Buyouts reshape region's business

Want to buy stock in PW Eagle, the Eugene, Ore., pipe maker that just topped The Seattle Times' Northwest 100 ranking of the best-performing public companies for the second year in a row? Better hurry up — in a few weeks it'll be off the market.

How about aQuantive, the hot online-advertising company that came in third in the Northwest 100 derby? Sorry — Microsoft beat you to it.

Maybe a nice, stable utility stock such as Cascade Natural Gas? Nope — it's being bought by a North Dakota utility, in a deal expected to close later this year.

Those three are among 20 Northwest public companies that have been acquired, taken private, or are in the process of being bought since the beginning of 2006. It's the regional reflection of a national and international buyout wave that is reshaping the landscape of American business.

The buyouts can have broad impacts on communities. New owners often cut payrolls or move jobs — particularly headquarters jobs — out of the area. Fewer home offices can mean fewer experienced executives to lead nonprofit groups and fewer corporate sponsors for symphonies and softball teams.

And while investors can get a big one-time payday, they miss out on the opportunity to participate in a successful company's future growth. Many Icos investors, for instance, who had bought into the Bothell-based biotech when it was young and struggling, bitterly opposed management's decision to sell the company to Eli Lilly just as it stood to reap the rewards from its impotence drug Cialis.

Record corporate profits have made it easier for companies to snap up competitors, as J-M Manufacturing is doing with PW Eagle for $400 million, or buy their way into new business lines, as Microsoft is doing with aQuantive for $6 billion.

Often they're competing with private-equity firms that, bulging with billions in investors' cash, have stormed through corporate America like Christmas shoppers at Pacific Place.

In April, the family that had run Longview Fibre since it was founded 80 years ago sold it to a Canadian asset-management firm. Last year, Francisco Partners and Vector Capital teamed up to buy Seattle's WatchGuard Technologies.

All told, about one of every eight publicly traded companies in the Northwest has been sucked up by the wave of deals since the beginning of 2006. Ten were bought or merged in 2006, six more have been bought out so far this year, and four more deals are pending.

Nonpublic companies are being swept up, too. Among the dozens of locally based private companies bought last year were biotech Corus Pharma ($365 million) and billing-software developer Qpass ($275 million); earlier this year, high-speed Internet company Speakeasy sold out to Best Buy for $97 million.

Last year there were 12,553 deals involving U.S. companies, a 15 percent increase from 2005, according to data compiled by Thomson Financial. Last year's deals were worth more than $1.7 trillion, up 34.5 percent from 2005.

And the pace is picking up. Through May, according to Thomson, there have been 5,341 deals worth nearly $1.1 trillion this year.

What's fueling all the buyout activity? Money, and lots of it.

"Companies seem to be really flush with cash right now," said Peter Brous, a finance professor at Seattle University's Albers School of Business. Many companies are holding 40 percent or more of their assets in cash, he said.

But cash hoards also can make companies attractive takeover targets, Brous said — perhaps giving them an extra incentive to spend on acquisitions.

Private-equity firms and hedge funds also have big war chests, which have helped them become major players in the buyout market.

"There is just a huge supply of private equity out there," said Brad Gevurtz, head of investment banking for D.A. Davidson in Lake Oswego, Ore. "If you've been successful in the past, there's no shortage of capital wanting to invest with you."

Bank interest rates remain low by historical standards, Gevurtz noted, and cheap credit has fueled much of the recent buyout wave.

"A private equity firm with $1 billion of capital can borrow enough money to buy companies worth much more than $1 billion," he said. "If a firm can buy a company with a 25 to 30 percent annual return on investment, they have no problem borrowing money at 8 percent or slightly higher."

The last time deal activity reached current levels was during the go-go years of the late 1990s and early 2000s. But there are some important differences this time around.

During the technology-led boom, Brous said, many more deals were funded with stock than with cash: "The stock market had gone up so much that there was a sense that you were playing with Monopoly money."

In 2000, according to Thomson Financial, 36.4 percent of all U.S. mergers and buyouts were done with stock alone; 18.5 percent were funded by stock and cash, while just 21 percent were cash-only. Last year, by contrast, more than half of deals were all-cash.

In the previous boom, many deals were for companies that had no real profits, evanescent sales and business plans that in retrospect seem laughable.

In contrast, Gevurtz said, private-equity firms typically shop for established companies with strong, reliable cash flows, or at least the prospect of them. The idea is to cut their expenses and restructure them as needed, tap the cash flow to service the debt, then resell them — to investors in an initial public offering, to a competitor or, increasingly, to another private-equity firm.

Then there are the "activist" hedge funds and other aggressive institutions, which typically buy big chunks of target companies and then prod management to "maximize shareholder value" — usually code for putting the company on the block.

That's what happened to PW Eagle, which put itself up for sale after coming under pressure from Pirate Capital, a Connecticut hedge fund that owns 22 percent of its outstanding stock.

Pirate also owned a 12.6 percent stake in Cutter & Buck, before the Seattle sportswear company sold itself to New Wave Group earlier this month for $156.5 million.

The surge of deals and rumors of deals has been one factor behind the recent rise in stock prices, Gevurtz said. Some traders are simply looking for the next big jackpot; others, who want to invest for the long term, have fewer publicly traded shares to pick from.

But just as the last merger wave ended with a rash of overpriced, misbegotten deals — the awkward pairing of America Online and Time Warner, the doomed marriage of Kirkland's HomeGrocer.com and online grocer Webvan — some voices are warning of a similar fate.

Even as buyout funds chase bigger and bigger targets, rising bond yields are undercutting the cheap-debt assumptions that have helped fuel the boom.

"We are close to a time when we'll look back and say we did some stupid things," Ken Lewis, chief executive of Bank of America, told an audience in Zurich last month. "We need a little more sanity in a period when everyone feels invincible and thinks this [credit cycle] is different."

Said Davidson's Gevurtz: "If the banking system or the debt markets get spooked and start to tighten the availability of credit, that'll be the beginning of the end."

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com