New Merger Etiquette

December 31, 1993|By Bloomberg Business News

The suitors, not the stalkers, were the dominant force in mergers in 1993.

Although hostile bids were scarce, the transactions were hardly pikers -- with Mellon Bank Corp. offering $1.85 billion for mutual-fund manager Dreyfus Corp., pharmaceutical maker Merck & Co. paying $6 billion for mail-order druggist Medco Containment Services Inc. and, in the year's topper, Bell Atlantic Corp. agreeing to buy cable TV giant Tele-Communications Inc. for about $30 billion, to name but three.

The value of mergers and acquisitions leapt to $265 billion in 1993, a 73 percent gain on 1992, according to Securities Data Co. in Newark, N.J.

And 1994 could be even hotter -- at least that's the hope of Wall Street investment bankers grown accustomed to this year's fat advisory fees. Judging from clients' plans, "people are low" in their estimates of next year's activity, said Morgan Stanley Group Inc. Chairman and Chief Executive Richard Fisher.

Consolidation in the health care industry has just begun, Mr. Fisher said. Meantime, the finance and transportation industries are ripe for mergers, he added.

One thing has changed from the last merger wave that crested in 1988 and ebbed in 1990: Buyers have some putative strategic reason for making an acquisition.

That doesn't mean the mergers -- much less the prices paid -- make any more sense than the takeovers epitomized by Kohlberg Kravis Roberts' $26 billion buyout of RJR Nabisco in 1989.

But those at risk are often different. In the 1980s, cash more often than not was king, usually taking the form of bank debt or junk bonds. Nowadays, it's often shareholders who'll pay the piper if a merger goes bad, since a growing proportion of transactions now are financed all or in part with stock.

That phenomenon reflects not just greater wariness on the part of lenders, but also the lofty -- some say scary -- prices paid for the shares of companies in even fairly mundane, slow-growth industries.

That's one reason why corporations -- not raiders or leveraged buyout specialists -- are mounting takeovers or arranging friendly mergers. Their goals also are different. The money's to be made through profits spun off from the business being acquired, not from busting up a target or taking public a leveraged buyout a couple of years after it went private.

Merck, for instance, bought Medco to gird itself for the tougher world of health-cost controls where a low-cost distribution system could keep its proprietary drugs flowing profitably even as margins get squeezed by the emergence of giant buying groups demanding bulk discounts.

In a period where a 3 percent gain in gross national product is a world-beater among developed countries, "acquisitions become a way to grow," said Steven Wolitzer, an investment banker at Lehman Bros.

The activist administration of President Clinton -- notably his plans to overhaul the health-care system -- also is playing a role.

OrNda HealthCorp. said Dec. 2 that it would acquire Summit Health Ltd. for $264 million in cash and stock, creating the fifth-largest publicly traded hospital chain in the United States -- and a company with annual revenue of $1.6 billion and facilities in 17 states. Just one month earlier, OrNda agreed to buy American Healthcare Management Inc. in a $330 million transaction.

Deregulation also is leveling barriers in financial services. Mergers among banks, brokerage firms and mutual fund operators surged as companies sought advantage in size and marketing reach.

The biggest-ever brokerage merger began in March, when Primerica Corp. agreed to buy the Shearson brokerage and asset management operations of American Express Co. for $1.2 billion. Half a year later, Primerica said it would acquire the 73 percent of insurer Travelers Corp. it didn't own for $4.2 billion.

Technology and still-murky changes in the regulatory structure in Washington are fueling a wave of consolidation in telecommunications and media.

Besides Bell Atlantic's merger with Tele-Communications Inc., U West Inc. formed a joint venture with a unit of Time Warner Inc., while Southwestern Bell Corp. and Cox Cable Communications agreed to set up a $4.9 billion cable television partnership. American Telephone & Telegraph Co. agreed to buy McCaw Cellular Communications Inc. for $12.6 billion in stock.

But there were some reminders of the 1980s, particularly the battle for Paramount between home-shopping network QVC Network Inc. and cable programmer and operator Viacom Inc. Bidding exceeded $10 billion, a price many considered excessive.

Still, despite these echoes, it's the chairmen and CEOs that run the show. The limited role that investment bankers played in arranging Bell Atlantic's merger agreement with Tele-Communications reflects this shift.

Investment bankers weren't even invited when Bell Chairman and Chief Executive Raymond Smith and Tele-Communications CEO John Malone came to terms aboard Mr. Malone's yacht off Portland, Me., last August.

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