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Land Of The Giants


Cover Story

LAND OF THE GIANTS

Blink, and another billion-dollar company may have disappeared. Step out for coffee, and an entire industry could be transformed.

Almost without warning, the U.S. has entered a new era of bigness. Since the beginning of 1995, more than $270 billion worth of mergers and takeovers have been announced, according to Securities Data Co. And that could mark the start of a merger wave that may dwarf the merger mania of the 1980s. Chase-Chemical, Disney-ABC, Time Warner-Turner--these are just the tip of an economywide move toward combination and consolidation (table).

Today's deals are not the financially driven hostile takeovers and leveraged buyouts that dominated the 1980s. No raiders are carrying out bags of cash this time around. Now, it's the corporate leaders of America who are riding the merger boom. Their goal: to acquire the size and resources to compete at home and abroad, to invest in new technology and new products, to control distribution channels and guarantee access to markets. "We are moving toward a period of the megacorporate state in which there will be a few global firms within particular economic sectors," says Steven Nagourney, chief investment strategist for Lehman Brothers Inc.'s private client group.

That's certainly true in the media industry, where the race to lock up key distribution channels such as television and cable networks just got more frenzied (page 40). Market dominance is also driving such mergers in the drug industry as Merck & Co.'s purchase of Medco Containment Services Inc. "As your competitors get bigger, you're almost forced to get bigger to stay equal," says Norman C. Selby, head of McKinsey & Co.'s. pharmaceutical practice. "It's a continual game of catch-up."

TRAILING TITANS. Other deals are driven by a need to bulk up as U.S. companies take on global competitors. The Chemical-Chase merger produces a bank that's No.1 in the U.S. but only 21st in the world, by assets. And the combination of Upjohn Co. and Sweden's Pharmacia, announced on Aug. 20, will create a titan that only ranks about ninth in sales among drugmakers worldwide.

Besides adding sheer size, acquisitions can provide an instant presence in foreign markets. Scott Paper Co. was acquired by Kimberly-Clark Corp., in large part, because Scott had strengths in Europe that Kimberly lacked. And Philadelphia-based Crown Cork & Seal Inc. recently said it would buy France's CarnaudMetalbox to create a global packaging giant.

Many of these mergers would not have been possible without today's permissive climate in Washington. With a Republican Congress and with the Clinton Administration on the defensive, companies no longer fear the knock on the door from the antitrust police. While noting that some transactions are "troublesome," Federal Trade Commission Chairman Robert Pitofsky observes that "many of these mergers are not between competitors and represent a healthy restructuring of certain industries, especially those with vast overcapacity."

Companies are taking advantage of deregulation to make ever-larger combinations. New rules lifting barriers on interstate banking set to take effect in September, for example, will ignite a new round of cross-country mergers. And the proposed elimination of the Interstate Commerce Commission, which reviews railroad mergers, may spark more combinations among rail carriers. One possibility: a Norfolk Southern Corp. takeover of Conrail Inc.

The passage of the telecom deregulation bill, expected this year or next, may be the signal for some of the biggest mergers of all time, especially if the mld Bell system starts reassembling itself. "It's not unreasonable to see several [regional Bell operating companies] merging over the next several years," says Daniel Reingold, vice-president at Merrill Lynch & Co. The most likely candidates: Bell Atlantic Corp. and Nynex Corp., which already jointly run a cellular service.

The drive to bigness vindicates CEOs such as IBM Chairman Louis V. Gerstner Jr., who ditched a plan to split Big Blue into smaller companies when he took over the industry giant in April, 1993. "The industry's coming back our way," Gerstner told Wall Street analysts on July 31. Indeed, the trend is for corporate customers to want to deal with fewer--and therefore bigger--suppliers.

Inevitably, some once-mighty players will be trampled in the stampede for market dominance. Apple Computer Inc., with only about a 10% share of the personal-computer market, may find that software developers opt to concentrate their efforts on the much larger Windows market--which could badly damage Apple sales. Apple CEO Michael H. Spindler is pushing to boost Apple's market share--but his efforts may be too late in the face of the Windows 95 juggernaut. Rumors have circulated--denied by Spindler--that Apple could wind up being acquired by IBM, Canon, Oracle Systems, or Sony.

TEMPTED. Is this new wave of mergers good for the U.S. economy? There's reason to be skeptical. The inevitable result of these mergers will be a new round of downsizings and layoffs, as companies attempt to find cost savings. Moreover, the megacompanies may be tempted to take advantage of their new- found market strength by raising prices.

But it may be that what used to be big is merely midsize when measured on a global stage. "I would be very uncomfortable in a world of 200 companies," says Lawrence J. White, an economist at New York University. "We are not anywhere close to that." Indeed, he notes, over the past 15 years the U.S.'s largest companies have accounted for an ever smaller share of economic activity.

Bigger, Bigger, Bigger. . . Acquisitions totaled more than $270 billion so far this year--a record pace. Here are some industries being swept by deal mania.

ENTERTAINMENT Just about everyone is trying to dominate this hot U.S. export. Reason: Vertical integration is supposed to yield clout in the Information Age. Result: Disney, Seagram, and Westinghouse are all doing huge deals. Now, Time Warner is wooing Turner Broadcasting.

FINANCIAL SERVICES The goal here is to squeeze out costs and earn economies of scale. That's a big reason behind Chemical's $10 billion merger with Chase and First Union's $5.4 billion acquisition of First Fidelity Bancorp. Now, can these behemoths increase sales?

UTILITIES Slow growth in domestic power consumption and increased competition from deregulation have spurred deal mania in the staid electric utilities industry. PECO Energy bids $3.8 billion for neighbor PP&L Resources; Union Electric and Cipsco merge for $1.2 billion.

HEALTH CARE Drugmakers, managed-care networks, hospitals--everyone in health care seems to be merging. One example: Upjohn is hooking up with Sweden's Pharmacia in a $6 billion merger. Cost-cutting aside, heft lets suppliers negotiate deals with large purchasers.

CONSUMER GOODS E Deals are largely driven by a need to compete globally and a fight for shelf space. Examples: Kimberly-Clark becomes world's largest tissue maker by paying nearly $7 billion for Scott Paper; raider Bennett LeBow is trying to buy 15% of RJR Nabisco.

TRANSPORTATION Deregulation has rocked every sector. Among railroads, Union Pacific is paying $5.4 billion for Southern Pacific; Burlington Northern anted up $4 billion for Sante Fe Pacific. Savings come from sharing overhead and cutting duplicative routes.By Michael J. Mandel with Christopher Farrell in New York, Catherine Yang in Washington, and bureau reports


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