The Future Calls

January signals blazing year for business marriage

The Sbc-at&t Merger

Consolidation

February 01, 2005|By Jamie Smith Hopkins | Jamie Smith Hopkins,SUN STAFF

Corporate America is back to the business of buying businesses.

Recent seismic consolidations - from telecommunications to financial services to software to consumer products - come after several quiet years of paying down debt and stashing cash during uncertain economic times. Now chief executives have the money to acquire, low borrowing rates to help them make up the difference and a new confidence in the U.S. economy.

In a span of a single day - yesterday - they announced three large deals: SBC Communications Inc. is acquiring AT&T Corp. for $16 billion; MetLife Inc. is buying Travelers Life & Annuity Co. from Citigroup Inc. for at least $11.5 billion; and Lee Enterprises Inc. is buying Pulitzer Inc. in a nearly $1.5 billion newspaper merger.

Last week, Procter & Gamble announced it was buying the Gillette Co. in a $57 billion deal.

Last year, the number of deals increased nearly 10 percent to about 8,300, the biggest year since 2000 - and economists say corporations are just getting started. Last month alone, there were 563 deals valued at $123.1 billion, according to Thomson Financial. That's more than a fourth of the total dollar figure in all of 2002.

"We're at the beginning of the cycle," said Fariborz Ghadar, director of the Center for Global Business Studies at Pennsylvania State University. "We've got so much pent-up demand and so much cash that '05 is going to definitely be much bigger than '04."

The demand, in many of these deals, is the determination by leading companies in a number of tough, price-competitive businesses to seize market share and achieve economies of scale through sheer size.

A combined Procter & Gamble-Gillette would command huge amounts of shelf space in grocery and drug stores and deal with pressure from Wal-Mart Stores Inc. to keep cutting prices. Oracle Corp. persevered for more than a year to seize PeopleSoft Inc., in order to better combat Microsoft Corp. in business software.

SBC - the former Southwestern Bell, one of the regional spinoffs of the original Ma Bell - was looking for dominance in long-distance and business services, not to mention an internationally recognized name.

AT&T, which birthed the telecommunications industry more than a century ago before being broken apart in 1984, needed help of a different sort: Its revenues sank from nearly $50 billion in 1999 to $30.5 billion last year as the price of long-distance calls continued to fall, customers switched to wireless phones to make more of those calls and huge acquisitions in cable television failed to live up to expectations.

Merger experts expect the deal will set off a flurry of other acquisition attempts in the industry - with a Verizon Communications Inc. run at MCI Inc. one much-discussed possibility - because consolidation feeds on itself.

A recent survey of deal makers suggests that nearly three-quarters think the merger-and-acquisition environment is good or excellent, up from 45 percent last year. Fewer are finding the economy and financing to be impediments, according to the survey, produced by Thomson Financial and the Association for Corporate Growth.

"There's a lot of capital available," said Roger Kafker, managing director of TA Associates, a Boston private equity and buyout firm.

Ron Kerdasha, who manages the Baltimore office of LaSalle Business Credit LLC, expects the local market will not be immune - much as it has been caught up in previous waves of mergers: "There's no doubt that we have major companies in the Baltimore area that you'll see doing some things in '05."

Economists expect consolidation in health care and eventually in biotech, key Maryland industries.

Deals in the late 1990s were often propelled by the irrational exuberance of the stock market - prices were pushed so high on stock that companies were buying left and right with inflated currency, and not always for good reasons.

Companies have largely bought similar companies in the most recent deals, and Ghadar thinks they've been "justifiable." SBC is getting AT&T's global customer base, he notes. He thinks the Procter & Gamble-Gillette deal should produce significant cost savings.

But many deals do not work out as well as expected. The 2000 merger of America Online Inc. with Time Warner Inc. was heralded as a synergistic melding of old media and new but ended up as a 21st-century mess. The company reported a $99 billion loss for 2002, the biggest annual corporate loss in U.S. history, and AOL is no longer part of the corporate name.

"I have major reservations about a lot of these mega-mergers that we're looking at now," said Tony Buono, a professor of management and sociology at Bentley College in Waltham, Mass.

SBC is asking for a culture clash by taking on AT&T, said Gary J. Bierc, president and CEO of the Kingson Group in Baltimore, an enterprise risk-management consulting firm.

"One might think they're the same, but I don't think so," he said. "AT&T is an old company; there's a way they do things, and believe me, it is not nimble.

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