Market’s Slide Freezes Merger Mania
This year’s merger mania stopped cold Monday as stock markets plunged and investment bankers and lawyers putting together mega-deals scrambled to revalue and restructure deal terms, sources said.
While it’s too early to say exactly how the market slide might influence the pace of mergers and acquisitions through the rest of 1998, it is expected to initially chill a historic year that has brought eight of the largest U.S. mergers ever, most fueled by record-high stock prices.
However, some deal makers predict a renewed wave of takeovers and acquisitions later this fall, prompted by cheaper stock prices.
“Everything is going to be thrown into a bit of a tailspin,” said Ian Pereira, a managing director with Morgan Stanley Dean Witter in Los Angeles. “We saw this back in 1987. It’s tough to have stocks of both companies in a deal down. It’s going to be a difficult merger environment.”
The Dow Jones industrial average, which fell 6.4% on Monday, is now down 19.3% from its record high this year, signaling what is perhaps the first bear market since 1990. Because of the new, lower stock prices for most companies involved, deal makers are recalculating the values--and even rethinking the economic sense--of some mergers.
“There’s going to be a reassessment period,” said Ken Moelis, managing director with Donaldson, Lufkin & Jenrette in Los Angeles. “Any transaction you’re working on right now, you have to rerun the numbers, cost of financing, everything. It’s still too early to tell what the long-term effect will be.”
“You are going to see a pause while people digest this into their pricing models,” agreed James H. Zukin, partner at Houlihan, Lokey, Howard & Zukin, an investment banking firm in Los Angeles. “You may see fewer deals, because it’s harder to price them.”
Some of the larger pending deals that could be affected by Monday’s market drop include those of two San Francisco-based companies: Wells Fargo & Co., which has a $33.9-billion plan to merge with Minneapolis-based Norwest Corp., and BankAmerica Corp., which is working on a $59.3-billion merger with NationsBank Corp. of Charlotte, N.C. Based on Monday’s stock prices, the Wells Fargo deal is valued at $25.4 billion, down 25% from the original price, and the BankAmerica deal is valued at $44.6 billion, down 24.8%, according to Mergerstat, a division of Houlihan Lokey.
Spurred by globalization, deregulation and a booming stock market, America’s companies in recent years have rushed to find strategic partners in a mergers-and-acquisition bonanza that has surpassed even the go-go 1980s.
By the end of the second quarter, deal makers announced 3,831 transactions valued at $773.1 billion, putting this year on track to surpass $1 trillion. Last year, the number of mergers between U.S. companies totaled 9,992, worth a record $845 billion, double the 4,950 deals, worth just $139 billion, announced in 1992, according to Securities Data, the New Jersey deal tracker.
“Looking at all these mergers on my plate, none of these are in trouble,” said Alison Ressler, a mergers-and-acquisition lawyer at Sullivan & Cromwell in Los Angeles. “Assuming that each company is hit equally hard by market conditions, and it’s not something internally at one of the companies, there isn’t a problem.”
On Monday, Ron Ferguson, chief executive of General Re Corp., the U.S.’ largest reinsurance company, said it expects its planned $18.5-billion merger with Berkshire Hathaway Inc. to go ahead despite the turbulence in financial markets.
“I would expect that the share price development will not cause any shareholders to vote against the merger,” Ferguson said at a news conference. “I fully expect it to be approved.”
Indeed, many deal makers predicted a surge in mergers and acquisitions later this year as leveraged buyout funds and merchant banks, flush with cash, move in as prices come down.
“In some industries, with prices down, this could be a good time to do deals. There will be buying opportunities,” Ressler said.
Zukin said his firm began getting calls two weeks ago from merchant banks and leveraged buyout funds looking for opportunities in this market turmoil.
“That’s the engine that’s been sitting almost on idle waiting to kick into gear,” Zukin said. “They are beginning to galvanize into action.”
John Danhakl, a partner at Leonard Green & Partners in Los Angeles, said he thinks there are opportunities in the current climate.
“Some companies might be [unfairly] valued at lower levels just because the rest of the market is down,” Danhakl said. “There are more opportunities at more favorable prices. For us, that’s good news because we have capital to employ.”
“Adversity creates opportunity for many. There are some [funds] that have been sitting on the sidelines that are undoubtedly seeing value right now,” said Harry McMahon, a managing director of investment banking for Merrill Lynch & Co. in Los Angeles.
Times wire services were used in compiling this report.
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Shifting Values
With Monday’s market plunge, values plummeted for many of the largest mergers announced--but not completed-this year, because most are based on the current stock prices of each company. A lookat 10 of the biggest pending deals:
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Date Base price Adjusted value* announced Buyer Seller (billions) (billions) April 6 Travelers Citicorp $70.0 $50.3 Group May 11 SBC Com- Ameritech 61.4 55.1 munications April 13 NationsBank BankAmerica 59.3 44.6 July 28 Bell Atlantic GTE 52.8 51.8 Aug. 11 British Amoco 48.1 47.1 Petroleum May 7 Daimler-Benz Chrysler 40.7 36.0 June 24 AT&T; TCI 37.0 28.0 June 8 Norwest Wells Fargo 33.9 25.4 June 1 Amer. Home Monsanto 33.3 35.1 Products May 13 Banc One First Chicago 28.9 17.8
Date Percentage announced change April 6 -28.1% May 11 -10.3 April 13 -24.8 July 28 -1.9 Aug. 11 -2.0 May 7 -11.5 June 24 -24.3 June 8 -25.1 June 1 +5.4 May 13 -38.4
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*Based on analysis of change in stock price only
Source: Houlihan, Lokey, Howard & Zukin’s Mergerstat
