They say the takeover boom is over, but if that’s so, how do you explain Philip Morris Cos.’ decision to buy Swiss candy maker Jacobs Suchard for $3.8 billion or ConAgra Inc.'s $1.34-billion purchase of Beatrice Co.
Easy: The mergers and acquisitions business hasn’t died, it has evolved into another stage. Deal makers are doing a new kind of buyout, one that harks back to the days before the junk bond binge but has a few novel twists.
If you ask investment bankers about the deals they’re doing these days, two words keep surfacing: strategic and global.
Philip Keevil, a managing director at S.G. Warburg & Co., the U.S. arm of the British investment firm, said it has been swamped in recent months, handling “mostly transactions that are started by strategic acquirers.”
In a strategic deal, a company seeks to expand through acquisition of a firm in a similar or related industry. This is a far cry from the buyouts that dominated the merger wave of the 1980s because they are undertaken by companies interested in running a business, not investors looking for quick profits.
Strategic transactions also differ from the mega-deals of the ‘80s because they do not involve the sale of the risky junk bonds that helped finance--and in some cases, undermine--big buyouts. The acquiring companies are putting up much more equity to finance their transactions.
So far, the biggest deals of 1990 have been strategic. When food giant ConAgra bought Beatrice, it picked up well-known labels including Swift’s meats, Butterball turkeys and Wesson oil. Philip Morris, another food company, found a candy maker in Jacobs Suchard that would broaden its base.
Even some recent hostile bids were strategic, including Georgia Pacific Corp.'s $5-billion purchase of rival paper producer Great Northern Nekoosa Corp., and Torchmark Inc.'s failed $6.34-billion offer for another insurance and financial services company, American General Corp.
The emphasis on strategic moves is similar to the late 1970s and early 1980s, before junk bonds came into vogue. Most of the deals done in the old days were by firms looking for opportunities to expand.
Now they want to expand not only in their own countries, but overseas. Today’s market is global, and more acquisitions are what deal makers call cross-border transactions.
Among Warburg’s recent deals was Reckitt and Colman PLC’s purchase of the Boyle-Midway division of American Home Products Corp. for $1.25 billion.
Reckitt and Colman, a British firm, had already bought U.S. businesses, including Durkee foods and Airwick air fresheners. The purchase of Boyle-Midway, a consumer products business, represented a further move into the U.S. market.
Now, “every business looks at their competitive position on a worldwide basis,” said a prominent U.S. investment banker who asked not to be identified. “You can’t be in the car industry without looking at the worldwide car industry.”
If this sounds like the mergers business has found renewed vigor, it hasn’t. There is still plenty of evidence that in spite of so many strategic and global opportunities, the business has shrunk.
U.S. merger transactions fell 50% over the first half of 1990 from a year earlier, the financial research firm Securities Data Corp. said. There’s proof beyond the numbers. In June, Bankers Trust New York Corp. said it was reducing the corporate finance staff by 10%, the latest financial services company to cut personnel because of the drop-off in mergers.
Several days later, one of the most prominent takeover strategists of the 1980s, the investor group Coniston Partners, said it was disbanding because of scarcity of financing and worthwhile targets. Coniston’s three founding partners said they had to be realistic about the changing market.
The change has forced investors and deal makers to adapt, and investment bankers who have sought cross-border deals are flourishing.
Coniston’s founders said they would still seek acquisitions, but via new forms of financing. They said they’re also branching out into areas they hadn’t focused on, such as real estate.