The urge to merge was at all-time high in 1994

January 03, 1995|By Bloomberg Business News

NEW YORK -- Marriage, corporate-style, set a record in 1994 as mergers and acquisitions surged 43 percent to $339.4 billion, according to Securities Data Co.

Led by acquisitions such as American Home Products Corp.'s $9.3 billion purchase of American Cyanamid Co., Lockheed Corp.'s $10 billion merger with Martin Marietta Corp., and Mellon Bank Corp.'s $1.9 billion takeover of Dreyfus Corp., U.S. companies raced into each other's arms at an even faster pace than during the 1980s.

Pressures to reduce the costs of health care, a shrinking defense budget, federal deregulation in communications, the lower dollar and demanding shareholders spurred companies to surpass the previous record of $336 billion worth of mergers set in 1988, according to Securities Data Co.

"It's been 'Katie bar the door' ," said Michiel C. McCarty, co-head of investment banking at S.G. Warburg PLC's U.S. unit. "The U.S. business heated up early in the year. We saw the overseas business rise in the third and fourth quarters."

Goldman, Sachs & Co. was the leading adviser in mergers that were completed in 1994. The firm advised in 152 mergers valued at $86.4 billion, or 19.3 percent of the total.

Morgan Stanley & Co. came next, with 86 transactions worth $68 billion. Salomon Brothers Inc. was third, with 88 mergers worth $61.3 billion. Lazard Freres & Co. and its overseas affiliates followed with 93 transactions valued at $60.2 billion and Merrill Lynch & Co. ranked fifth with 134 deals valued at $54.5 billion.

Though business is up, Wall Street bankers aren't reliving the go-go '80s. Advisory fees are lower than they were then, some companies aren't using investment bankers in their negotiations and fewer junk-bond sales tied to the transactions mean less underwriting commissions for Wall Street, bankers said.

Lower profits across Wall Street also could take a bite out of merger bankers' bonuses this year. Rising interest rates caused overall profits of securities firms to fall 80 percent from last year to $1.8 billion, according to the Securities Industry Association.

What's more, merger bankers aren't racing to complete transactions or fending off hostile raiders. Unwelcome bids made up $23.4 billion, or 8 percent, of all transactions this year, compared with 24 percent of the total in 1988.

"I don't think it will be all-night sessions at 9 W. 57th Street or at Rockefeller Center," said securities industry analyst Perrin Long.

RJR Nabisco, the biggest leveraged buyout ever, had its offices at 9 W. 57th in New York, while Lazard Freres & Co. is in Rockefeller Center.

Last year's biggest mergers were in the telecommunications business, where companies are racing to keep up with changing technologies and deregulation by the Federal Communications Commission.

Telecommunications and media mergers accounted for more than $40 billion of this year's activity, Securities Data said. The biggest deal in that area is US West Inc.'s $13.5 billion joint venture to combine domestic cellular businesses with AirTouch Communications.

The drug industry was the second-busiest, with transactions valued at $23.7 billion. Insurers also had an urge to merge with $22.6 billion of transactions.

The Clinton administration unwittingly promoted mergers by pushing health-care reform and cutting the defense budget. That caused hospital and defense firms to merge, including National Medical Enterprises Inc., which is buying American Medical Holdings Inc. for $2 billion, and Northrop Corp., which in April paid $2.17 billion for Grumman Corp.

The weaker U.S. dollar also contributed to the rise in mergers. The dollar fell about 5 percent against the British pound and 12 percent against the Swiss franc, making it less expensive for companies in the United Kingdom and Switzerland to buy U.S. firms.

Roche Holding AG of Switzerland, for example, took advantage of the weak dollar to buy Syntex Corp. for $5.3 billion.

SmithKline Beecham PLC agreed to buy the Sterling Winthrop Inc. division of Eastman Kodak Co. for $2.93 billion. It also acquired United Healthcare Corp.'s Diversified Pharmaceutical Services Inc. unit for $2.3 billion.

Even with the weaker dollar, U.S. companies prowled the world's markets, searching for acquisitions as they expand worldwide.

While mergers not involving U.S. companies declined 6 percent in 1994 to $203.4 billion, total mergers worldwide were $542.8 billion, the second-highest total on record and a 20 percent increase from last year.

Corporations everywhere find they can become more competitive more quickly through mergers than by growing by themselves, bankers said.

"Buying has been the choice of most companies," Goldman, Sachs & Co. partner Steven Heller said. "It takes a long time to build a market position. It takes a long time to build a new factory. It takes a long time to launch a new brand."

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