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Surge in Mergers Showing Economic Pluses, Minuses

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TIMES STAFF WRITER

CBS Chairman Laurence A. Tisch stunned 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 said they would merge, creating the most formidable department store chain in America. Eli Lilly & Co. also said this week that it would pay $4 billion for 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.

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While some highly publicized mergers have fallen through, many others are going forward, often with much less fanfare but with no less importance for the American economy.

But whether the fallout from the heightened merger activity will be viewed positively or negatively in the near term--on Wall Street and on Main Street--is as yet unclear.

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

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

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 sharp decline in the dollar’s value this year.

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.

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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 deal worth $650 million.

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, Securities Data said.

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.

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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: Companies 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 New York investment banker and veteran of the ‘80s merger era.

“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.

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He regards the takeover wave as “a bullish thing for the American economy,” because it appears to promise stronger and more productive 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 skeptical 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 largely placed on investors, who pushed down the prices of many 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. The planned merger of CBS Inc. and QVC Network was broken up when a large QVC investor, cable firm 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 reacted badly to 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.

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

In part, buyers’ stocks in merger deals often fall for technical reasons related to the transactions, especially in cases where shares are being exchanged.

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

Especially in the area of new technology and services, “the (corporate) attitude is, if you’re not there first you’re going to get left out,” Kalin said. But investors may increasingly be worrying that the rush to complete 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, some economists say.

The reason: The end result of nearly all corporate mergers is a substantial loss of jobs, as the combined company inevitably streamlines itself and eliminates duplicated departments.

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In the planned Macy-Federated merger, for example, hundreds of jobs are expected to be lost in California alone as the two store chains consolidate operations.

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.

Yet for the average American worker, the odd juxtaposition of a better economy and still-rising layoffs is difficult to comprehend, said Lynn Reaser, an economist at First Interstate Bank in Los Angeles.

“The corporate restructuring wave is by no means over,” Reaser said, and a faster pace of merger activity will only accelerate job cuts, she said.

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

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“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,” he said.

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

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