Fewer Mergers in 2000, but Bigger Deals

Boosted by America Online’s mega-offer for Time Warner, corporate merger activity is off to a fast start this year in dollar terms. Yet deal activity overall is running at the slowest pace since 1995.

Through Tuesday, 2,270 mergers involving U.S. companies have been announced this year with a dollar value of $537 billion, according to Thomson Financial Securities Data.

The dollar total is already the strongest for any first quarter and is the second-biggest overall, after the $677 billion of deals announced in the second quarter of 1998.

But the number of deals is the lowest for any quarter since the second quarter of 1995. Since peaking at 3,409 announced deals in the third quarter of 1998, the quarterly totals have declined fairly steadily.

“It may be that most of the low-hanging fruit, at least among smaller companies, has already been gobbled up,” said Karin Estes, vice president for research at Institutional Shareholder Services, a proxy-advisory firm in Rockville, Md.

But if the dwindling number of obvious bargains means potential acquirers are finding less to buy, the deals that are getting done are bigger than ever.

Even leaving aside the AOL-Time Warner monster--worth $182 billion when announced in January--the average size of deals continues to rise, as companies whose shares have soared during the bull market are willing to spend that currency freely.

The average size of deals announced in the first quarter is $236 million, or $156 million not including AOL-Time Warner. That compares with an average size of $155 million for all of 1999 and $134 million in 1998.

As in the case of AOL-Time Warner, most mergers are stock-for-stock transactions. Deals using cash as payment have accounted for only 24% of the value of deals announced this quarter. By contrast, 10 years ago cash deals and stock deals were split nearly evenly.

“A lot of these i-commerce companies can pay stupid amounts of money for deals because their stock is so high,” argues Linda Varoli, analyst for research firm Merger Insight in New York. “You can pay 30 or 40 times earnings if your stock is at 50 times,” she added.

In one of the hottest merger sectors--communications equipment--giants such as Lucent Technologies, JDS Uniphase, Corning and Cisco Systems are “vacuuming up all the little companies to gain capacity,” Varoli noted.

Yet in some tech sectors, the issue of industry concentration may begin to worry antitrust regulators, she said. “Everyone is wondering which deal is going to be the straw that breaks the camel’s back.”

Of course, the surge in tech deals could be slowed by another force: If the latest decline in tech stocks continues, both acquirers and potential targets may think twice about stock-for-stock swaps.

Meanwhile, among “old-economy” companies, the weakness in many of those stocks during the quarter has spurred a different kind of takeover deal.

Leveraged buyouts of companies are rising at the fastest pace in years, in both number and dollar terms, according to Securities Data. Through March 24, 55 LBOs totaling more than $8 billion had been announced this year, nearly triple the value of the 39 deals announced in the same period a year ago.

In an LBO, investors--often including company managers--use borrowed money to buy all the shares of a company. LBO targets typically are firms with strong cash flow but depressed stocks.

Just this week, managers of computer disk drive giant Seagate Technology teamed with an investment group to offer $2 billion to buy the company’s basic business.

The proposal evoked howls of protest from some Seagate shareholders, who contend that the disk drive business is worth much more.

With many old-economy stocks still trading near their lowest levels in years, hostile takeovers also are making a comeback.

Perhaps the splashiest recent example was MGM Grand’s successful attack on casino rival Mirage Resorts, whose stock was flagging because of expensive new casino projects whose profitability was in doubt.

Carl Icahn, who made his name as a corporate raider in the 1980s takeover boom, also is at it again. Icahn this week stepped up the pressure on Nabisco Group Holdings, the cookie and biscuit maker that he has been trying to seize control of for years.

In the banking sector, which hasn’t seen much merger activity of late, North Fork Bancorp of Long Island, N.Y., earlier this month made a brash, $1.9-billion bid for Dime Bancorp, New York’s largest thrift. The bid is aimed at breaking up an earlier-announced marriage between Dime and Hudson United Bancorp.

And last week, eye-care giant Bausch & Lomb made an unsolicited, $600-million offer to buy contact-lens maker Wesley Jessen VisionCare, stepping up the pressure after having been in talks with the smaller firm for several weeks.

Still, the vast majority of mergers are friendly, experts note, because hostile deals can be difficult to pull off.

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Takeovers: A Mixed Picture

Corporate merger activity has declined in the first quarter as measured by the number of announced takeover offers. But the dollar value of announced deals remains high, as mega-transactions dominate the merger landscape--as in the case of America Online’s planned takeover of Time Warner. Quarterly data on the number of announced merger offers and the dollar value of those offers from 1995 through Tuesday:

First Quarter’s Biggest Deals

Here are the top 10 announced takeover offers for U.S. companies in the first quarter, ranked by their dollar value on the announcement dates. The offer for Aetna has been rebuffed by the company.

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Deal value at announcement Bidder Target (billions) America Online Time Warner $181.9 VeriSign Network Solutions 21.0 JDS Uniphase E-Tek Dynamics 15.2 El Paso Energy Coastal Corp. 14.9 Tribune Co. Times Mirror 11.5 ING/WellPoint Health Aetna 10.0 UPM-Kymmene Champion International 8.8 NiSource Columbia Energy 8.5 TriZetto Group IMS Health 8.1 I2 Technologies Aspect Development 7.9

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Source: Thomson Financial Securities Data