Record year for takeovers and mergers

Hopes of a bumper 1995 for bids were realised spectacularly, with a provisional pounds 70bn worth of deals done, writes Magnus Grimond; With conglomerates apparently assigned to the dusbin of history, industrial logic was to be the new mantra
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City hopes of a bumper 1995 for big deals were realised with a vengeance, as British companies chalked up pounds 70bn worth of takeovers and mergers by late December.

A provisional 1995 estimate from the magazine Acquisitions Monthly puts the last peak of pounds 47.2bn in 1989 into the shade and pitches last year's pounds 24.8bn into outer darkness. Around pounds 950m of the money that changed hands is estimated to have stuck to the sticky fingers of merchant banks, lawyers, stockbrokers and public relations people, making it easily the best year ever for City advisers.

The omens were propitious from the start, as companies surviving the recession rushed to spend the liquidity built up during the recovery - even if the stock market gave little encouragement, ending 1994 below where it had started. Just 23 days into the new year, the record-breaking pounds 9.1bn bid for Wellcome by its rival Glaxo was a giveaway that 1995 was going to be a vintage year.

Unlike the freewheeling 1980s, however, the motivation behind the big deals has changed in the more puritan 1990s. With conglomerates apparently consigned to the dustbin of history, it was not difficult to see that asset stripping and accounting magic would no longer be the driver of the urge to merge - at least not in public.

Instead, industrial logic was to be the new mantra of the politically correct City, with pharmaceuticals, financial services and the privatised water and electricity utilities picked out as ripe for rationalisation, reform and rejuvenation.

And thus it was. With the pounds 1.8bn takeover of Fisons by Rhone-Poulenc Rorer, the creation of Glaxo Wellcome put two pharmaceuticals deals into the top five of the year. Glaxo spoke of the need to cut bloated research and development costs, streamline management and pack a bigger punch. Following the takeover, Glaxo became the world's biggest drug company, but its market share only edged ahead to a still pretty unimpressive 5 per cent or so.

Fisons put up a doughty defence under Stuart Wallis, the former Bowater (now Rexam) executive parachuted in to sort out the sick man of the drugs sector. Slaying one of the most sacred cows of the industry, Mr Wallis sold off most of Fisons' research and development operations as part of a strategy which all but doubled the price of the shares, levering them up from a low of 105p even before the bid. He eventually squeezed a higher offer out of RPR, taking the bid to 265p and leaving Fisons' shareholders plenty to be pleased about after years of underperformance.

It also won Mr Wallis a new reputation as a corporate turnround artist, but even he was not able to reverse the currently received wisdom that medium-sized pharmaceuticals groups such as Fisons will be squeezed in the new world divided between giants like Glaxo Wellcome and minnows, like the new biotech companies which caught the imagination of the stock market so spectacularly during 1995.

The other sector where the industrial logic argument held sway was financial services. Having seen 120,000 jobs go in the last six years, it is hard to see where further rationalisation can come. But Lloyds Bank's agreed pounds 6.1bn marriage with TSB - the second-biggest deal of the year - was seen as a further move in the tidying up of the banking industry.

There was also a little local flurry of enthusiasm by foreigners for some of the City's proudest names. Having failed to consummate a tie with Morgan Stanley of the US five months earlier, SG Warburg succumbed ignominuously to Swiss Bank Corporation for pounds 860m. The level to which the once-mighty Warburg had sunk was graphically illustrated in June, when Kleinwort Benson, relegated to the second division of the merchant banking sector, gave up its independence for pounds 977m.

One sector drew more than its fair share of the takeover fire last year, and industrial logic was hard to discern in the thinking of most of the bidders. The electricity industry and its healthy cash flows became ripe for the picking as the Government's golden shares in the 12 regional electricity companies fell away from March. Trafalgar House, which blazed the trail with its pounds 1.2bn tilt at Northern Electric, was eventually forced to pull out of the running - the subsequent revelation of its own parlous financial position giving a strong clue as to its reasoning. The irony of its situation was underlined as the result in July of the electricity price review prompted by the Trafalgar bid was taken as the green light for a motley collection of other raiders to enter the fray.

They poured across the border from the north as Scottish Power launched a pounds 1bn assault on Manweb, the distributor for Merseyside and North Wales, and from across the seas, with Southern Company - America's biggest power utility - also offering pounds 1bn, this time for South Western Electricity.

As the turkey shoot continued, a water company, North West Water, was drawn into the fun and games, eventually seeing off another group of US predators to secure Norweb for pounds 1.8bn in the sixth biggest deal of the year.

With all this action, the old guard of conglomerates and would-be contenders were clearly itching to get involved. Hanson, already unloved, failed to win back many admirers by hitching itself to Eastern Electricity in a pounds 2.4bn deal. Its share price remained becalmed on a three-year low.

Meanwhile, Gerry Robinson clearly showed himself keen to emulate Lord Hanson's achievement as he watched his share price go backwards after his Granada Group dropped its pounds 3.3bn bombshell on Forte, the Savoy to Happy Eater group. When the dust settled, that turned out to be potentially the third biggest deal of the year, although the outcome remains far from certain.