Stock Market Climbs With Merger Boom
Linkups help companies gain strategic edge, capital
NO wonder a lot of people on Wall Street have been smiling in recent weeks. The stock market has continued to set new highs, despite worries about a possible correction. And, in a tip of the hat to the rip-roaring "go-go" days of the mid-1980s, the mergers and acquisitions (M&A) game is red-hot.
When First Data Corporation announced last week that it would acquire First Financial Management Corporation in a transaction valued at $6.6 billion, the two corporate behemoths were merely joining a roster of dozens of other firms that have also announced high-stakes mergers or takeovers this year.
These include the $5.7 billion takeover of MCA Inc., by Seagram Company Ltd., and computer giant International Business Machines' $3.5 billion takeover of Lotus Development Corporation.
The M&A game, however, is not just being played out among Wall Street titans.
Scores of smaller firms - particularly in the high-technology area - are also entering into mergers. In the metropolitan New York area (Connecticut, New Jersey, and New York), for example, the first five months of 1995 have seen almost as many mergers among high-tech firms as in all of 1994, according to Michael Balmuth, a principal with Broadview Associates, an investment bank based in Fort Lee, N.J.
Smaller high-tech firms are merging both for strategic reasons and to gain access to new capital, Mr. Balmuth explains. In some cases, insiders in one of the two merging companies gain access to needed financing; in other cases, he says, the mergers are made to ensure enlarged distribution or marketing channels. Whatever the particular reason, the mergers tend to be "synergistic," Balmuth says. They are occurring among firms that have somewhat similar goals or some commonality of operation.
Through last Friday, more than 1,300 transactions involving mergers and acquisitions have taken place in the United States this year. These transactions are worth a total value of $168 billion, according to Securities Data Company, a financial information and securities firm based in Newark, N.J. That compares with slightly more than 1,400 transactions with a value of $112 billion for the same period last year. Many recent transactions involve a "strategic" linkage, says Richard Peterson, a spokesman for Securities Data Company.
Despite similarities, today's mergers are clearly different from those of the 1980s, says Hildegard Zagorski, a stock-market analyst with investment house Prudential Securities Inc., in New York.
In the case of the leveraged buyouts of the last decade, speculators, or corporate insiders, often sought to gain access to the intrinsic cash value of a firm - many times by selling off whole parts of the firm immediately after takeover.
Companies are joining forces today to increase market share or gain access to complementary products or operating systems, Ms. Zagorski says.
The current M&A wave is helping to propel the stock market to new highs. For example, when the First Data and First Financial hookup was announced last Tuesday, First Data's stock dipped 25 cents a share. But First Financial's share price rose $7.25 that day.
The linkup brings together two giants - and rivals - in the credit-card transaction business. First Data, which until 1992 was a subsidiary of the American Express Company, is a large processor of credit cards issued by banks. First Financial is a large processor of credit-card transactions involving merchants.
Under the proposed merger, First Data will become the new company. Despite its size, it is expected to face intense competition from other firms in the same sector.
The merger agreement, however, must be approved by shareholders as well as federal regulatory agencies before it can go through. Antitrust scrutiny is expected to be intense, since both First Data and First Financial operate large money-transfer subsidiaries.
In the case of mergers involving smaller high-tech firms, corporate executives often find it easier to achieve needed capital and new market share through linkups, rather than by seeking loans from a commercial bank or venture-capital firm, Balmuth says. Other than their innate creativity and accounts-receivable lists, many smaller companies have few tangible assets that lenders can use as collateral, he says.
Thus, high-tech officials tend to be favorably disposed to linkups, Balmuth adds, provided neither firm is put at a disadvantage in the combined firm.