It’s ‘Merger Monday’ as 9 Alliances Are Proposed
Merger activity came roaring back Monday as nine $1-billion-plus corporate marriages were proposed--signaling a new merger wave after stock market volatility sharply slowed deal-making in recent months.
The action should continue to build in coming weeks, many experts say. But some also warn that this new wave of consolidation will lead to soaring job cuts in 1999.
* With about $65 billion in corporate alliances and potential alliances announced Monday, it was one of the biggest days for mergers since May 11, when $90.5 billion worth of deals was reported, according to CommScan, an investment banking research firm in New York.
* Monday’s proposals bring the domestic total announced so far this year to $1.41 trillion, the largest annual volume in U.S. history. That already is more than last year’s record of $906 billion, according to Securities Data Co., a New Jersey research firm.
Wall Street dubbed the day “Merger Monday.” The proposals reported include America Online’s announcement that it is negotiating to buy Netscape Communications for about $4 billion and Deutsche Bank’s tentative plan for a nearly $9-billion takeover of Bankers Trust.
“It was a busy weekend,” said Robert A. Kindler, a Wall Street lawyer for Cravath, Swaine & Moore, which represented clients in nearly $30 billion worth of merger plans announced Monday, including the $11.3-billion deal between Tyco International, the No. 1 maker of home security systems, and electronics firm AMP.
“It sure looks like [merger mania is] back. We’ve got a large backlog,” Kindler said.
The stunning rebound in the stock market and calmer economic conditions worldwide have helped jump-start merger action, investment bankers and lawyers agreed.
Because stock is the usual currency in such deals--the buyer swapping its shares for the seller’s shares--the sharp drop in stock prices from August through early October gave many executives pause.
Now, with share prices soaring, potential acquirers again have greater buying power. What’s more, companies may see this resurgent period on Wall Street as a window of opportunity before another round of volatility.
“The crack in the market in August has made more chairmen more receptive to this [merger] idea,” said Peter Allen, managing director and co-head of the Western region for Credit Suisse First Boston in Los Angeles.
Indeed, industry players are predicting a rush of merger deals in the next few weeks before the slowdown that traditionally occurs in late December.
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Many investment bankers expect another spate of deal activity in January and February. “January and February will be huge,” Allen said.
The forces propelling deals are “as strong as ever,” said James B. Freedman, managing director with Barrington Associates, an investment banking firm in Los Angeles that specializes in mergers of mid-sized companies. “There was a blip there, but strategic plans never changed, so companies are hunting as aggressively as we’ve ever seen them.”
The trends fueling the historic level of mergers include a desire to create larger companies that can better compete in the global marketplace of the next century, the search for sales and profit growth by companies in mature markets, a deep-seated desire to cut costs and realize more efficiencies, and the always-present need to keep investors happy by realizing “shareholder value.”
It helps the deal flow, analysts say, that the government seems to have a laissez-faire attitude when it comes to antitrust regulations and approval of most mergers.
“These executives say, ‘We’ll make a whole lot more money if we come together,’ ” said Robert R. Sobel, a business historian at Hofstra University in New York. “They are cashing out. This is the stuff dreams are made of.”
Not for America’s rank-and-file workers, say critics, who predict that a new wave of mergers means new waves of layoffs. In fact, in the first 10 months of this year, job cuts have totaled 523,000, or about 200,000 more than in the same period a year ago, according to Challenger, Gray & Christmas, a Chicago outplacement firm.
“I hate to say it, but this means more of the same for the American worker,” said Ben Psillas, publisher of the “Job Source” series of books. “When one company lays off workers, then others can follow suit. They want to keep their stock price momentum.”
Even workers at companies not directly involved in a merger can be hurt by another firm’s merger, Psillas said, because the merged entity might cut back on the number of suppliers it uses.
“If any of those companies are your firm’s clients, be concerned. These things trickle down,” Psillas said.
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In recent years, U.S. companies have moved to find strategic partners in a merger mania unlike any seen in this century, surpassing even those deals of the go-go 1980s, the conglomerate-driven 1960s and the consolidation wave at the turn of the century.
Stock price is key, as most of the 1990s deals have been friendly mergers paid for with stock or cash, as opposed to the hostile junk-bond-driven deals that were common in the ‘80s.
Each deal seems bigger than the one before, and each one seems to prompt more deals. Companies are engaging in a sort of merger arms race to try to be bigger than their competitors worldwide.
Industries especially vulnerable to mergers next year include oil and gas, telecommunications, finance and health care, bankers say.
So far, eight of the 10 largest merger deals in U.S. history have been announced in 1998. That’s why this year is already a record for mergers, even with the relative shutdown of October and September, when only $132 billion worth of deals were announced, compared with $260 billion for the same two months in 1997, said Securities Data.
“We may have had a month or so breather, but that’s it,” said Graeme A. Gilfillan, managing director of Salomon Smith Barney in Los Angeles. “The backlog has been building of deals across the board. You have to be prey or predator, it’s one or the other.”
Still, any future economic uncertainty in the international realm, particularly in countries such as Brazil and China, could curtail deal activity, as could another market downturn, some bankers said.
“There’s still a few more shoes in the closet that could drop,” Gilfillan said.
