They're back - and this time they're sober. Mega-mergers in the 1990s are based on need not greed
Sunday 03 September 1995
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.
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