Financing for Business--It’s a New Ballgame
Chairman Robert Mercer of Goodyear Tire & Rubber Co. testified to the Senate Commerce Committee on Wednesday that new laws are needed to control foreign takeovers of U.S. companies. Mercer’s concern is understandable, since it was British financier Sir James Goldsmith who led a raid on Akron, Ohio-based Goodyear last November.
But Goldsmith wasn’t the most potent threat to Goodyear. For all anybody knows, some of his reputed millions may be bluff. The real power in the attempt to grab Goodyear was the investment banking division of Merrill Lynch, the largest U.S. brokerage, which had $2 billion of its own capital committed to the deal. The threat, in short, lay closer to home.
However, Mercer’s testimony, as well as the very hearings themselves, are not in response to a single takeover but to a wider fear--that foreign investment, particularly investment from Japan, which possesses billions in U.S. dollars these days, threatens to buy up U.S. industry. Such fears are groundless, as much so today as similar fears were in the last decade when Arab oil money was regularly reported to be buying up General Motors or some other U.S. treasure.
Massive Transformation
The truth is, the financing of business has undergone a massive transformation, and that gives rise to anxiety as old certainties no longer apply.
For example, should we call Allied Stores a foreign takeover or a domestic one? Campeau Corp., a Canadian real estate company, made a bid for Allied (Bonwit Teller, Brooks Bros., Ann Taylor and other stores) last fall and eventually merged with it. But it wasn’t Canadian money that did the deal, it was American--first a $1.8-billion, short-term loan from First Boston Corp., then $1.1 billion in permanent “junk bond” financing arranged by First Boston.
The money plays defense, too. Currently, Dominion Textile, Canada’s largest textile company, is allying itself with U.S. raider Asher Edelman in trying to acquire Greensboro, N.C.-based Burlington Industries. But Morgan Stanley, the investment banking firm, is committing more than $2 billion on behalf of investors to make a friendly deal for Burlington.
There was no foreign angle, but the same phenomenon of plentiful big money lay behind this week’s big Allegis story. It was Salomon Bros. arranging $1.5 billion in financing for the United Airlines pilots as much as any specific offer or argument that caused Allegis’ directors to oust Chairman Richard J. Ferris and scrap his plans for a travel conglomerate.
Global Money Markets
Examples aplenty, but what do they all mean? They mean that the global money markets are calling the tune in business these days. But there is no evil Dr. No or villainous Goldfinger behind them. On the contrary, the power behind the money markets is you and your savings, whether in a pension plan or IRA, mutual fund or insurance policy.
Yes, people have saved before, and there have always been money markets. But their size is different today. Richard Bott, a managing director of First Boston, cites the growth of “IRAs and 401ks, the public and private retirement plans. There is more money being managed than ever before.”
Trillions of dollars, not billions, in fact. And it’s being managed outside of the traditional banks, which used to pay a regulated rate of interest on your deposit and then lend it to business at a higher, but also regulated rate. The banker, carefully controlled by the government, allocated money in the community from the 1930s right up until the 1970s.
But in the last 10 years, investment bankers from the securities industry--the people who can sell bonds or stocks in markets from London to New York to Tokyo--have displaced the banks as the institutions that channel your savings into finance for industry. They buy and sell according to what John S. Wadsworth Jr., a managing director of Morgan Stanley, calls “the market’s valuations of corporate profits, and the productivity and efficiency of industry.”
The investment bankers, understandably, see virtues in the new finance--the efficiency of a market-determined allocation of resources, and the opportunity for U.S. business to raise capital from the almost limitless investor base of the whole world.
Two questions: If rule by money market is such a good idea, why don’t the Japanese have it? The answer is, they are about to get it. Wadsworth of Morgan Stanley is en route to Japan right now to head his firm’s 400-person Tokyo office, expanded from 20 people two years ago when, says Wadsworth, “the Ministry of Finance decided to deregulate Japan’s capital markets.” One result of that decision is that market trading--more than central banks or Venice economic summits--now sets the yen-dollar exchange rate.
And, finally, does this make Goodyear or any other U.S. company more competitive? That’s a subject of a continuing debate (and of countless newspaper columns). But one thing surely can be said: Whatever U.S. industry wants to do, it can find the money to do it. There was $2.9 billion in venture capital alone disbursed to new businesses in this country last year. If competitiveness lags, it could be for lack of wit or of will, but it’s not for lack of funds.
