Best buys: Tight capital leads to mergers

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Best buys: Tight capital leads to mergers

Harry Hishon, president of Top’s Choice merges with Innovative Ideas & Solutions. Buyer & seller brought together by Russell Cohen of Transworld Business Brokers in Fort Lauderdale.

Top’s Choice an office furniture dealer has been acquired by Innovative Ideas & Solutions
TRANSWORLD BUSINESS BROKERS

THE SOUTH FLORIDA BUSINESS JOURNAL

A corporate fire sale may be getting hotter.

Three public companies in South Florida have announced planned mergers in recent days and a banking deal got a $175 million nod from the state.

Acquisitions are heating up since corporate valuations have ebbed, experts say. The buyers’ market comes as companies looking to raise money retreat from public markets rocked by fraud scandals and economic pressures.

ProxyMed’s (Nasdaq: PILL) $24 million purchase of MedUnite earlier this month followed word of AmeriPath’s (Nasdaq: PATH) purchase of a medical practice in Georgia and a laboratory in Utah.

AmeriPath, which closed four acquisitions in the fourth quarter, now faces a shareholder lawsuit attempting to halt its planned $840 million merger with companies formed by buyout firm Welsh Carson Anderson & Stow.

Admiralty Bancorp (Nasdaq: AAAB) won approval from Florida’s Department of Banking and Finance for its merger with RBC Centura Banks (NYSE: RY), the U.S. banking subsidiary of Royal Bank of Canada, on Jan. 7 in a deal worth $150 million.On Dec. 20, Daleen Technologies (OTC BB: DALN) acquired the assets of privately held Abiliti Solutions in a reverse merger.

"Valuations are pretty low, companies are undervalued, and there are some bargains out there now," said Mark Bloom, co-chairman of the National Reorganization, Bankruptcy & Restructuring practice at Greenberg Traurig in Miami.

Bloom is seeing distressed companies in and out of court attempting to avert bankruptcy filings by making financial and strategic acquisitions. Some are publicly traded or have public divisions that they are taking private when equity is bought by a private equity fund, he said.

"One current phenomenon is that a fewer number of companies that go into Chapter 11 are reorganizing," he said. "Some are being sold off in whole or in parts."

Boca Raton appliance-maker Sunbeam created four private companies as part of its reorganization plan. That fueled speculation in the national financial press that it will sell one or more of the units to generate cash flow.

Rolling down rollups

One present-day trend, Bloom said, is an unwinding of rollups that were done in the 1990s when money was readily available in the capital markets.

"We see that many of today’s distressed businesses are viable operating companies but unable to sustain the debt burden," he said. "When debt was easy to come by, lenders were able to make loans on projected cash flow."

Bloom said there is validity to the perception that attractive companies are out there "that incurred too much debt or managed with too much of an eye toward top-line growth."

Bloom cited recent venture capital interest from clients looking for companies "of any type, any indus try, any location, and any size."

"The surviving companies will prove to be more stable," he said.

68 IPOs last year is a fifth of tech boom^s heyday

A roliup strategy is when a company attempts to consolidate a fragmented industry with a plan designed to acquire many smaller players in a particular industry, such as what Blockbuster did when it added video stores. While rollups can be lucrative when properly executed, they are challenging because the consolidator must integrate many different businesses and arrange financing for many deals, while still remaining competitive.

Companies can be made fundamentally sound with stricter controls in place and new ownership, Bloom said.

"To a large extent, the people who are making money are the people with the ready capital and expertise to act on those [acquisition] opportunities."

Shareholder, poison pill pitfalls

Still, shareholders are casting skeptical eyes on corporate purchases, particularly when it comes to timing and materiality, said Betsy S. Atkins, CEO ofBaja Corp., a Miami venture capital firm.

"If the acquisition is not successful, you will have a share holder lawsuit," she said.

Another pitfall is the "poison pill," a provision where penalties are incurred when one party in a joint venture pulls out of the deal before it expires at a set time. One example is P&O Princess Cruises’ plan to merge with Royal Caribbean Cruises Ltd. Carnival Corp. made a better offer, but P&O could not endorse it before the P&O/Royal Caribbean agreement expired at the end of 2002.

The P&O/Camival merger was sealed last week after P&O’s board approved the deal. The $5.4 billion offer is expected to get the nod of shareholders in April.

Wary shareholders have also been embroiled in litigation with Boca Raton’s Tyco International (NYSE: TYC), whose acquisition-happy former CEO Dennis Kozlowski was recently indicted on federal fraud charges.

The loss of trust in companies and the market has left many investors shaken, Bloom said, resulting in fewer initial public offerings.

2002 was the worst IPO year since 1979: 68 IPOs last year, down from 83 in 2001. That’s way off from more than 400 in both 1999 and 2000.

"It’s possible that once the economic climate of the country becomes more receptive to IPOs, some [companies] will be spun back out only if they can be grown to a bigger size," he said.

The typical business plan going into a restructuring is to break up a company and sell off the less profitable divisions, or those that don’t fit the core business they may want to narrow and restructure around. Bloom said.

"Sometimes you can’t – when the integration hasn’t been handled well – you can’t even tell the one [division] that is the cash cow," he said. "Management is only as good as its systems."

Bloom said many rollups and consolidations of related companies within an industry didn’t work in the past. Technology was "oversold or overpromised." Nuts-and-bolts integration of shipping and receivables proved to be more problematic than originally thought.

"The devil is in the details," he said.

Parlux deal off

The importance of strategy in long-range corporate planning was highlighted in one acquisition deal that fell through this month. Parlux Fragrances (Nasdaq: PARL) said it has not reached an agreement with a company that had indicated it was interested in buying the Fort Lauderdale-based fragrances manufacturer and international distributor.

Company Chairman and CEO Ilia Lekach said a combination with Ronkonkoma, N.Y.- based Quality King Distributors did not meet Parlux’s strategic objectives.

But several strategic buys on a smaller scale in Broward County are a microcosm of what may lie ahead for companies in South Florida.

Deerfield Beach-based iBX said last Friday that it expects sales during the first year of its acquisition of MediCompliant Solutions, also based in Deerfield Beach, to be at least

$1.5 million. The company said it arrived at the figure by calculating new pending accounts and existing clients already under contract.

Innovative Ideas & Solutions in Lauderhill, whose clients include Tyco, AutoNation (NYSE: AN) and Bluegreen (NYSE: BXG), bought furniture seller Top’s Choice of Fort Lauderdale recently for an undisclosed sum. The motivation, according to co-owner Sandra Retford, was simple: Sell or grow.

"We opted to grow," said Retford, who along with her husband, Steve, help firms relocate, arrange and install office furniture. "They [Top’s Choice] were not into planning. Our numbers increased. Why not go ahead and take the next leap?"

From: South Florida Business Journal Print Edition
January 17-23,2003
Author: John T. Fakler


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