Corporate Mergers Slow to Their Lowest Rate in 5 Years

Merger activity among U.S. companies continued to slow in the second quarter, as rising interest rates and falling stock prices hampered potential acquirors.

The number of announced deals totaled 2,210 in the quarter, down 22% from the second quarter of 1999, according to figures from Thomson Financial Securities Data.

The dollar volume of deals announced fell to $323 billion from $477 billion a year earlier, a 32% decline.

The deal total in the quarter was the lowest for any quarter since the second quarter of 1995.

“There was a slowdown,” said Bob Woolway, managing director and head of the Los Angeles investment banking group at J.P. Morgan. “But in recent weeks we have seen some improvement and I expect a rebound. That has to do with stock markets and interest rates stabilizing and people being able to agree on prices and terms.”

Still, the merger market also has faced some unexpected obstacles in recent months, including the government’s opposition to the planned marriage of WorldCom and Sprint.

In the first half of the year overall, the number of U.S. deals declined 13% to 4,942 from 5,662 a year ago.

The dollar value increased slightly, to $874 billion from $845 billion, but would have fallen except for the $182-billion pending merger of America Online and Time Warner, announced in January.

Without that deal, the dollar amount of mergers declined 18% for the year.

As interest rates on bank loans and corporate bonds have risen, financing cash takeovers has become more expensive for U.S. companies.

Meanwhile, the stock market’s weakness has hurt the value of many potential acquirors’ shares, depressing the “currency” used in all-stock deals.

But as U.S. companies have found it tougher to do deals among themselves, the number of cross-border mergers--where foreign companies are buyers of U.S. companies--rose dramatically in the second quarter to 344 deals worth $87.3 billion, the second-highest quarter ever for such activity.

Those deals included such transactions as Anglo-Dutch company Unilever’s plan to buy Bestfoods for $20.2 billion; and Telefonica of Spain’s planned $10.7-billion purchase of Lycos Inc. through its Terra networks group, which will create a global Internet portal.

Many investment bankers are expecting mergers between U.S. companies to pick up later this year, assuming the economy slows but doesn’t sink into recession.

Recent activity has included United Airlines parent UAL Corp.’s plan to swallow most of US Airways Group Inc., and more deals in the tech sector, where bankers expect a flurry of activity later this year as cash-strapped “dot-coms” that aren’t able to raise money in the public markets seek out merger partners.

That trend was signaled in late June, as Webvan Group agreed to buy rival online grocer HomeGrocer.com for about $1.2 billion in stock.

Although lower stock prices can hurt the deal market, they also provide bargains for aggressive acquirors.

“What you’re likely to see is an increase in cash acquisitions as valuations of many companies decline. I see that happening in the ‘old economy’ as well as the ‘new economy,’ ” said Robert D. Bertagna head of West Coast mergers and acquisitions for Credit Suisse First Boston in Los Angeles.