VENTURE CASH FUELING MERGERS

Byline: T.J.R.

NEW YORK — Wall Street expects to stay busy in the near term as merger and acquisition activity heats up and venture capital firms search for projects to finance.
The merger and acquisition activity will be driven by continued consolidations in all fields as firms in a slower growth economy fight for market share, according to the four financial experts at WWD’s recent forum on the state of the retail apparel industry.
Most acquisitions in retailing will likely involve one retailer acquiring another, in deals generally referred to as strategic acquisitions, but financial players, including venture capitalists as well as equity investment firms, are expected to play a larger role in the merger deals and remain eager to support start-up concepts.
Peter J. Solomon, who heads his own investment banking firm, said the M&A activity in retail and apparel will be driven by the same macro trends seen throughout most industries. “Mergers and acquisitions will continue to accelerate because it is a market share battle,” he said.
Solomon said the M&A business is being driven by consolidations to grow, eliminate competition and achieve cost savings.
“It could be argued that in no field should there be more than three national chains. Its sort of the mold of macroeconomic theory, but in fact, in each field that seems to be happening,” he said.
Elizabeth Eveillard, a managing director at PaineWebber, said she looks for greater merger activity not only among the larger retailers, but also in “the rapidly growing areas,” such as the category-killers and superstores.
“People see the opportunity through acquisitions to pick up new markets without building stores,” Eveillard said.
Further heightening the action, Solomon said, many financial players are looking to alternative investments to the stock market.
“As the stock market has become more volatile and less predictable, you have other forms of investment,” he said. In addition, these financial players now prefer “old, plain vanilla” merger deals, after getting burned by more complicated deals, such as derivatives, last year. Financial buyers are also expected to fund start-up projects, which are being fed by a growing stream of experienced entrepreneurs.
Walter Loeb, of Loeb Associates, said many creative people that have lost their jobs in various consolidations wind up embarking on startup concepts: “So many people, obviously through mergers, are being thrown out of the business, and there’s a lot of new ideas that are germinating and coming forth.” Solomon said many executives get tempted by the challenge and the potential monetary benefits of heading up a start-up business.
“They’re getting bought out with a lot of money,” Solomon said. “With their experience, they have a track record which allows them to attract money.”
The emergence of the financial buyer could alter some deals, experts said.
“Theoretically,” said Eveillard, “strategic buyers should have the upper hand because of synergies, but I’m not sure they will because the financial buyers have a great deal of money and are very competitive in pricing acquisitions.”
“I think the strategic buyer has the synergies and if they are smart enough to pay for these advantages, they will have the upper hand,” she observed.
Peter Schaeffer, retail analyst at Dillon Read, also observed that the financial player looks more at the investment gain on the deal rather than the long-term prospects of the company.
“The financial player always has an exit strategy,” Schaeffer said. “They go into a deal thinking how they are going to get out, while the strategic buyer is just making himself bigger. That’s a big difference,” he said.
Eveillard said financial buyers will use less leverage than in the Eighties.
Solomon said massive debt payments required in a leveraged buyout place time constraints on retailers that make it hard to operate through good times and bad times. “The inexorable nature of debt and interest payments makes that a very hazardous occupation,” he said.

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