New Corporate Merger Wave Is Rolling In
Corporate fashions for the ‘90s will be in the larger sizes, as big companies devote their money and brainpower to acquiring other, not-so-big companies.
That’s the trend, and it got a major send-off last week in the agreement between American Telephone & Telegraph and NCR Corp. The telephone giant will acquire the Dayton, Ohio-based computer company for $110 worth of AT&T; stock for each NCR share, a deal totaling $7.4 billion.
There are a lot of reasons for the acquisition, which AT&T; was able to complete only after a five-month struggle and a 22% increase in its original offer. AT&T; wants to marry its money-losing computer business to the profitable NCR company, and to retain a presence in computing to complement its leadership in communications.
In a broader context, the deal spoke volumes to all large companies. AT&T;, a giant at $37 billion in annual sales, is bolstering a product line by acquiring another sizable company--NCR has $6 billion in sales. The merger is what business people call “strategic”--that is, not for a quick-sale profit but for long-term business reasons.
You’ll be hearing that word strategic often in the years ahead as a new merger wave rolls through U.S. business.
The trend was signaled strongly last week by Thomas S. Murphy, chairman of Capital Cities/ABC, who told the annual meeting that Cap Cities was in the market to buy a company for $1 billion or more. Cap Cities is looking for companies in newspapers, magazines or other media to add to its own media properties, which include the Kansas City Star, Women’s Wear Daily and Institutional Investor and Los Angeles magazine--as well as the ABC television network.
Its objective is earnings growth. The company’s profits have declined in the recession and clearly Murphy doesn’t see them returning to the strong growth of recent years. “Reading between the lines, Murphy is saying that going forward, they won’t be able to reach their profitability objectives with the current properties, so they will have to add new properties,” says Michael Lamb, head of Wealth Monitors, a Kansas City, Mo., investment research firm.
What Murphy is saying about his company applies to others. “If Murphy sees ABC slowing, you know (General Electric Chairman) Jack Welch sees NBC’s growth slowing, too,” says one analyst, suggesting that GE may be looking for a big acquisition.
And it applies to industry in general. In a time of relatively slow U.S. economic growth, it will be hard for companies to show rapidly rising profits----unless they grow by acquisition. So for big companies with large cash resources and ample borrowing power--for the top 100 on Fortune’s or Forbes’ rankings--the answer will be to reach out and buy someone.
Everyone will be affected--employees, investors and interested bystanders. Big business transactions will affect jobs and the stock market; the global competitiveness of U.S. business will either benefit or suffer. In fact, many people may ask whether the new merger wave will be any different from the junk bond buyout and bust-up craziness of the 1980s.
Yes, it may be kinder to employees because the objective won’t be to break up the company and sell it off in pieces--as was the case with such as Borg Warner and Beatrice Foods in the ‘80s. For one thing, selling assets is difficult in a time of tight credit. For another, “corporations buy to improve assets, not to make money selling assets,” says Theodore C. Rogers, head of American Industrial Partners, an investment and management company.
NCR’s employees won’t lose jobs, for example, because AT&T;’s aim is to expand the computer business, not scuttle it.
For investors, it’s probably a good idea to look through the lists of fairly big companies with good earnings growth. Firms with sales as high as $3 billion--a category that takes in such large companies as Maytag washers and Upjohn pharmaceuticals--could be bait for giant appetites in the new era.
The big companies will pay a premium, just as AT&T; had to pay up for NCR, because takeover candidates can use legal maneuvering as a bargaining tool. Right now, Square D, a Chicago area electrical company, is using legal tactics to hold off Groupe Schneider of France, which is offering 20% more than Square D stock ever sold for. No offer is so good it can’t be improved.
The real question is whether big mergers will represent a productive use of capital, or simply one more swelling of executive ego and Wall Street avarice. Probably both will be in evidence. Mergers will be productive if an otherwise efficient company can extend a global presence or a successful product line.
But if mergers are made for the aggrandizement of an already overpaid executive staff, then there will be financial disaster, corporate embarrassment and a shareholder revolt later in the decade. “I’m suspicious,” says Nell Minow, adviser to pension fund investors and co-author with Robert Monks of “Power and Accountability,” a book on corporations. “Growth by acquisition usually expands fees and salaries but not efficiency.”
The verdict on the new wave will reflect one of two cliches: The bigger the better. Or, the bigger they are the harder they fall. Expect a bit of both.
