Surge in Mergers Showing Economic Pluses, Minuses

CBS Inc. Chairman Laurence A. Tisch shocked the business world earlier this week by announcing he was abandoning his plan to merge with QVC, the hot home-shopping network.

Yet a day later, retailers Macy and Federated agreed to merge, creating the most formidable department store chain in America. Eli Lilly & Co. also said this week that it would pay a stunning $4 billion to expand into health care benefit management, buying PCS Health Systems.

The sheer volume of recent company takeover announcements, some more tenuous than others, is demonstrating the powerful pull that the forces of consolidation and restructuring still have on corporate America--even as the economy improves, experts say.

While some highly publicized mergers have fallen through, many others are going forward, often with much less fanfare but with no less significance for their industries.

And as with the 1980s takeover boom, the fallout from this one is having both positive and negative effects on the broad economy. Thus, how this merger wave will ultimately play with the public, employees and investors is still an open question.

For example, though Americans are increasingly convinced that the economy is getting better, the rising number of mergers points to another major round of job cuts on the horizon, economists warn.

At the same time, the ongoing urge of U.S. companies to expand via acquisitions is bolstering the competitive advantage that corporate America enjoys over foreign rivals, many analysts contend.

Yet that, in turn, could spur a dramatic increase in foreign bids for U.S. businesses, as overseas companies seek to harness U.S. know-how--and at cheap prices, given the plunge in the dollar’s value this year. A new round of foreign takeovers could add another element of uncertainty to the lives of American workers on the receiving end of such bids.

For now, the recent acceleration of the takeover boom that began last year is largely domestically driven, and encompasses a wide spectrum of the economy--from retailing to telecommunications to health care.

On Thursday, for example, retail giants R.H. Macy & Co. and Federated Department Stores agreed to merge in a $4.1-billion deal.

Also Thursday, two leading providers of wireless communications services, Nextel Communications and OneComm Corp., said they will combine in a $650-million deal.

On Monday, drug titan Eli Lilly agreed to pay McKesson Corp. $4 billion for its PCS Health Systems division, which manages the dispensing of drugs for a large number of corporate benefit plans.

All told, the value of domestic mergers announced this year already totals $131.6 billion, up from $105.5 billion at this point a year ago, according to deal-tracker Securities Data Co. in Newark, N.J.

The number of deals announced so far this year is 3,843, up from 3,179 a year ago.

With half the year to go, the 1994 merger tally has nearly surpassed the full-year total of $136.8 billion in 1991--the low point for takeover activity after the economic and banking crises of 1990 put a temporary end to corporate consolidation, following the wild deal days of the late 1980s.

Analysts say the motivation behind the merger explosion of the ‘90s is vastly different from that of the ‘80s. The latter half of the last decade was an era of deals often done for financial reasons: Firms were bought by professional takeover artists, most of whom simply broke up their targets and sold off the pieces for a quick return.

Now, most deals are between consenting companies that see material gains in productivity and competitive critical mass in joining, said Guy Wyser-Pratte, a veteran New York investment banker.

“Almost all of the deals you’re seeing today are for strategic reasons,” he said.

The strengthening economy only adds to the urgency many companies feel to combine, experts say. As business opportunities expand, so too does the corporate view that the smartest strategic move is to quickly boost market share and thus derive a bigger earnings boost from the economy’s growth.

What’s more, the merger movement is being abetted by the ample availability of bank financing, as banks step up their lending again.

And ironically, the stock market’s overall decline this year has effectively lowered the prices of many desirable corporate targets, as their stocks have slumped.

From a company’s standpoint, “the best time to buy is when people are selling,” said Frank Baxter, head of Jefferies Group, a Los Angeles-based brokerage and investment banking firm.

He regards the takeover wave as “a bullish thing for the American economy,” because it promises stronger companies that should be better able to compete in the global arena.

But while many Wall Streeters are preaching the merits of mergers, investors--and the public--may be growing more doubtful about the supposed benefits.

In the race to develop the information highway, for example, some of the key merger deals announced among telephone, cable TV and entertainment companies last year have since been called off.

The blame for the deals’ unraveling was partly attributed to the huge egos involved, as media and communications moguls discovered that sharing power was far less attractive in practice than in principle, analysts say.

Yet a bigger problem was that investors reacted with skepticism to many of the mergers, pushing down the prices of the stocks involved in apparent rejection of the marriages.

The most celebrated such broken deal involved Bell Atlantic Corp. and cable TV leader Tele-Communications Inc. This week, the planned merger of CBS and QVC was broken up when a large QVC investor, Comcast Corp., decided to make its own bid for QVC.

While Comcast had strategic reasons for stopping a QVC-CBS deal, investors in general have shown disdain for some of the other deals announced recently. Eli Lilly’s stock, for example, plunged from $57.375 to $50 on Monday, as many investors decided Lilly was overpaying for PCS Health.

Computer networker Wellfleet Communications last week saw its shares dive more than 20% after agreeing to buy rival SynOptics in a $1-billion stock swap.

Analysts note that the buyers’ stocks in merger deals often fall for technical reasons related to the transactions, especially in cases where shares are to be exchanged.

Still, investors’ unwillingness to embrace some of this year’s big deals may reflect fears that the transactions haven’t been well thought out, said Sharon Kalin, a takeover-stock trader at Athene-Coronado Capital in New York.

Especially in the area of new technology, “The (corporate) attitude is, if you’re not there first you’re going to get left out,” Kalin said. But investors may be worrying that the rush to do deals is leading to ill-advised transactions, she said.

Meanwhile, the public’s (and employees’) reaction to rising takeover activity may also turn increasingly negative. The reason: The end result of nearly all corporate mergers is a substantial loss of jobs, as the combined company eliminates duplicated departments.

In the Macy-Federated merger, for example, California alone may lose hundreds of jobs as the two chains consolidate.

Still uncertain is whether an expected wave of new foreign investment in the United States will produce similar cutbacks.

American companies are now attractive to potential foreign buyers for two reasons, experts say: U.S. businesses are, by and large, financially healthy and highly competitive. And with the dollar’s deep slide, the purchase price of U.S. assets has fallen sharply.

A foreign takeover wave “has to come” as the global economy advances, argues Jefferies’ Baxter.

For many Americans, the odd juxtaposition of a better economy and still-rising layoffs is difficult to comprehend, said Lynn Reaser, economist at First Interstate Bank. Yet “the corporate restructuring wave is by no means over,” she said, and rising merger activity will only accelerate job cuts.

The still-high level of layoffs is evident in weekly figures showing new claims for unemployment benefits, Reaser said. Last week, those claims rose by 19,000 to 363,000.

Even so, Reaser also notes that the economy created a net 1.72 million new jobs in the first half of the year--despite continuing layoffs.

Samuel Hayes, professor of finance at Harvard University, argues that while the social costs of U.S. companies’ consolidation can’t be ignored, mergers that ultimately boost productivity will have a long-term payoff for the American economy.

“Our competitiveness in the global economy today can be attributed in large part to the restructurings that began in the 1980s,” Hayes said. “There’s no question that this has on balance been a good thing.”

* RETAIL POWERHOUSE: Impact of Macy’s planned merger with Federated Department Stores. D1