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Corporate Merger Climate Turning Chilly

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TIMES STAFF WRITER

Merger mania, already a waning trend, has fallen off the cliff in 2001.

Despite some high-profile transactions this month, including Nestle’s $10-billion deal for Ralston Purina Co. and Intel Corp.’s offer for Xircom Inc., the number of announced mergers so far in 2001 is down 27% from the same period last year.

That follows a 9% drop in announced corporate deals in the fourth quarter compared with the year-earlier period, to the lowest quarterly total in more than five years, data tracker Thomson Financial Securities Data said.

Analysts say the ongoing slide in merger activity stems from a number of factors that may continue to depress the deal total in the near term.

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For one, with more than $5 trillion in announced mergers during the acquisition frenzy of the last three years, many of the most desirable companies with marquee names already have found partners, Wall Street pros say.

In addition, the stock market’s slide last year left many firms unwilling or unable to use their own shares as currency for deals.

“People think differently when their stock is down,” said Mark Lanigan, co-head of investment banker Credit Suisse First Boston’s Los Angeles office. “When stocks come down it puts the brakes on deals.”

In the technology sector in particular, the decline in stock prices will slow the merger pace, said Harry T. McMahon, managing director of investment banking at Merrill Lynch in Los Angeles.

And with corporate earnings weakening in many industries, using cash to do deals has become more difficult, analysts said. Borrowing also may be more difficult as banks and bond investors remain cautious about financing higher-risk transactions.

“Investment bankers are going to have to work a lot harder to justify deals this year,” said Richard Peterson, analyst with Thomson Financial. “They are going to have to dig deeper to find deals that can get done.”

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As of Tuesday, 458 mergers with a value of $31.6 billion had been announced nationwide this year, compared with 630 deals valued at $74 billion by this time last year--excluding the massive AOL Time Warner merger announced a year ago, Thomson Financial said.

That drop-off follows three quarters of declining numbers of deals. In the fourth quarter, 2,406 mergers were announced, down from 2,698 in the third quarter and 2,788 in the second. The fourth quarter total was the lowest since 2,186 deals were announced in the second quarter of 1995.

But the dollar value of deals announced in the fourth quarter was $415 billion, up from $376 billion in the year-earlier quarter.

The trend has been that a relatively few mega-deals have lifted the dollar value of transactions in recent years, even though the number of deals has continued to slide from its peak in mid-1998.

The dollar value of deals in 2000 set a record, at $1.83 trillion. That compares with just $194 billion in deals announced in 1990.

Analysts say some executives are thinking twice about merger deals this year with the economy slowing. “There is some heightened nervousness about the economy,” said Don Hilber, senior economist with Wells Fargo Bank.

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Still, he said, “Mergers tend to go in waves, moving from one industry to another. I think we are starting to see [activity] pick up again in certain industries, such as food and insurance.”

What’s more, many of the forces driving mergers in recent years remain and are likely to reassert themselves if corporate confidence about the economy revives, experts say. A continuing drop in interest rates--and a rallying stock market--also could stoke deal action by making financing easier.

Already this year, more companies have rushed to issue junk bonds as yields have fallen in the wake of the Federal Reserve’s surprise interest rate cut Jan. 3. But only the higher-quality junk issuers have found ready buyers for their bonds.

One obvious effect of slowing merger activity is that it removes a key source of demand for stocks, which may make it tougher to sustain a new bull market move.

Even so, in the long term the pressure on companies here and abroad to extend their market reach globally is expected to drive more mergers. Cheaper U.S. stock prices also could fuel more bids from foreign firms for American companies, analysts say.

Some experts expect to see more transactions among “old-economy” firms, such as the recent announced marriage of Northrop Grumman and Litton Industries.

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“It’s not going to be one of the best years ever” for deals, said Lanigan at Credit Suisse First Boston, “but it won’t be a disaster.”

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Bigger Dollars, Fewer Deals

Last year saw a record for the dollar value of announced U.S. corporate mergers, but the total was boosted by a few mega-deals such as AOL Time Warner. The number of mergers announced declined in each quarter of 2000, and the fourth-quarter total was the lowest since the spring quarter of 1995.

Dollar value of mergers announced (In trillions of dollars)

2000: $1.83 trillion

Mergers announced each quarter (Quarterly transactions)

Fourth quarter 2000: 2,406 mergers

Source: Thomson Financial Securities Data

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