Two's company

They're back - and this time they're sober. Mega-mergers in the 1990s are based on need not greed

A MID-NINETIES successor to Carl Icahn and T Boone Pickens emerged last Monday. Michael Price, manager at Heine Securities in New Jersey, was the man who, it was said, forced two of the world's biggest banks, Chase Manhattan and Chemical Bank, to merge. Earlier this year, Mr Price had bought 6.1 per cent of Chase's shares and had then started chivvying its chairman to push up the share price. The merger announcement did the trick. Chase's share price closed 12.5 per cent up on the day, and Mr Price declared himself satisfied. "[The chairman] put the interest of shareholders first, and that's just great," he said.

Mr Price was doing a pretty good imitation of Mr Icahn and Mr Pickens. Those in Wall Street and the City who make their money from mega-deals may have gone misty-eyed with nostalgia; the 12,000 people who will lose their jobs as a result will probably take another view.

But if Mr Price does have aggressive instincts, he is also a blast from the past. It is true that we are in the midst of an eruption of mergers that is running the 1980s boom close on both sides of the Atlantic. According to Acquisitions Monthly, there were 669 UK bids worth pounds 25bn in the first six months of this year - more than in the whole of 1994 and, in value terms, on course to match the 1989 record (in the US, the six-month total of $164bn (pounds 106bn) is already running ahead of 1989).

What sets the two booms apart, though, is the nature of the mergers. The 1980s was a period of turmoil, when the sharp-witted financier was king; this time, managers are calling the shots.

The financiers of old made their money from takeovers - either by buying and selling stakes, or by doing the deals themselves. Leveraged buyout specialists took over companies, raising funds through debt, then made a few million selling off the bits at a profit.

Industrialists joined the game, too. Conglomerates such as Hanson were natural acquirers, but specialist companies - such as Saatchi & Saatchi and WPP in advertising and Coloroll in home furnishings - picked up the habit and went on great corporate shopping sprees. It was also essential even for conservative British companies to make at least one US acquisition.

The most traditional industrialists became experts at "acquisition accounting" - using a raft of devices to present take- overs in the best light. Their great ally was the stock market, which rewarded aggressively acquisitive companies by marking up their share prices. This, in turn, meant it was easier for them to fund takeovers - and so on, in apparently virtuous circle. It also meant it was much easier to justify making acquisitions that made little commercial sense.

The zenith of UK debt-fin-anced bidding came in 1989, when a consortium of Sir James Goldsmith, Kerry Packer and Lord Rothschild made an unsuccessful bid of pounds 13.4bn for BAT Industries. Sir James said that BAT was a conglomerate that had outlived its time - but his aim was the same as any other buyout artist's: to break the company up and bolster his fortune.

Although these bids were financially driven, most were possible only because of real problems within industry. The recession of the early 1980s had thrown up many enfeebled and overmanned giants - which was why it was easy for tightly managed companies to buy them, cut out the fat (and many of the people), and quickly recoup their investment. But by the end of the 1980s, much of the sloppiness had been excised from UK and US industry - the days of the predator were drawing to an end.

The latest recession, accompanied by high interest rates, both destroyed the less plausible takeover merchants and dampened acquisition activity. The value of UK deals fell from pounds 47bn in 1989 to pounds 17.3bn in 1993, picking up a little to pounds 24.8bn last year. Then suddenly this January, Grand Metropolitan's pounds 2.6bn offer for the Mexican food company Pet and Glaxo's pounds 9.1bn bid for Wellcome signalled a renewal of the open season.

This year's deals have little in common with those of the 1980s, though. Of the 68 $1bn-plus bids identified by Acquisitions Monthly, only one was leveraged and failed, while another was a leveraged-deal-that-never- was. In May, Onex Corporation of Canada offered $1.7bn for Labatt, the Canadian brewer. Onex planned an LBO, and intended to break Labatt up. Fortunately for the brewer, a white knight (another rare escapee from the 1980s lexicon) rode up in the form of the Stella Artois company Interbrew, and carried Labatt off.

The biggest bid of all appeared like a shooting star and disappeared as quickly. Kirk Kerkorian, a billionaire investor active in the 1980s, was upset that the value of his shares in Chrysler was slipping. So he launched a $23bn bid - not because he wanted to buy the motor company, but because he wanted to get his hands on some of the $5.5bn cash pile. He hoped the bid would buck the shares in its own right, or perhaps entice a more serious bidder off the streets. After taking it seriously at first, Wall Street lost interest when it became clear Mr K could not raise the funds - in the 1980s, he would probably have had little difficulty.

The only other glint of glamour, and craziness, has been in the media industry, where old-fashioned egos still rule. Edgar Bronfman, head of the drinks group Seagram, bid $5.7bn for 80 per cent of MCA, which owns Universal Studios. He talks of the relevance of Seagram's distribution skills; others point to his love of films. And on Thursday Ted Turner, boss of the CNN empire, agreed to be taken over by Time Warner for $8bn - he tried to buy NBC, but was thwarted, so this was another way of converting himself from Mr Big to Mr Enormous.

At least as crazy is the passion for vertical integration - which was last in fashion in the 1960s and which lay behind Time Warner's move on Turner and Disney's $19.1bn agreed bid for ABC. Ever since the end of restrictions that stopped US media and telecom companies from straying from their patches, they have been straying like mad. Talk of "synergy" and "value chains" is used to justify deals that bolt together "content providers" - such as film or television studios - with "pipeline providers", such as cable companies. The TV companies add a third element which Wall Street calls "packaging" - the skill of schedule-making.

But no one has confronted the well-established argument against such vertical integration: that it locks one part of the chain into buying from or selling to another part, even when it makes no commercial sense.

Mr K and the media moguls apart, the characters behind the 1995 deals have been a sober bunch, driven by a number of prosaic and sensible factors. First, many have cash to spend. They cut costs during the recession, and did not loosen the purse strings as it eased. Second, banks have been opening their wallets - at least to large companies wanting to borrow modestly. The stock market has also been more amenable - Cadbury and GrandMet raised funds for their takeovers of Dr Pepper and Pet respectively through rights issues.

Third, the deregulatory bandwagon has been rolling on, and has unleashed a wave of deals in a number of sectors - electricity in the UK, banks, health care and media in the US. The rush of mergers in US health-care companies followed a decision last year to allow the "blues", as they are known, to make profits - just as several UK building societies have changed from mutual to plc status. The number of "blues" has already fallen from 110 to 70, and could fall below 40. The proliferation of blues is confusing to outsiders: for example, Wellpoint Health, which is owned by Blue Cross of California, is the subject of a $4.8bn bid from the quite separate Blue Shield of California.

But what really distinguishes this merger wave from that of the 1980s is the urge to cuddle up in an unfriendly world. The bankers call this activity "strategic" - defensive might be a more honest word. The recession may be over, but no one in the West expects much growth: that means competition will intensify as companies fight to stay at the table.

One way of increasing their chances, they feel, is to link up with someone else: they can cut some costs, if not to a Hansonesque degree, and increased size should give some protection.

Britain's most successful company, Glaxo, bought its rival Wellcome because it was afraid of the future. It had grown mighty on the back of one drug, Zantac. But Zantac's sales were falling and no other worldbeater was in the pipeline. Wellcome, meanwhile, was about to lose patent protection on its best-selling drug.

Sir Richard Sykes, Glaxo's chief executive, believed a defensive merger was the answer and convinced Wellcome Trust, Wellcome's biggest shareholder, that he was right.

American railroad companies have been getting together to

generate profits in an otherwise flat market. The rail networks are still fragmented, which means plenty of scope for cost-cutting when two groups pool resources: add the aggression of one of the giants, Union Pacific, and the track was laid for a burst of takeover activity. The only question is where it will stop: some people believe the US rail network will become one just as the British network becomes many.

The US banking mergers are defensive - although they have now gained a momentum that might make them unstoppable. The sluice gate was opened when the banking laws that restricted banks to operating within their states were lifted. But the flow has been driven by banks' desperation to raise their flat revenues. Not only has recession reduced demand for loans, non- banks have been muscling in on business traditionally provided by the banks. As a result, the buzzword is now "merger of equals" - a way of both saving face and protecting themselves in a cold climate. The bank mergers are also driven by two more old-fashioned urges - the desire to be a big fish in a regional pond, and the bandwagon effect. Once a couple of mergers have been announced in an industry, other companies find it difficult to resist the urge to join in.

On this side of the Atlantic, companies that are used to making a fortune sitting on merger sidelines - the merchant banks - have been getting first- hand experience in midfield. Barings had its own little difficulties, but the absorption of Warburg and Kleinwort Benson by European banks was part of a broader restructuring of a battered industry. On one hand, the UK merchant banks realised they were too small to compete worldwide; on the other, the big European lending banks were looking for a new source of income in an unprofitable and overcrowded world.

The irony is that corporate finance fees are now recovering on the back of the takeover spree - but too late to save the independence of some of the grandest names in the City.

Start your day with The Independent, sign up for daily news emails
Ben Little, right, is a Labour supporter while Jonathan Rogers supports the Green Party
general election 2015
The 91st Hakone Ekiden Qualifier at Showa Kinen Park, Tokyo, 2014
Life and Style
Former helicopter pilot Major Tim Peake will become the first UK astronaut in space for over 20 years
food + drinkNothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
Kim Wilde began gardening in the 1990s when she moved to the countryside
peopleThe singer is leading an appeal for the charity Thrive, which uses the therapy of horticulture
Alexis Sanchez celebrates scoring a second for Arsenal against Reading
Life and Style
An easy-peel potato; Dave Hax has come up with an ingenious method in food preparation
voicesDave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Japan's population is projected to fall dramatically in the next 50 years (Wikimedia)
Life and Style
Buyers of secondhand cars are searching out shades last seen in cop show ‘The Sweeney’
motoringFlares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own