Corporate Optimism Sparks Wave of Deals
A corporate takeover spree is signaling a new aggressiveness on the part of U.S. executives, who suddenly appear less concerned about the economy or about making strategic missteps.
The parent of retailer Kmart is swallowing Sears, Roebuck & Co. Cellular phone giant Sprint Corp. is reported to be in talks to buy rival Nextel Communications Inc. Johnson & Johnson is widely expected to take over Guidant Corp., a maker of pacemakers and cardiac stents.
And on Monday, software company PeopleSoft Inc. ended its 18-month-long fight to remain independent, agreeing to a $10.3-billion buyout by Oracle Corp.
The latest wave of takeovers, and expectations of more to come in 2005, helped to push a key index of blue-chip stocks to a three-year high on Monday. But as corporate deal making ramps up, so do worries that business consolidation will mean more lost jobs in an economy still struggling to generate healthy employment growth.
Experts say a confluence of factors is driving the surge in deals. Many firms are flush with cash after deep cost cutting in 2001 and 2002 helped profits soar. Rebounding share prices since 2002 also have given companies more spending money in the form of their own stock.
“For those companies in industries that have good stock prices, they have good currency” for deals, said Kent Kresa, chairman emeritus of Northrop Grumman Corp. in Los Angeles.
More important is that many corporate managers are gaining confidence in the economy and in the prospects for their businesses, say investment bankers, lawyers and others who advise executives. President Bush’s reelection, widely supported by business leaders, boosted that sentiment, they say.
“It’s a sign of a different attitude in terms of companies’ perception of the future,” said Ned Riley, chief investment strategist at investment firm State Street Global Advisors in Boston.
That increased confidence is translating into a willingness to take more risks -- a big change from the hunker-down mentality that prevailed after the stock market began to crumble in 2000 and after financial scandals intensified scrutiny of business.
After several years of caution in the executive suite, “I think a lot of companies have already wrung out costs, and now it’s a question of, how do you grow?” said Stephen Arcano, a partner and merger advisor at law firm Skadden, Arps, Slate, Meagher & Flom in New York.
The dollar volume of announced takeover deals involving U.S. companies is expected to reach $700 billion this year, according to data tracker Thomson Financial in New York. That would be an increase of 29% from the level in 2003 and a jump of 62% from 2002.
At $700 billion, takeover deals still would be less than half the annual level in 1998, 1999 or 2000, when the stock market was soaring amid the dot-com boom.
But the latest batch of deals is setting the stage for more to come in 2005, many experts say.
“There’s a new sense of urgency to get deals done that I haven’t seen in several years,” said Brooks Dexter, senior managing director at USBX Advisory Services, an investment bank in Los Angeles.
Some of that urgency may stem from pressure from company shareholders: As cash has built up to record levels on corporate balance sheets, executives must decide whether to reinvest it in their business or return it to shareholders, such as through dividends, Riley said.
By turning to takeovers, “companies are trying to show that they can earn a lot more than 1.25%” on their cash, Riley said, referring to typical rates paid on short-term bank accounts. The total level of cash in the coffers of the biggest U.S. industrial companies reached $590 billion as of Sept. 30, more than twice what it was at the end of 1999, according to Standard & Poor’s in New York.
On Monday, two major U.S. companies announced deals that would burn off some cash. Soft-drink and snack-food leader PepsiCo Inc. said it would spend $750 million to buy full control of Europe’s biggest snack maker. Honeywell International Inc. agreed to pay $1.7 billion to buy a British maker of security devices.
Investors’ reaction to large takeover deals in recent weeks has generally been favorable, lifting the stocks of both buyers and those being bought. On Monday, Honeywell shares jumped $1.14 to $36.45.
A favorable response from Wall Street can be crucial because it validates executives’ decisions -- and may encourage their rivals to look for deals of their own.
“All it takes is a couple of marquee names in deals to trigger more,” said Richard Peterson, market strategist at Thomson Financial.
The stock market rallied broadly on Monday, helped by takeover news. The Dow Jones industrial average gained 95.10 points to 10,638.32, and the Standard & Poor’s 500 index of blue-chip shares rose to its highest close since August 2001.
Many executives say the strategic forces driving buyouts haven’t changed from the 1990s, although they may be intensifying again.
Richard Heckmann, chief executive of Carlsbad, Calif.-based sporting goods maker K2 Inc., said he had been forced to beef up the company to keep up with demand from retailing giants such as Wal-Mart Stores Inc. and Target Corp.
“How does a little guy put 30 products in 3,000 stores?” said Heckmann, whose firm has made 26 acquisitions since he took over in 2002, including 10 this year. “The retailers want bigger, stronger, fewer vendors.”
Semiconductor maker International Rectifier Corp. in El Segundo has completed eight acquisitions since 2000, said Chief Executive Alex Lidow. He said the firm expects to make several more in 2005 as it focuses on its energy-saving chip technologies for such products as hybrid cars and fluorescent lights.
“We have the means and we have the desire,” said Lidow, noting that his company has about $800 million in cash on hand.
Another factor boosting deal making: As memories of the 1999-2000 technology stock bubble fade, attractive target companies are more willing to accept reasonable takeover prices from acquirers, Lidow said.
“It’s kind of like the real estate market,” he said. “Everybody always wants to sell at the peak, but it takes a few years to realize that we’re not going to see the peak again.”
For shareholders of target firms, deals can mean an instant windfall. In most cases, deals are friendly rather than hostile.
For shareholders of an acquiring company, the question is whether a takeover will be a benefit or a curse to the business in the long run. The history of big takeover deals is littered with transactions that turned out to be duds, or worse, Thomson’s Peterson and others note.
Some analysts worry about the effects of a new takeover wave on the economy overall. Further business consolidation could raise the productivity of the surviving companies, but compared with using capital to create a new plant or product line, such deals may not add to the nation’s economic base, said Thomas McManus, investment strategist at Banc of America Securities in New York.
He noted that takeovers often lead to layoffs -- a worrisome prospect given still-slow U.S. job creation. “I’m not sure it definitely argues for continued economic growth,” he said of the upturn in deals.
For executives themselves, however, takeovers can be hugely rewarding. Chief executives, along with chief financial officers and chief legal officers, often land bonuses when a corporate marriage is concluded, said Paul Hodgson, senior research associate at research firm Corporate Library.
For example, WellPoint Health Networks’ chairman, Leonard D. Schaeffer, will earn $47 million in so-called change-in-control payments as a result of his Thousand Oaks-based company’s acquisition by Anthem Inc.
“If I were a [WellPoint] shareholder, I would have viewed that with no great relish,” Hodgson said.
