Corporate urge to merge will grow even more, strategists say
If you think merger mania is sweeping corporate America, just wait. Mega-mergers and multi-mega-mergers are on the way.
The current high level of business mergers in the United States, arbitrageur Ivan F. Boesky predicted in an interview here last week, will be ``dwarfed in the next five to 10 years.'' Mr. Boesky, who spells out his views in the book ``Merger Mania'' (Holt, Rinehart & Winston, New York), has profited enormously from these mergers through speculative investments. He expects an ``explosion'' in mergers and acquisitions and is angling for a big piece of the action.
Mr. Boesky's view is confirmed by other investment officials.
Brian D. Young of First Boston, a securities firm noted for helping facilitate mergers, told a Boston conference last week that ``money on the sidelines'' to fuel mergers is increasing dramatically.
More and more pensions and mutual funds are pooling money to participate in highly popular devices called leveraged buyouts (LBOs). Most banks now understand how LBOs work and are willing to back them, Mr. Young says, and many mutual funds are eager to snap up the high-yield ``junk bonds'' connected with such deals.
In 1974, says D. Scott Lindsay, a First Boston specialist who advises companies on ways to avoid hostile takeovers, the total value of mergers and acquisitions was $13 billion. This figure rose slowly in the late '70s, slowed during the 1981-82 recession, but then shot ahead. Last year it reached $122 billion.
Barring a severe recession in the next few years, here's what to expect:
LBOs will grow in popularity. In these, a buyer or group of buyers finances the purchase of a company by using the assets of that company as collateral on a loan. Once the new owners and managers are in control, they concentrate on paying down their debt. Often this requires sale of company assets (real estate, for example), paring staff, or other radical restructuring.
Mutual funds and pension funds will become more aggressive, perhaps even backing corporate raiders, since this now seems a sure way of boosting stock prices, and thus fund performance. For his part, Boesky confirms he is raising capital (estimates put his target at $1 billion) to take part in, or profit from, the merger wave.
Hostile takeovers will accelerate, using these pools of investment money available. And they'll succeed. Beatrice Companies, for example, has consented to negotiate with Kohlberg Kravis Roberts & Co. on an unsolicited LBO. Revlon has acquiesced to Pantry Pride. Sir James Goldsmith succeeded in taking over Crown Zellerbach.
Corporate defenses will continue to prove ineffective in the face of a determined raider. SCM Corporation is now trying to ward off Hanson Trust with such measures. But exclusionary devices -- such as Unocal's buy-back of stock from shareholders other than raider T. Boone Pickens -- may still work.
Probably the best corporate defense will continue to be corporate restructuring well in advance of a takeover bid. Businesses will divest themselves of divisions that are not in their main line of work, embark on stock buy-back action, and increase ratios of debt to equity -- all in an attempt to make the market value of their stock reflect the possible breakup value of the company.
``The key is to maximize and communicate your values,'' says Mr. Lindsay of First Boston.
First Boston divestiture specialist Maynard J. Toll Jr. calls corporate restructuring the ``modern business equivalent of born-again Christianity'' -- a trendy, unassailable strategy. More and more corporations, he says, feel it is ``better to be implementers of change than a victim.''
Mr. Boesky, too, endorses voluntary corporate restructuring in advance of any takeover episode that would force the issue.
``The right answer,'' he says, ``is not to feed lawyers and merger specialists. The right answer is to increase the value of a company to stockholders and owners.'' Boesky's purchase of a large interest in CBS last summer helped precipitate the network's own restructuring. (This week CBS is again in the thick of takeover rumors, and its stock price has been climbing.)
Driving all this activity is a relatively laissez faire antitrust policy in Washington, Mr. Young says. ``The Reagan administration is saying you can acquire complementary companies -- which I guess means acquire your competitors, though they don't say it that way.''
Young says the Securities and Exchange Commission, in its rulings, is ``encouraging the auction process.'' And finally there is the entrepreneurial factor: Wall Street, he says, ``believes there is value created when senior managers look at a company as the owners.''
But might an abrupt change in the economy cause highly leveraged companies -- and high-risk junk bonds -- to fail?
Perhaps, says Young. But he points out that over the past year many LBOs have been structured with long-term (five- to seven-year) maturities and holidays on principal repayment. This would help companies weather a recession or a temporary surge in inflation. Moreover, Young says, all parties to a leveraged buyout do projections based on worst-case possibilities.
For his part, Mr. Boesky contends that there is ``nothing unwholesome about leverage or debt.'' He opposes any ``artificial means that would deter the natural process'' of corporate mergers and acquisitions, and he believes Congress is not moving to stop the merger wave.