After a four-year absence, are the barbarians returning to the gates?
The multibillion-dollar bidding war for Paramount Communications--so far, QVC Inc. has made a hostile offer of $9.5 billion and Viacom Inc. is in for a friendly $8.2 billion--recalls the takeover battles and mega-merger-mania of the 1980s.
Merger and acquisition activity dropped off drastically with the end of that overheated decade. Wall Street chopped its ranks of high-priced merger specialists in half. The frenzy that culminated in the $25-billion takeover of RJR/Nabisco seemed a phenomenon of a crazed era that mercifully ended.
But in the last six months, deal making suddenly has shot up again. And after years of famine, Wall Street’s mergers and acquisitions departments smell fresh meat.
In recent chats with merger specialists, “you sense a certain euphoria creeping into their vocabulary,” says Guy Wyser-Pratte, long a prominent speculator in takeover stocks.
The QVC/Viacom/Paramount battle has inaugurated an ‘80s-style scramble on Wall Street for a piece of the action.
Allen & Co., a leading investment banker for the entertainment industry, represents QVC. Smith Barney Shearson is representing Viacom. Other firms, desperate for a shot at fat fees, are seeking to round up other prospective bidders. Insiders say investment bankers who so far don’t have clients are trying, for instance, to persuade one or more of the Baby Bell phone companies to bid for Paramount.
“Everybody who isn’t in it is trying to get in it,” says Gordon Rich, co-head of mergers at CS First Boston.
The resurgence of multibillion-dollar corporate mergers in recent months has included AT&T;'s agreement to buy McCaw Cellular for $12.6 billion in stock; drug company Merck’s acquisition of Medco, a drug distributor, for $6 billion in cash and stock; and Columbia Hospital’s acquisition of Galen Health Care for $4.2 billion.
The number of $100-million-plus deals is up sharply, with at least eight last week, not counting Viacom’s offer for Paramount.
The revival of merger activity stems from a combination of economic and market factors.
Stock prices have hit historic highs, making it possible for buyers to acquire companies mostly for stock while spending little cash and taking on little or no debt. And interest rates are at 30-year lows, meaning that whatever money does have to be borrowed comes cheap.
In addition, with U.S. economic growth extremely sluggish, many companies think acquisitions--rather than boosting their own sales--are their best chance for growth.
“This is really the perfect combination of circumstances to favor a resurgence of mergers,” says Fredric M. Roberts, head of F. M. Roberts & Co., a Los Angeles-based investment banking firm.
But while the Paramount battle, in particular, may seem an unsettling throwback to the 1980s, Wall Street executives say it is an aberration. Most see almost no prospect of a return to the extreme forms of debt-fueled merger mania.
Notably, they say, there is little likelihood of a fresh wave of hostile raids of the type in which companies that were minding their own business--from Gulf Oil to Revlon, Phillips Petroleum to National Can--suddenly found themselves “in play,” their assets leveraged to finance unwanted advances.
In the case of Paramount--a veteran of one of the most bruising of the 1980s’ merger wars, when it lost Time Inc. to rival Warner Communications--it was Chief Executive Martin S. Davis himself who opened the company to a hostile offer by formally proposing its sale to Viacom.
“It’s not like Paramount was just sitting there,” says Matthew Greco, editor of the Mergers & Corporate Policy newsletter. “In this case, the company put itself into play.”
Moreover, Paramount is a special case, observers say, because it is the last of the big, independent movie studios--a coveted target for clashing Hollywood egos who hardly need Wall Street deal makers to egg them on.
Investment bankers, in any case, dispute that they were the driving force behind the last spate of merger mania.
But what isn’t in dispute is the wake of devastation many of those deals left--from the major companies so loaded up with debt that they were driven into bankruptcy to the thousands upon thousands of jobs lost to the leading investment bankers so caught up with lust for money that they ended up in jail.
Today’s would-be deal makers are wary of heading back down that path.
“You will see hostile bids every once in a while,” says Wyser-Pratte. “But companies spent a lot of time and trouble to reliquefy their balance sheets. They’re not about to despoil them with that cursed thing called debt that got us into so much trouble in the 1980s.”
In the recent sustained bull market, brokerage firms have profited handsomely just from selling stocks and bonds. But that doesn’t mean Wall Street firms don’t have a certain nostalgia for the 1980s.
G. Chris Anderson, a former Drexel Burnham Lambert executive who is now vice chairman of PaineWebber Inc., acknowledges that his firm is hungry for deals. PaineWebber, he says, is seeking a piece of the Paramount affair. And he sees nothing wrong with the financial innovations of the 1980s that made it possible for “little people to take over big companies.”
Still, there is no sign that Wall Street is moving to beef up its merger departments to anything like the levels of the ‘80s, when “greed is good” was the motto and Drexel’s Michael Milken an untarnished hero.
“I don’t think we’ll ever see a return to 1988 or 1989, when it seemed like I was working on at least one hostile deal at all times,” says CS First Boston’s Rich.
Indeed, except for a relatively few senior executives, merger departments aren’t made up of the same people who were involved in the heady days of corporate raiding. People have moved on; a new generation of young MBA’s has taken their places.
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