Merger Mania Expected to Continue on Wall St. Despite Intense Scrutiny
The Wall Street merger and acquisition sector, celebrating possibly its best year ever in 1988, expects its business to continue to boom in the year ahead, despite intense new scrutiny from Washington.
As of Nov. 30, $172.9 billion worth of mergers and acquisitions were completed, according to Mergers & Acquisitions magazine. A strong December could lift the total above 1986’s record $204.9 billion.
The 1988 total will easily top the $176.5 billion recorded for mergers in 1987, even though stock prices were down steeply after last year’s market collapse.
Helping lift the total for 1988, and raising eyebrows in Washington, was the record-shattering $25-billion buyout of RJR Nabisco Inc. In its aftermath, Senate and House committees plan hearings on leveraged buyouts early in the year. But the industry is not alarmed.
“From a practical standpoint, I don’t think there will be any changes,” said William Rifkin, a managing director at Salomon Inc.
Others agreed, saying they view Washington’s interest in buyouts as a warning shot, with no action likely to slow the business in the near future.
Public dismay over the RJR Nabisco deal was also provoked by reports that F. Ross Johnson, the company’s chief executive officer, had tried to buy the firm for substantially less than its takeover value.
“The spectacle and the appearance of a CEO trying to buy his company at one price and then offering 50% more . . . that says these guy must be thieves in the public mind,” Rifkin said.
In a leveraged buyout, a buyer, often with only about 10% of the buyout price in cash, borrows heavily to acquire a publicly held company and uses its cash flow to repay borrowings, often selling assets to lower the debt.
Critics of buyouts say the massive debt generated by such deals is an unnecessary burden on a company’s balance sheet and could cripple it during an economic downturn.
Current tax laws encourage the accumulation of debt, making it tax deductible. This treatment for leveraged buyouts is one area that will surely be examined by Congress, but investment bankers believe that changes Washington institutes after the RJR Nabisco deal will involve the form, but not the substance, of the buyout game.
Also lending a note of uncertainty and caution to the business is the case of Drexel Burnham Lambert Inc. The largest underwriter of corporate securities and a central figure in the buyout of RJR Nabisco and many other concerns, Drexel agreed last week to plead guilty to six criminal counts. The charges stem from the longstanding U.S. probe of Wall Street insider trading that snared takeover speculator Ivan Boesky. Drexel is issuing junk bonds to help finance the RJR Nabisco deal.
