Corporate takeovers are back in style.
Fueled by low stock prices, the weak U.S. dollar and concern that the federal government eventually may toughen its antitrust stance, corporations are aggressively pursuing acquisitions to strengthen their businesses.
The spurt in takeover offers--including Campeau Corp.'s $4.2-billion bid Monday for Federated Department Stores, the parent of Ralphs groceries and Bullock’s department stores--marks a turnaround from late last year. After the stock market crashed on Oct. 19, investors became leery about putting their money into risky takeover ventures and merger activity slowed abruptly.
But corporate deal makers now expect the takeover wave to continue for a number of reasons. For one thing, stock prices of companies such as Federated remain depressed, making corporations available at bargain prices.
The crash created “an unprecedented buying opportunity,” said Stephen Waters, co-head of mergers and acquisitions at the Shearson Lehman Bros. securities firm in New York. “The decline in stock prices is responsible for a lot of the activity.”
In addition, the weak dollar makes U.S. corporations especially attractive to foreign buyers, which have been responsible for some of the larger takeover offers this year.
For instance, BAT Industries, a British tobacco giant, recently bid $4.2 billion for Farmers Group, the Los Angeles insurance company. F. Hoffmann-La Roche, a Swiss pharmaceutical firm, offered $4.65 billion for Sterling Drug, although it eventually was outbid by Eastman Kodak.
Merger specialists say that takeover activity also has picked up because of concern that the relaxed antitrust attitude of the Reagan Administration might end with a new administration next year. “No one knows what 1988 will bring,” Waters said.
After Black Monday, most takeover deals were put on hold as the market dried up for high-yield, high-risk “junk bonds,” which often finance takeover attempts.
Southland Corp.'s initial $5.1-billion effort to go private, for instance, ran into trouble in November when the company’s investment bankers had trouble selling the needed junk bonds. The deal eventually was revived, but only after the firm’s management group agreed to pay even higher interest on its debt.
Junk Bonds Recover
There were just five takeover offers of more than $400 million in October after the crash, according to IDD Information Services, a New York research firm.
Takeover activity began to warm up in mid-November, with 16 $400-million-plus offers that month and another 17 in December. IDD reports only nine takeover offers during the first three weeks of this year, but that number includes such major bids as those for Farmers Group and Sterling Drug. This month’s offers also include the $6-billion offer by E-II Holdings for American Brands, a tobacco, financial services and liquor company, and American Brand’s $875 million counteroffer for E-II Holdings, whose businesses include Samsonite luggage and Culligan water treatment.
Between Black Monday and Jan. 21, according to IDD, there were takeover offers worth nearly $85 billion in the $400-million-plus range.
The junk bond market has recovered somewhat, although investors still are generally skittish about buying the risky debt securities. As a result, the nature of merger activity has changed, experts say.
Though money isn’t readily available to many of the raiders of the late 1970s and early 1980s, major corporations still can get financing. Consequently, corporations now are leading the way in launching takeover battles.
“Prices looked high last year and a lot of corporate buyers were nervous about paying those prices,” said Edward N. Robinson, director of investment banking for First Boston in Los Angeles. Now, he said, “corporate buyers face a little less competition from financial buyers.”
In the past, many of these corporations were thwarted in the takeover arena because professional raiders easily could outbid them. Raiders were able to raise extra money in part because they were more likely to break up acquired companies and sell the pieces for short-term profits. (Campeau, which broke up Allied Stores after buying it a year ago, said it might do the same if succeeds in acquiring Federated.)
Robinson predicted that corporate acquisitions will be more focused than in the past. “People are expanding their core businesses or diversifying into something related to what they do,” he said.
Corporate raiders aren’t completely out of the picture. Paul Bilzerian, a Tampa corporate raider, recently was able to obtain financing for his $1.06-billion takeover of Singer Co. Robinson said there still are a number of other financiers who have large pools of capital and thus would have no difficulty financing a takeover.
Main story in Part I, Page 1.