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Small-firm owners getting their share while the getting is good / Deals occurring quietly, quickly

August 27, 1999

Friday, August 27, 1999

Times-Dispatch Staff Writer

Microscopic scrutiny follows every step in the modern megamerger. Reynolds Metals Co. and Alcoa Inc., Crestar Financial Corp. and SunTrust Banks Inc.

But beneath the radar, mergers and acquisitions of much smaller companies — private local companies and family-run firms among them — are occurring at a blistering and virtually unnoticed rate. Fearnow Bros. Inc. and Castleberry/Snow’s Brands Inc. Hungerford Mechanical Corp. and Group Maintenance America Corp.

People involved in negotiating the deals say money and market share have helped drive the consolidation in recent years.

The bullish economy is the most obvious. Cash is abundant. Companies are pursuing new markets and economies of scale through consolidation.

The graying of family firms established after World War II is another factor.

Simply put, many business owners are getting their share while the getting is good.

“There is no better time than right now,” said Charles P. Moncure Jr., a principal with Dominion Partners.

The Richmond investment-banking firm pairs companies with others interested in buying or merging interests.

Dominion Partners has seen its volume of transactions and the value of those transactions increase by 25 percent in each of the past three years. Most of the deals are worth $5 million to $50 million, in contrast with supermergers of Fortune 500 companies that fetch billions.

Because so many of the smaller companies are private, there are no shareholder battles or approvals to contend with, no hostile takeovers to consider. The deals, as a result, are largely unpublicized.

“There’s a tremendous amount of activity,” said Jeffrey Moore, president of Matrix Capital Markets Group, a national merger and acquisition advisory firm based in Richmond. “It’s staggering how many transactions are taking place that go unnoticed.”

Eugenia Shapard, vice president of a firm that tracks deals, said the private companies don’t have the disclosure requirements that accompany public deals, so the buyer, target and price often aren’t publicized.

Shapard works for Mergerstat, a division of the Los Angeles investment-banking services firm of Houlihan Lokey Howard & Zukin. Mergerstat has tracked merger and acquisition announcements of all sizes since 1963.

After a burst of activity in the early ’70s, the annual number of announcements hovered between 2,000 and 3,000 for the next 20 years, according to Mergerstat. Then, in 1996, it recorded more than 5,800 announcements.

The next two years saw 7,800 each. And through Monday, 5,782 mergers and acquisitions have been announced so far this year.

Of the 7,800 transactions in 1998, more than 1,000 were middle-market deals. Mergerstat defines the middle market as deals of $25 million to $250 million.

“Below the surface, there’s tremendous deal activity,” Shapard said.

Matrix estimates that more than 4,000 deals were struck with individual values of less than $100 million in 1998.

Many more deals certainly have been struck, Moore said, but are not tracked because they’re not required to be reported.

Just this year, Ashland-based Valentine Electrical Inc. joined the growing list of local companies recently bought by larger operations. Terms of the deal were not disclosed.

Opened in 1982 by Michael and Kerri Valentine, the company was sold to Houston-based Integrated Electrical Services Inc., a nationwide electrical contractor.

Mr. Valentine said he and his wife saw the consolidation trend developing in their line of work, electrical contracting. They saw how larger clients were looking more toward one-stop shopping for services.

The Valentines talked with their employees, then made the move.

“It’s not a sellout. It’s the next level. We’re partners now,” he said of the alignment with IES. “We bought in to their philosophy.”

And with company valuations so strong, “the timing was perfect,” he said. “It was perfect for our clients, for our employees and financially for Mike and Kerri Valentine.”

There are well-known cases in which a large local company is bought out or merges, its name disappears, jobs are cut — Central Fidelity Banks Inc., for example.

When huge deals such as the Reynolds-Alcoa proposal emerge, the question naturally centers on jobs. Speculation often is negative.

Challenger, Gray & Christmas, an international outplacement firm that tracks job-cut announcements, reported that 250,000 positions have been lost as a result of mergers and acquisitions since 1995. That figure included 4,075 cuts announced in April.

With smaller companies, consolidation sometimes can lend a different interpretation.

Valentine Electrical will maintain its office, name and management structure.

“Nobody got laid off. If nothing else, we created 25 percent more positions in the company,” Mr. Valentine said, adding that he expects his workload to become “continuous, not sporadic.”

“Consolidation is nothing to be scared of,” he said. “Pick your partner now or be forced into a partnership later.”

Among the middle-market deals involving local companies, the owners of Fearnow Bros. Inc., maker of Mrs. Fearnow’s Delicious Brunswick Stew, sold the business to Castleberry/Snow’s Brands Inc. after a 50-year run as a family firm.

Hungerford Mechanical Corp., a Richmond contractor, was purchased by Group Maintenance America Corp., a nationwide provider of heating, ventilation, air conditioning, plumbing and electrical services.

And as long as current economic conditions continue, Moore of Matrix said, additional mergers and acquisitions should be expected — even if not noticed.

“Every day you can read about another institution raising hundreds of millions of dollars to create a buyout fund. The demand is continuing to increase,” he said.

“With relatively low interest rates, it’s more economical to leverage a deal. As well, there’s a great deal of optimism in the marketplace.”

Merger mania

The yearly number of deals of less than $100 million and their estimated total value. The figures are based on reported transactions. Experts say many more deals are not reported, particularly transactions of less than $25 million.

Year Number Total Value
1998 4,168 $95 billion
1997 4,414 $92 billion
1996 4,188 $76 billion
1995 3,683 $60 billion
1994 3,449 $54 billion
1993 2,852 $45 billion
1992 2,412 $37 billion

Copyright (c) 1999, Richmond Newspapers, Inc.

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