Wall Street may be in for new spate of big mergers
The billion-dollar deals are making an encore on Wall Street. The merger business, which suddenly found itself silenced by high interest rates and a tepid economy, has started to play again.
The latest example of the renewed interest in big takeovers is the attempt by the Bendix Corporation, an automotive and aerospace company, to buy Martin Marietta, a building materials and aerospace producer, for $1.5 billion. Martin Marietta has responded by offering to buy Bendix for $1.8 billion in what investment bankers are calling a ''Pac-Man'' strategy. (It's called Pac-Man after the popular video game, since one company tries to gobble up the other first.)
In recent weeks, there have been other major mergers, too. Occidental Petroleum agreed to buy Cities Service for $4.5 billion and R. J. Reynolds Industries has purchased Heublein (including Kentucky Fried Chicken franchises) for $1.3 billion.
Some securities analysts think this might be the start of another round of big takeovers. ''With the decline in interest rates, it's possible we may see a step-up in interest in takeovers,'' says Rollins Maxwell, a vice-president with E. F. Hutton, a brokerage house.
Adds Brian Saffer, first vice-president in the mergers and acquisition department at Bache Halsey Stuart Shields Inc., another brokerage, the rising stock market is also placing pressure on companies to act on their merger intentions. ''When the market price pushes closer to the deal price,'' he comments, ''it places some pressure on the company to make the offer sooner.''
The rising market, in fact, may be interpreted by some companies as an advance sign that the economy is turning around. This can prompt some merger interest. When the economy is down, Mr. Saffer says, companies lose interest in acquisitions. He adds: ''Rather than thinking 'What a terrific bargain,' companies say, 'If the economy keeps going down, we'll take a beating with this acquisition.' '' Thus, he notes many companies wait until an upturn before making acquisitions.
Despite these recent mergers, the number of billion-dollar mergers so far this year has been disappointing to merger-makers. According to Tomislava Simic, director of research at W. T. Grimm, a Chicago firm that keeps track of merger trends, in the first half of the year there were seven deals worth $500 million or more, compared with 12 in the first half of 1982.
Not only were high interest rates a factor in keeping the bidding down, Ms. Simic says, but the natural resource ''play'' had died down. Last year, oil companies still had a fairly high level of cash flow, which prompted some bidding wars for companies rich in natural resources. This culminated in the battle over Conoco, subsequently won by Du Pont at a cost of $7.6 billion.
Even though corporations were not engaged in spending billions on buying new companies, Ms. Simic points out that total mergers in the first half of 1982 came to 1,198, compared with 1,184 in the first half of 1981. Of those mergers, 101 were publicly listed companies, compared with 82 in the first half of last year and 77 in the first half of 1980.
Not everyone thinks the merger mania will catch on again this year. Marc Golovan, an economist with Manufacturers Hanover Trust Company, says corporations, with profits hurt by the long recession, ''will place more emphasis on repairing their balance sheets than financing a new spree of mergers.'' He concedes that some cash-rich corporations may be tempted to employ their funds by buying companies at distressed prices.
James A. C. Kennedy, a vice-president with T. Rowe Price, a Baltimore-based mutual fund, agrees that the heady days of 1980-81 are over.
''The oil companies had the cash flow,'' says Mr. Kennedy, ''and had to invest it.'' Now, the oil companies are trying to conserve cash, since oil prices are no longer rising.
When, or if, merger mania does return, analysts have differing views as to what industries will be the most sought after. Mr. Kennedy says he believes the mergers will occur in the basic industries, ''since the stocks are so depressed.'' He would particularly look for companies that have the ability to apply the latest technologies in their own industries.
''I like a company that's a leader in its own niche,'' he says.
Mr. Golovan believes the most interesting merger candidates are those involved in the defense business, as the ''strongest segment of the economy,'' or in the high-tech consumer electronics business. He says he would avoid raw materials companies, or those involved in housing or the auto business.
Mr. Saffer of Bache also maintains that high-technology industries or companies with new products or new markets will be the prime takeover candidates. ''The larger companies cut back on research and development during the recession,'' he explains, ''and one way to catch up is to buy the technology.''
And, unlike many other analysts, he believes there will be more mergers in the depressed oil sector. Only two years ago, he recalls, many companies were unwilling even to talk about mergers. Now, when they need the cash, he notes, ''they are willing to discuss a merger with a company that is solid and well capitalized and will get them out of trouble.'' Largest mergers in 1982 Buyer Seller Merger price 1. Occidental Cities Service $4.0 billion 2. American General NLT Corp $1.6 billion 3. Bendix Martin Marietta $1.5 billion* 4. R.J. Reynolds Heublein $1.3 billion Allied Corp. and Supron Energy $711.9 million Continental Group Corp. 6. Coca-Cola Columbia Pictures $629.7 million 7. Aetna Life & Casualty Geosource $609 million Pittsburgh National Bank Provident National Corp. $599 million** * Martin Marietta has countered by attempting acquisition of Bendix (8/30/82) ** Straight merger