Merger Mania Could Put U.S. Far in the Dust
The beat goes on--unfortunately. Despite last October’s stock market crash, merger and takeover activity is hotter than ever in the U.S. economy. In the first two months of 1988 there were 554 merger deals, worth $43 billion, according to Mergers & Acquisitions magazine. That’s up more than 50% from last year’s pace, and ahead of the record year for mergers, 1986.
Even seasoned veterans of finance are dismayed. “Can you believe this?” asks investment banker Michael Tennenbaum of Bear, Stearns & Co. What is happening, Tennenbaum explains, has less to do with the outlook for production and jobs than with opportunities for financial speculation.
Easy money and short memories are behind it. After the crash, the Federal Reserve loosened the money supply and interest rates fell. But merger activity didn’t pick up immediately because deal makers feared that the economy would fall apart. Then, as time went on and it didn’t fall, they got braver. Now they’re dealing like there’s no tomorrow because interest rates and stock prices make the numbers look right.
But where does this activity lead? Often, it looks like mere liquidation, businesses turning long-term assets into instant cash. In fact, explains Tennenbaum--who has earned a reputation for putting together innovative financings himself--it is liquidation. And in theory that could be healthy for the economy, taking stagnant capital and recirculating it to more productive uses.
The trouble is, he admits, this may be the wrong time for theory. The current takeover activity is increasing the indebtedness of U.S. business when “the financial infrastructure is already fragile”--meaning the economic weaknesses that caused last year’s crash haven’t gone away.
U.S. Industry Weakened
And the real trouble--beyond what investment professionals may admit to--is that theory often breaks down in practice. Rather than directing money to more productive purposes, too many takeovers weaken U.S. industry while companies from other countries invest to win markets and eat our lunch in competition.
For example, while all this deal making is going on, Burlington Industries--the nation’s largest textile company--is licking its wounds from being savaged in an earlier takeover battle. Burlington is in the midst of selling $900 million worth of its factories--including all of its plants in the European market--to pay debts incurred last year in a buyout by its management and the investment firm of Morgan Stanley. The buyout of Burlington--$3 billion in sales, over $2 billion in assets before the deal--was not voluntary. It was done to escape a takeover from raider Asher B. Edelman and Dominion Textiles, a Canadian firm.
Some of the plants Burlington is selling are being bought by companies from Hong Kong, Japan, France and Canada; others are being purchased by Burlington competitors.
Amputations seldom strengthen. The plants are modern, says textile analyst John Pickler of Wheat, First Securities; selling them weakens Burlington just at a time when foreign firms are interested in beefing up their U.S. operations--because the low U.S. dollar is making imports expensive, and protectionist legislation threatens to shut them out altogether.
Just to the point. In Fresno last week, a Japanese company announced that after studying the project for two years, it was going to build a mill to weave cotton from the nearby San Joaquin Valley into cloth for the apparel industry of Los Angeles. The Japanese company, Nisshinbo Industries, will invest $45 million to build the mill.
Ultimately, say people knowledgeable about the textile industry, Nisshinbo and other Japanese firms in Georgia and South Carolina--where they are building mills or buying those the Americans are selling--have their sights on capturing selected segments of the U.S. market--particularly the men’s underwear market. The Japanese reportedly have a spinning and knitting process for producing underwear superior to Jockey or Hanes, and their plans for U.S. plants are founded on that strength.
Could the contrast be more stark? The Japanese see a market opportunity and are building plants and machinery to take advantage of it. Their business strategies are founded on employing real assets to make real products to attract real customers.
Meanwhile many U.S. companies, some by choice, others by force, seem caught up in a game of turning plants and industrial skills into instant cash, which then erodes with inflation and shifting currency values.
The one strategy is designed for world industrial leadership. But the other, unless something is done to change the system, seems destined to turn once proud American industry to a handful of dust.
