View from City Road: Merger mania makes a worrying comeback

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The biggest takeover in US history suggests that merger mania has returned to Wall Street in earnest. Earlier this week, Bell Atlantic committed another dollars 1bn to buy into a Mexican cellular phone group, and TCI said it would pay dollars 3.8bn to reacquire Liberty in advance of the mega-merger. Liberty is also an investor in the war for Paramount, where the bidding is now just shy of dollars 10bn. And two of the other players in the Paramount auction, Viacom and BellSouth, announced separate, unrelated deals yesterday, acquiring a video games group and a Las Vegas cable company.

And that is just this week. Earlier this year, AT&T acquired McCaw Cellular for dollars 12.3bn, Merck took over Medco Containment for some dollars 6bn, and Primerica acquired both the Shearson brokerage and Travellers Insurance. And billion-dollar mergers in the US healthcare sector are becoming so routine that news of them barely makes it across the Atlantic.

Not surprisingly, all this deal- making is having a salutary effect on the bottom line of Wall Street's big securities firms. Of the first three houses to report third-quarter earnings this week, two - Merrill Lynch, America's largest securities firm, and Bear Stearns - both posted sharply higher investment banking revenues. Merrill's record quarterly profit of dollars 360m came on underwriting and mergers fees totalling dollars 452m; Bear Stearns doubled its year-on-year investment banking income to dollars 120m.

But can it last? Merger booms are imperfectly understood, but there is one worrying explanation. Companies may prefer to buy other companies rather than invest in fixed assets because they are cheaper: business taxes take a slice out of their income stream. The gap between the price of businesses and the price of investment may be particularly large when profits are expected to grow. This is also usually near the top of the market. Wall Street bulls, beware.