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News: Analysis & Commentary: DEALS
AN OLD-FASHIONED FEEDING FRENZY
Shades of the 1980s? In the wake of Kirk Kerkorian and Lee Iacocca's hostile $20.5 billion bid for Chrysler, a lot of analysts are wondering: Is the takeover party getting out of control?
There's little doubt that corporate buyouts are booming--or that acquisition prices are rising fast. U.S. merger volume in 1995's first quarter totaled $73.2 billion, up 36% from the year before--the highest first-quarter figure since 1989, according to Securities Data Co.
The second quarter shows no signs of a letup, either: In recent weeks, Seagram said it will spend $5.7 billion acquiring 80% of MCA, and Coram Healthcare struck a merger deal with Lincare Holdings for about $1 billion. At Chase Manhattan Bank, mutual-fund manager Michael Price is pressing management to get the stock up, and NationsBank says it might be interested in taking Chase over. (Chase says it can maximize shareholder value on its own.) Plenty of other companies could be vulnerable, too. At Scott Paper Co.'s annual meeting on Apr. 18, Chief Executive Albert J. Dunlap pretty much summed up the atmosphere--and fueled rumors that the paper giant is on the block--saying: "Everything but your family and your dogs in this world is for sale at the right price. And anybody who denies that is a hypocrite."
DOLLAR DAYS. Sounds familiar, right? Yet unlike the merger frenzy of the late 1980s, there are plenty of solid business reasons for the latest upswing in deals. The most important: CEOs, caught in a Darwinian struggle for survival in a world of international competition, deregulation, and technological upheaval, are snatching up competitors at home and abroad to expand their global market share and improve earnings. Says Allen L. Sinai, Lehman Brothers Inc.'s chief economist: "We are on the cusp of a major takeover boom, and it will be global in scope."
In the U.S., the dollar's steep fall adds a further incentive for corporate combinations. For German and Japanese buyers in particular, U.S. assets now are almost irresistibly cheap. In the first quarter, overseas companies went on a $19.3 billion corporate buying spree in the U.S., the strongest first quarter since 1990. Also contributing to America's merger wave is strong corporate cash flow and banks eager to lend.
Little wonder that the great debate of the late 1980s is being revived: Is the long-term health of American companies and economy being sacrificed for a quick buck? Take Chrysler. Management says its $7.3 billion cash stash is a prudent hedge against an inevitable downturn. And a former top Chrysler executive argues that Iacocca and Kerkorian "could tank the company through their own greed." Worries Michael Porter, professor of management at Harvard business school: "Who's going to make the investments if the presumption is that any management team will waste resources?" But many economists think Chrysler has way too much cash. "What is the purpose of the cash? It's to allow them to stay fat and lazy," scoffs Harvard economist Michael C. Jensen.
True, few Wall Street merger mavens expect a surge in cash raids by financial gunslingers, especially with the Chrysler bid showing signs of shakiness (page 38). "I don't see Chrysler being consistent with anything else we've seen," says Rick Escherich, managing director for mergers and acquisitions at J.P. Morgan & Co. But lots of antsy shareholders are pushing for a greater distribution of cash flow--and many companies now have big bucks to distribute. The dividend payout ratio for Standard & Poor's 500 companies is "among the lowest in history," says Charles Clough, chief investment strategist at Merrill Lynch & Co. And during the past three years, corporate cash flows have risen by around 29%, to over $480 billion, says Mark Zandi, an economist at Regional Financial Associates Inc.
In the rapidly consolidating drug industry, large companies such as Warner-Lambert and Bristol-Myers Squibb are feeling the heat. Take Warner. With its stock trading at around $80 a share, it might go for more than $15 billion. Yet it still could be vulnerable. Perhaps to help forestall a hostile bid, Warner CEO Melvin R. Goodes and his top aides assured analysts on Apr. 13 that they plan to sell some $200 million worth of assets in the next two years.
With other industries also consolidating, plenty of other companies may be vulnerable. Some analysts think that Sundstrand, a smallish military and industrial supplier, could be a breakup candidate. Even if Chase resists pressures to do a deal, smaller banks, such as Boston's BayBanks, clearly could be gobbled up. Multimedia also is hot, as software, telecommunications, and other companies jockey for position.
GLOBAL TREMORS. Feeling similar pressures, European companies now are avid shoppers in the world's largest market. The fall of the dollar aside, many Eurogiants have strong balance sheets to finance acquisitions. Among their bigger U.S. deals so far this year: Germany's Hoechst is trying to close its purchase of Marion Merrell Dow for $7.1 billion, and Italy's Luxottica will pay some $1.3 billion for U.S. Shoe.
The merger wave, however, is not just an American phenomenon. Worldwide merger volume, including the U.S., hit $135.2 billion in the first quarter, 26% more than in last year's first quarter, Securities Data says. Japanese companies may spend more time undoing past mistakes than launching new bids, as Matsushita is doing by selling MCA to Seagram (page 37). But they're quite actively striking alliances in Asia.
Some huge deals, moreover, have occurred or are brewing in Europe. Britain's Glaxo Holdings PLC acquired Wellcome for $14.3 billion, and Hanson PLC is strongly rumored to be gunning for British Gas PLC, the world's largest natural-gas company. PolyGram, the Anglo-Dutch entertainment group, recently increased its stake in Music India, a Bombay record company, to 51%. Germany's Siemens is sitting on some $17 billion in cash. Says CEO Heinrich von Pierer: "This is a time of consolidation. I prefer alliances, but other acquisitions may come if we need to fill in any gaps in our core businesses."
Translation: The takeover wave may hit hardest in the U.S., where shareholders wield the most power. But in an era of globalization, companies everywhere are repeating the mantra of the rambunctious '80s: Acquire or be acquired.
Prime Takeover Bait?
Some companies Wall Street thinks could be ripe for buyouts, based on industry trends and relatively low price/earnings ratios.
The Boston-based bank is a buyout candidate for bigger institutions that want to expand.
As the industry consolidates, Bristol's stock is up on expectations of a deal, possibly with a rival.
Investor Michael Price thinks the No. 6 U. S. bank would be worth more broken up into pieces.
Ratings are off from last year, but Morgan Stanley says it's worth $80, vs. a share price of $62.
A leader in industrial, home, and building controls, its record has been marred by write-downs.
On Apr. 18, its CEO said nearly "everything" is for sale for the right price. Maybe $9 billion?
This small player is likely to get caught up in defense industry consolidation, Wall Street thinks.
A drugmaker in need of restructuring, Warner may attract a big European buyer eager for U.S. share.By Christopher Farrell, with Phillip L. Zweig, in New York, Joseph Weber in Philadelphia, Paula Dwyer in London, and bureau reports