Global Swarming
Richard J. Heckmann built his company the 1990s way--acquisition by acquisition.
His U.S. Filter Corp. in Palm Desert has become a global player in water treatment by purchasing more than 100 companies worldwide in the last seven years, including 60 in the last 12 months.
“You want to be the big guy out there,” said Heckmann, chief executive of U.S. Filter. “It’s quicker, cheaper to buy. In all my years in the business, I’ve never seen an ‘urge to merge’ like I’m seeing now.”
Although the number of U.S. Filter acquisitions is particularly dramatic, its basic strategy is hardly unusual.
America’s companies are rushing to find strategic partners in a mergers-and-acquisitions bonanza like none this nation has seen, surpassing even those of the go-go 1980s, the conglomerate-driven 1960s and the roaring 1920s.
The numbers are indeed mind-boggling. For the 11 months ended Dec. 1, nearly $835 billion worth of mergers-and-acquisitions deals were announced in the United States, more than the record $625 billion for all of 1996, according to Securities Data Corp., a New Jersey data firm. By year’s end, total deals in the U.S. could reach $880 billion, it said.
The merger surge is causing some mild angst because it is driving prices for some companies far too high, a few specialists say. As a result, they believe, many of these combinations are bound to falter.
Despite the fears, the merger mania is expected to continue through most of 1998, given the current economic climate. Only a major market shift, such as a severe global stock market downturn, might slow things, experts say.
Unlike in the 1980s, when hostile deals and junk-bond-driven restructurings ruled, these new mergers are typically friendly, strategic ventures fueled by record-high stock prices and cash. Unlike in the 1960s, when major conglomerates were created from groups of dissimilar companies, these new deals are often combinations of near-equals in the same industry, and are designed to increase efficiency through size and to boost shareholder value. In an echo of the 1920s, a soaring stock market is serving as a catalyst for the deals.
But this global merger trend is more akin to the situation at the beginning of the century, market specialists say, when companies werescrambling to compete for the first time in a national market.
Now, on the verge of a global marketplace and another century, corporations in America and in Europe are again positioning themselves for power and profits. This time the world is their market.
“It resembles the early 1900s--except it’s global and it’s bigger,” said Robert R. Sobel, a business historian at Hofstra University on Long Island. “Companies think, ‘I have to be overseas and I have to be bigger.’ And technology also plays a big part. If you told anyone 20 years ago that Disney would be a global powerhouse, they would wonder what you were talking about.”
In the U.S., such deals as WorldCom Inc.’s $41.8-billion pending bid for MCI Communications Corp. and Boeing Co.’s acquisition of McDonnell Douglas Corp. for $16.3 billion have captured headlines and the market’s attention.
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Each deal seems bigger than the last. So far this year, 1.5%, or 146, of all 9,831 mergers-and-acquisitions deals were at least $1 billion in size, Securities Data found. That’s up from less than 1% in 1996, it said.
In California this year, such historic deals as Lockheed Martin Corp.’s $11.8-billion acquisition of Northrop Grumman Corp. and Washington Mutual Savings’ $6.8-billion acquisition of Great Western Corp. have forever changed the state’s corporate landscape.
“What’s remarkable is the sense of strategic urgency,” said Herbert Lurie, head of financial institution mergers and acquisitions at Merrill Lynch & Co. in New York. “Each time a deal happens, a company looks around and sees there is a smaller universe of potential partners.”
Lurie noted that the financial services industry, which includes banks, insurance companies and investment banks, have accounted for 20% of mergers and acquisitions this year.
Many of the nation’s other major industries are just beginning to consolidate.
“It’s especially busy in California with defense almost done but health care and technology still consolidating,” said Peter K. Barker, a managing director at Goldman, Sachs & Co. in Los Angeles.
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Despite the economic turmoil in Asia and the market jitters in the U.S., more consolidations are expected, bankers say, because fueling the trend is a powerful combination of major forces, including:
* The still-strong stock market. With share prices so high, companies find it quicker and cheaper to buy businesses than to start them from the ground up. In fact, nearly half of all 1997 deals are being paid for with stock, Securities Data found, including some of the biggest, such as NationsBank Corp.’s $14.6-billion purchase of Barnett Banks.
* The wave of globalization. Companies are searching for partners that will lead to efficiency and increased value for shareholders, and as long as markets and the economy stay strong, deals will continue, experts say. Also, as long as the reigning philosophy is that bigger companies are better competitors in the global arena, firms will look for partners.
* Government’s laissez-faire attitude when it comes to antitrust regulations and approval of mergers. Spurred by recent deregulation, combinations in similar industries that wouldn’t have passed muster in previous decades are eagerly put together on Wall Street and approved by the government in the interest of international competitiveness. With a few recent exceptions, such as the Federal Trade Commission’s decision to block the merger of Staples Inc. and Office Depot Inc., most are cleared.
“There are better reasons and worse reasons for some of these,” said FTC Chairman Robert Pitofsky. “The better reasons are adapting to the global economy and deregulation. The worse are to eliminate their most vexatious competitors.”
* Investors have generally welcomed the merger bonanza. Whereas acquisitions in the 1980s typically sent an acquiring company’s stock price down, stock prices of acquiring companies in the 1990s often rise if Wall Street thinks the deal makes strategic sense.
Now the only thing worrying Wall Street is the impact of another correction like the 554-point drop in the Dow Jones industrial average that occurred Oct. 27. Still, most financiers believe that even if stock prices begin to decline steadily or languish, other sources of financing will become popular, such as leveraged buyout funds.
“A correction allows the LBO guys to be more competitive,” said Peter Nolan, partner with Leonard Green & Partners, a leveraged buyout fund in Los Angeles.
In fact, LBO funds right now have a record amount of cash. As of October, LBO funds had raised $19.5 billion, an increase from the $14.9 billion raised by the same time last year, according to Buyouts newsletter.
Although the market has partially rebounded, many believe a real market shift, especially a global correction, could put a chill on future mergers and acquisitions. But some believe another scenario is even more ominous: poor long-term performance of some of these high-profile merged corporations if they are unable to successfully integrate their many acquisitions.
“There’s no doubt we will look back a few years from now on some of the deals and say, ‘What was the buyer thinking?’ ” said Steven Rattner, deputy chief executive at Lazard Freres & Co., who worked on the mega-acquisition of Paramount Communications Inc. by Viacom Inc.
“It’s hard to know which ones or how many, but the pricing we’re seeing implies growth rates that are simply unachievable,” said Rattner.
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Although mergers and acquisitions may provide price boosts in the short term, many deals don’t live up to initial expectations. In fact, nearly half the mergers done during the 1990s have created companies whose stocks don’t perform as well as those of their industry peers, according to Mercer Managing Consulting.
Only 52% of the stocks of companies participating in mergers in the 1990s have outperformed those of their industries as a whole when tracked by return to shareholders after three years, Mercer found. Although that’s a higher proportion than the 37% that outperformed their industries after three years in the 1980s, it’s still low, the study found.
“It’s very poor performance given the amount of money being poured into these deals,” said Ken Hodge, a vice president at Mercer.
Some critics take it a step further. The basic idea that bigger companies are better competitors in the global arena is just flawed, said James Brock, an economist at Miami University in Oxford, Ohio, and author of several books, including “Dangerous Pursuits: Mergers and Acquisitions in the Age of Wall Street.”
“Beyond a certain point, big is worse. They become bureaucracies and stagger under the weight of their own inefficiencies,” Brock said. “They become like big government. This merger trend ought to be a cause for alarm, not jubilation.”
Brock believes these major combinations could very well lead to a lessening of competition, higher prices, less innovation and huge increases in costs to consumers. They also lead to layoffs and a more vulnerable corporate work force, with many workers too worried about job security in the next restructuring or merger to give their jobs their best, he said.
“I’m not saying the whole world should be . . . hot dog stands--but the deals we’re seeing now involve shuffling paper-ownership shares--it’s a charade, basically. When two companies merge, it doesn’t tighten one nail or screw or put one board into place.”
Money that could be creating new industries, employment or products is used to buy what already exists and doesn’t do much to strengthen the economy, Brock said. What we’re seeing in the 1990s is just another in a long historical cycle of companies combining and then breaking apart, which doesn’t do much for the economy but makes Wall Street and CEOs rich, he said.
“Investment bankers make millions of dollars in fees putting these companies together, and then millions of dollars years later when they come in and advise them on how to bust them up again,” Brock said. “What’s productive about that? It’s just a lot of financial razzle-dazzle.”
Not so, say Wall Streeters and many others familiar with the roles of investment bankers, lawyers and accountants in mega-merger deals.
Although it’s true that many of the conglomerates created in the 1960s were busted apart in the ‘80s, the combinations being created now are different, they say, because they are strategic alliances being formed as part of a business philosophy of globalization. Companies that might have eventually gone out of business are instead purchased. Investment bankers and others play a key role in helping companies find partners.
“Americans and other people have a classic distrust of middlemen,” said Sobel, the market historian. “But investment bankers are extremely important people. Their basic job is the heart of the system. It pumps out the money.”
And for CEOs like Heckmann, more acquisitions and mergers are eagerly awaited in 1998.
“We’re grappling with that right now--what is too big?” said Heckmann, who has grown U.S. Filter to an expected $3 billion in revenue in this year, from $17 million when he took over in 1990.
“Once you cross the bridge into the big company, I think the bigger you get, the easier it is to win,” he said. “I don’t see anything else for us to do but keep growing. If we stopped acquiring, I think it would really hurt us.”
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Securities Industry Profits
The pretax profits of the securities industry, which handles mergers and acquisitions, has risen particularly fast in recent years and should reach about $12 billion in 1997.
Source: Securities Industry Assn. (BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Pick Your Partner
Here are the 10 largest mergers-and-acquisitions deals involving California companies
Target: Pacific Telesis Group
Acquirer: SBC Communications
Date announced: 04/01/96
Date effective: 04/01/97
Value of the transaction (millions): $16,490.0
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Target: Northrop Grumman
Acquirer: Lockheed Martin
Date announced: 07/03/97
Date effective: pending
Value of the transaction (millions): $11,830.5
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Target: First Interstate Bancorp
Acquirer: Wells Fargo
Date announced: 10/10/95
Date effective: 04/01/96
Value of the transaction (millions): $10,929.9
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Target: Hughes Aircraft
Acquirer: Raytheon
Date announced: 01/16/97
Date effective: pending
Value of the transaction (millions): $9,500.0
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Target: MCA
Acquirer: Matsushita Electric
Date announced: 09/24/90
Date effective: 01/03/91
Value of the transaction (millions): $7,406.0
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Target: Great Western
Acquirer: Washington Mutual Savings
Date announced: 03/06/97
Date effective: 07/02/97
Value of the transaction (millions): $6,847.5
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Target: MCA (Matsushita Electric)
Acquirer: Seagram
Date announced: 04/10/95
Date effective: 06/05/95
Value of the transaction (millions): $5,704.0
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Target: Syntex
Acquirer: Roche Holding
Date announced: 05/02/94
Date effective: 11/03/94
Value of the transaction (millions): $5,307.2
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Target: Universal Studios TV assets)
Acquirer: HSN
Date announced: 10/17/97
Date effective: pending
Value of the transaction (millions): $5,275.0
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Target: Lockheed
Acquirer: Martin Marietta
Date announced: 08/30/94
Date effective: 03/15/97
Value of the transaction (millions): $5,204.1
* Source: Securities Data Co.
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Making Deals
The merger-and-acquisitions business in California and the nation has been booming in recent years.
Value of mergers
1997 United States: $835 billion
1997 California: $160.6 billion
Number of Deals
1997 United States: 9,831
1997 California: 1,582
* Source: Securities Data Co.
