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Merger and acquisition activity has dropped to the lowest level in nearly five years, according to Mergerstat, the data and market tracking division of Houlihan Lokey Howard & Zukin, a West Coast investment banker. Moreover, the events of Sept. 11 dramatically slowed M&A activity in South Florida and nationwide. “A large part of the market came to a standstill after Sept. 11,” says lawyer Harvey Goldman, a partner in the Miami office of Steel Hector & Davis. Indeed, nearly all of the third-quarter deals in Florida were announced in July and August, with only a handful of smaller transactions coming after Sept. 11, according to the Mergerstat data. All of the larger Florida deals, including the largest 25, were announced prior to Sept. 11. “For three weeks, people did not do very much,” says Dale Bergman, co-chair of the corporate and securities practice in the Miami office of Broad and Cassel. Signs of a rebound in the market are emerging, but with significant changes in transaction structures and contracts, according to market professionals. Nationwide, there were just 1,699 deals announced in the third quarter involving U.S. companies, a drop of nearly 35 percent from the third quarter of last year. What’s more, the number of transactions during the three-month period that ended on Sept. 30 was 18 percent lower than the transaction volume for the second quarter of this year. On a dollar basis, the quarter’s deal flow totaled $225.7 billion, down from $397.5 billion in the year-ago period. Blockbuster transactions — deals with a price tag of $1 billion or more — are also dramatically lower, according to Mergerstat. South Florida had a single deal in the billion-dollar and above category. The announced acquisition of Boca Raton, Fla.-based Sensormatic Electronics by Tyco International of Bermuda for $2.18 billion represented the state’s largest transaction. Other large deals announced during the third quarter include Palm Beach County-based B/E Aerospace’s proposed $200 million purchase of M&M Aerospace Hardware. In the banking sector, Fort Lauderdale, Fla.-based BankAtlantic Bancorp announced in early September its plans to purchase Community Savings Bankshares of North Palm Beach for $164 million. That transaction has not yet closed. A number of the deals in Florida involved players from troubled companies. “There are a lot of distressed transactions,” says Jim Decker, director of the Atlanta office of Houlihan Lokey. For instance, Gerald Stevens Inc., a Fort Lauderdale-based floral retail company that has filed for Chapter 11 bankruptcy protection, has been shedding assets, and on July 10 sold its Florafax Floral Wire Service unit for $10.7 million to Teleflora, a company based in Los Angeles. A total of 128 deals involving Florida companies as a buyer or seller were announced during the quarter. Disclosed transaction prices totaled $3.7 billion, which includes the mega-transaction (the Sensormatic Electronics buyout) for $2.18 billion. That compares with 182 deals worth $3.56 billion during the first quarter of the year, a period without a comparably big deal. Although the numbers point to a slowdown, there are signs of improvement. “I am now seeing things come back slowly,” says Bergman of Broad and Cassel. He predicts that two types of trends will develop in M&A activity. First, stronger companies will be on the prowl for bargains. Second, there are many good companies, including a few struggling dot-coms, who still have $1 million or $2 million in cash and a public listing on Nasdaq. He expects such companies to attract buyers looking for a shot of cash and a backdoor into the public stock market. Bergman is working on similar transactions right now. He declined to comment on specifics. “I definitely expect to see continued strong M&A,” says Andrew Hulsh, an international partner and head of the corporate securities practice in the Miami office of Baker & McKenzie. Hulsh says that an increase in M&A will be driven by depressed valuations and lack of access to the capital markets. Many companies that had planned to grow “organically” are now searching out partners, he says. “These companies are now seeking to meet their business objectives and strategic plans by combining with one or more companies.” At Akerman Senterfitt in Miami, Stephen Roddenberry believes there is “still a relatively active market.” However, he notes that prices have come down sharply “because sellers in this market do not have the option of going public. The IPO market is dead.” Not surprisingly, he is seeing fewer deals in which stock is used as a currency to pay for the corporate assets. Indeed, sellers are getting fewer dollars, but they’re demanding and getting cash. The events of Sept. 11 have also introduced a new wrinkle in purchase contract negotiations, according to Steel Hector’s Goldman. In the past, M&A transactions could be canceled or altered under the terms of a standard “material adverse change” clause, which enables a buyer or seller to walk away from a deal if there are any material negative changes in a company’s stock price or financial performance. “War was not an issue. Now it is,” says Goldman, who anticipates that going forward both sides of the bargaining table will address current events in contract negotiations. Meanwhile, caution continues to dominate corporate decision-making. Says investment banker Decker: “Both buyers and sellers are going to take a wait-and-see attitude, and I suspect that is going to last well into next year.”

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