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Although corporate mergers and acquisitions are significantly fewer this year than last, one type of M&A activity is ramping up — the sale of distressed companies, in whole or in part. While blockbuster mergers like that between America Online and Time Warner grab headlines, investment bankers and lawyers are seeing an increase in the number of cash-starved companies selling their assets — and sometimes relinquishing control — to stay in business and satisfy creditors. As of July 20, there had been 12 M&A deals in the southeastern United States involving companies that were in bankruptcy court — either preparing for liquidation under Chapter 7 or trying to reorganize while shielded from creditors under Chapter 11 — according to data from Mergerstat, a California company that tracks deal flow. That’s up from only eight such deals in the same period last year. What’s more, those figures don’t include companies that are ailing but not in bankruptcy court. Some investment bankers expect even more corporate fire sales as the economy slows after what has been an unprecedented nine years of continued growth, and as the stock market’s appetite diminishes for initial public stock offerings (IPOs). “There are a lot of dot-coms in distress because of what has happened with the markets,” says Harvey Goldman, an attorney with Steel Hector & Davis in Miami. “These companies will do whatever it takes to continue. If that means a merger, so be it. If that means selling a significant percentage, so be it. If that means a joint venture, so be it.” Clearly, the chill in the market for IPOs and the recent downturns in technology stock prices on the Nasdaq market have made early-stage and Internet companies less attractive to venture capital investors. That has left some companies struggling to raise equity financing. “One way to get a cash infusion is to get a merger partner with deep pockets,” says Samuel Thompson, head of the University of Miami’s Center for the Study of Mergers and Acquisitions. Thompson points to the recent $50 billion sale of Washington-based VoiceStream Wireless Corp. That transaction calls for buyer Deutsche Telekom to pump $4 billion into VoiceStream, which has been operating in the red. In South Florida, motivated sellers range from traditional companies that either are in or are facing bankruptcy to so-called “new economy” tech companies that need a shot of cash to survive. Ilife.com, an online publisher of bank rates and personal finance data, is selling assets after three years of aggressive expansion left the North Palm Beach, Fla., company with a $49 million loss and less than $10 million to keep operating. “They’re selling stuff right and left to survive,” says one investment professional in South Florida. In May, ilife.com sold its CPNet.com division, and on July 14, the company sold its Pivot.com unit, an online insurance agency, to a subsidiary of First Union Corp. for $4.35 million. A third unit, Consejero.com — a Miami-based, Spanish-language Web site on personal finance — is still being shopped around, according to Bob DeFranco, vice president of finance. Those three businesses were sold to put the company on the road to profitability, says DeFranco. Eliminating the “cash burn” associated with those units “helps us tremendously in achieving those profitability goals,” he says. It’s not just dot-coms that are struggling during these boom times. “Old economy” companies in textile, apparel, restaurant, oil and gas, and other sectors are also shedding assets rapidly, according to some market professionals. Last year, for example, Brothers Gourmet, a Boca Raton, Fla., wholesaler of ground coffee that filed for bankruptcy in 1998, was sold to a unit of Procter & Gamble. Likewise, computer importer-exporter CHS Electronics in Miami filed for Chapter 11 bankruptcy protection in April and is now liquidating in a plan that calls for the sale of its European subsidiaries. While younger companies such as ilife are typically debt-free, though in need of cash, older companies are shedding assets to meet the demands of creditors. Sales of distressed corporate assets are linked to a rise in defaults for bank loans and bond debt, says Andrew Stull, head of the Atlanta office of Houlihan Lokey Howard & Zukin, a California-based investment banking firm. Signs of distress are evident in higher debt default rates, says Stull. Loan defaults recently climbed to an average of six percent to seven percent of all loans, from a previous level of below five percent. Looking to preserve capital on a loan going sour, banks and bondholders have become more aggressive about forcing borrowers to restructure either through a complete sale or by shedding assets, says Stull. He has received a higher volume of calls from bondholders, large regional banks, and bankruptcy trustees looking to recover as much money as possible. Often, the strategy is to find a buyer for the troubled company that will pay off the debt, says Stull. “It’s one of the fastest-growing areas of our general investment banking practice,” he says. Recently, Houlihan Lokey worked on behalf of creditors to restructure Tampa, Fla.-based Breed Technologies, an auto parts company in Chapter 11. Breed, which sought protection from creditors last fall, owes $1.6 billion. In June, Breed’s board and its banks backed a merger with Harvard Industries in New Jersey. The transaction, valued at $600 million, calls for Harvard to assume $300 million in Breed’s liabilities and pay creditors $220 million in cash and notes. Earlier this year the creditors of UniCapital Corp., a Miami-based leasing company, prompted the company to restructure and to prepare to sell one of its major divisions, according to a Securities and Exchange Commission filing. In turn, UniCapital’s lenders, including Bank of America, waived certain loan covenants that the company had violated. UniCapital otherwise faced default on a number of loans, and the lenders could have foreclosed on the debt, according to the SEC filing. Twice this year, including earlier this summer, UniCapital lenders have granted the company a reprieve. The company is now shopping some of its assets, including a major division. Last week UniCapital announced it had sold 18 planes to subsidiaries of Lehman Brothers Holdings. “You’re going to start seeing M&A as a way to try and salvage something,” says Dale Bergman, an attorney with the Miami office of Broad and Cassel.

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