Mergers Proved to Be One of 1994’s Leading Growth Industries
The mergers and acquisitions business was one of the few real moneymakers on Wall Street in 1994, with the overall deal volume setting a record thanks to a flurry of last-minute activity.
According to a tabulation by Securities Data Co. released Wednesday, announced M&A; activity that involved U.S. companies as targets totaled $336 billion with just a few days to go before the end of the year.
The old record was $335.8 billion, set in 1988. Experts said they expect the booming M&A; trend to continue into 1995.
Steven Wolitzer, a managing director at Lehman Bros. Holdings Inc., said the roots of the 1994 boom go back 12 to 18 months when the economy was emerging from recession.
He said that against a background of modest economic improvement, business people seized on external deals as the quickest way to expand, rather than simply relying on internal growth.
“More recently we saw the European economy coming out of recession, and that dovetailed into it,” Wolitzer said.
He said banks were flush with cash, giving companies the option of doing acquisitions for cash or stock. Stock prices were at record highs early in the year before interest rates began moving up.
“The financing dynamics were pretty good on both a stock and cash basis, and then there were a number of industries where there were tremendous dynamic changes going on,” he said.
Chief among the industry themes driving M&A; was the convergence of entertainment and telecommunications into what is called the information superhighway.
Then, when the politics of health care reform became bogged down, industry participants began going out and doing their own deals to reflect a more competitive marketplace.
Pharmaceutical manufacturers teamed up with pharmacy benefits managers, and other health care providers sought economy of scale in a wave of mergers.
Financial services was another hot area for mergers, with mutual fund companies among those being merged into larger organizations. Dreyfus Corp. became part of Pittsburgh-based Mellon Bank Corp. last summer in a $1.8-billion transaction.
A shrinking defense industry was a driving force in several deals, including the acquisition of Grumman Corp. by Northrop Corp. The combined entity is now known as Northrop Grumman Corp.
“I think in 1995 M&A; will continue to do well as long as interest rates do not rise too dramatically,” said Perrin Long, an independent analyst who tracks the securities industry.
He said that in a year in which industry profits were down sharply on poor underwriting due to slumping stock and bond markets, M&A; and margin interest activity stood out as two moneymakers.
The year was notable in M&A; for the flop of the planned merger of Bell Atlantic Corp. and Tele-Communications Inc.
Federal regulation of the cable industry was widely blamed for killing that deal, which would have been one of the biggest ever. However, some traders said the structure of the deal was too generous to TCI and that approval by Bell Atlantic shareholders would have been hard to get.
