1995-96 REVIEW AND OUTLOOK : It Was a Year of Merger Fever--and 1996 Could Be Too
Corporations merged at a rate of about $26,161 per second in 1995.
Propelled by surging stocks, low interest rates, a rising U.S. economy and the hunger for higher profits in an increasingly global marketplace, worldwide corporate mergers rose 44% this year to a record $825 billion, according to preliminary information from Securities Data Co., a Newark, N.J., company that tracks corporate marriages.
And it may be just as active next year. “There’s no reason why 1996 won’t be a bigger year than 1995,” said Michael Koeneke, co-chief of mergers at Merrill Lynch & Co., the biggest U.S. securities firm.
That’s because corporate chieftains are hunting for ways to boost revenue and slash costs as the growth of the U.S. economy slows. Many chief executives--including Chemical Banking Corp.'s Walter Shipley, Walt Disney Co.'s Michael Eisner and Glaxo Wellcome’s Richard Sykes--found buying their competitors more efficient than building by themselves.
“The search for top-line growth is really the reason that many CEOs are pursuing mergers,” said Bob Kitts, a principal at Morgan Stanley & Co., the world’s biggest corporate matchmaker this year, with more than 160 transactions valued at $167 billion. Meantime, “in many cases, it’s easier to achieve growth through cost savings,” he said.
All that added up to the busiest period of mergers ever. This year’s total dwarfed the old record of $572 billion in 1994, Securities Data said.
It was a year of superlatives: most transactions; biggest bank; largest media conglomerate. About the only record that wasn’t broken was that of the biggest sale. That record still belongs to Kohlberg Kravis Roberts & Co.'s $26.4-billion acquisition of RJR Nabisco Inc. in 1989.
Still, there were few records that weren’t surpassed in 1995.
* Mitsubishi Bank Ltd. and Bank of Tokyo Ltd. agreed in March to merge, in a transaction valued at $33.8 billion that will create the world’s biggest bank. More than 1,000 banks thought 1995 was a good year to combine, according to Securities Data. Total value of banking mergers: $150 billion.
* Disney’s $18.8-billion plan to purchase Capital Cities/ABC Inc. would create the biggest U.S. media company. Throw in Time Warner Inc.'s agreement to pay $6.9 billion for Turner Broadcasting System Inc., Westinghouse Electric Corp.'s $5-billion purchase of CBS Inc., and 500 or so more media deals and you get this year’s total of $61.6 billion.
* Glaxo Holdings’ $14.3-billion raid on Wellcome was the biggest takeover in the drug field as well as this year’s largest hostile transaction. Hoechst’s $7.1-billion purchase of Marion Merrell Dow Inc. and Pharmacia’s $6.3-billion acquisition of Upjohn Co. helped raise the sum of drug and health services mergers to about $53 billion.
This year’s stock market rally gave U.S. chief executives the confidence they needed to initiate mergers, investment bankers said. The Standard & Poor’s 500 index offered plenty of chief executives that faith as the benchmark index for U.S. stocks rose 33%.
“A CEO says to himself, ‘If I can take my company to $10 billion [in market capital] from $5 billion, what can I do with a company twice this size?’ ” said Kim S. Fennebresque, head of mergers at UBS Securities Inc., the U.S. unit of Union Bank of Switzerland.
The confidence among chief executives should give workers the shakes. Many of this year’s mergers depend on job cuts to make them instant moneymakers--allowing bosses time to integrate the companies before the benefits of cost savings runs out. Chemical Banking’s $10.7-billion purchase of Chase Manhattan Corp. will slash 12,000 jobs.
As U.S. economic growth dwindles, companies may continue to seek merger partners to provide an earnings boost where sales fail to grow.
That’s one reason why mergers between U.S. and European companies are expected to remain robust next year, bankers said. Besides, as international markets become increasingly entwined, companies are stepping up their overseas purchases.
“As we move to a global economy, the guys who have big market share around the world are seeing their valuations go up,” said Robert deVeer, managing director at Lehman Bros. Inc.
Another reason for the optimism is the rising effort by executives of conglomerates to break off pieces of their empires and concentrate on becoming more nimble managers of their fastest-growing businesses. ITT Corp. did that this year and AT&T; Corp. plans a similar split in 1996.
Investment bankers have a lot at stake in maintaining the merger fever. Goldman, Sachs & Co., the No. 2 advisor after Morgan, earned much of its profit this year from helping clients in mergers worth $143 billion. CS First Boston was ranked third with $100 billion, followed by Lazard Freres & Co. and its affiliates with $84 billion and Merrill with $82 billion.
Although it may be a rosy scenario, investment bankers at the biggest merger advisors said they have more unfinished business now than they did a year ago.