debt, even though he runs a public company. The acquisition will be financed with available cash and $300 million of senior secured bonds in a private placement. Bourchard spent the first week of December in New York giving roadshow presentations to institutional ventures to promote the bond issue. Bryan Boghosian, a partner at Deloitte M&A Transaction Services in Los Angeles, said a lot of acquisitions among mid-sized companies are driven by the need for efficiency and economics of scale to compete in global markets. The deals take place to add product lines, expand to new geographic regions or simply to build scale. “But at both large acquirers and middle market acquirers the interest is pretty much the same – improve returns and drive value to shareholders,” he said. Bernath at B. Riley had a close-up view of M&A this year. In May his brokerage announced a merger with Great American Corp., a publicly traded liquidation and asset appraisal firm in Woodland Hills. In the depths of the economic downturn, Great American had a good business auctioning off inventory from bankrupt retailers such as Borders Group and Circuit City. But as the economy healed, that work dried up and the company moved into asset appraisal, an offshoot of its auction work. At the same time, Bryant Riley, chairman of the downtown L.A. brokerage and a member of Great American’s board, was looking to expand. He put together the stock-for-stock merger. The two companies, according to Bernath, now cross-sell their services to each other’s clients. In addition, the transaction made B. Riley a public company with stock that trades over the counter. “To have public company currency is important to incentivize employees,” he said. “It’s a strong motivator and a strong factor in recruitment and retention. Also, we can access it to use stock for growth financing.” For Bonrouhi at Calabasas Capital, one obstacle for M&A deals is that in the current market well-performing companies command a premium price, while poorly performing companies may not get any interest at all from buyers. Another obstacle is one that is always present – entrepreneurs expect way too much money when they decide to sell their company. “You always have sellers holding out for unrealistic prices, no matter how strong the market is,” he said.