BID FOR A GIANT AUTO MAKER : Ticker Shock : TAKEOVERS : Surprise Bid an Aberration of the Not-So-Hostile ‘90s
The monumental size of Wednesday’s hostile bid for Chrysler Corp. raises questions about whether corporate merger activity is again becoming superheated, as it was in the late 1980s when waves of hostile and friendly bids loaded up big companies with so much debt that many later collapsed into bankruptcy.
Last year, total announced domestic merger activity hit a record $340 billion, surpassing the previous record set in 1988. Experts said the trend continued in the first quarter of 1995.
But investment bankers, merger lawyers and speculators in takeover stocks--all of whom benefit from the upswing in merger activity--insisted Wednesday that there is no cause yet for alarm. Rather than hordes of barbarians, they see two grumpy old men at Chrysler’s gates: Kirk Kerkorian, 77, and Lee Iacocca, 70, who may want the company mainly for personal reasons--that is, if Kerkorian is not simply trying to cash in on his holdings by putting the company “in play.”
These merger specialists contend that, unlike in the 1980s, the great majority of recent deals--including a marked upswing in hostile bids--are strategic ones by companies seeking logical business expansions, not speculative plays by professional corporate raiders. For example, they cite the agreement Monday by Clark Equipment Co. to be acquired by Ingersoll-Rand Co. for $1.5 billion following a hostile bid. Both companies make machinery.
Another example could be the recent $5.7-billion bid by Seagram Co. to acquire 80% of Hollywood giant MCA Inc.--part of the liquor company’s effort to expand strategically in entertainment, which it sees as having great growth potential.
“These are mostly corporate, strategic deals,” said Robert Profusek, a partner specializing in corporate takeovers at law firm Jones Day Reavis & Pogue. “We’re not seeing a lot of raider-type participation.”
They also note that the type of ferocious bidding wars that erupted in the late ‘80s when companies were put in play have been extremely rare recently. One reason, Profusek says, is that it has become much harder to borrow money for highly leveraged transactions. “The public markets learned a lesson and the banks learned a lesson” from the 1980s, he said.
Although Wall Street had many questions about the Chrysler bid, including how it would be financed, experts said the proposed $22.8-billion deal does not appear excessive. Charles Ronson, a money manager at Balestra Capital in New York, said many of the 1980s leveraged buyouts involved taking on so much debt that companies had no choice but to sell off subsidiaries just to be able to meet interest payments.
“The deals they’re doing right now basically work without having to sell off 50% to 90% of the acquired company,” Ronson said.
He said Chrysler, which has a relatively strong balance sheet and good cash flow, could support the stated purchase price, even if the foreign strategic investors Kerkorian said he expects to find do not materialize. “It’s eminently doable,” Ronson said.
But even optimistic merger specialists acknowledged some reasons for caution.
For one thing, the recent deals have been done as the U.S. stock markets have hit a succession of record highs. The purchasers thus are paying a substantial premium over record-high stock prices. Should the market fall or a recession set in, the acquirers may find they overpaid. Although the acquisitions are strategic, many companies may be making bids now just because lots of other companies are doing so.
“There is definitely a herd-like mentality out there,” Profusek said.
Peter Schoenfeld, vice chairman and head of proprietary trading at the New York investment banking firm Wertheim Schroder & Co., said the precedent set by Kerkorian could trigger a new wave of speculative buyouts. But, he said, “this is probably the first financial deal that’s not a strategic transaction (in some time), and it’s too early to get concerned about any excesses.”
Kerkorian might also be seeing “greenmail”--seeking to profit by forcing Chrysler to buy back his 10% stake at a profit to him. But greenmail, while big in the 1980s, has been rare in recent years.
Investment bankers say a herd-like reaction definitely is behind the recent rise in hostile or semi-hostile bids. After the craze of the late ‘80s, hostile raids became extremely rare. Big corporations as a matter of policy avoided hostile bids as outside standards of good corporate behavior.
