Mergers Rise as Recession Recedes
MERGERS and acquisitions (M&A) are suddenly in vogue again, with cash-rich firms scrambling to buy up smaller competitors.
In the past few weeks, M&A specialists have sent shock waves through Wall Street with a number of major announcements. In a transaction valued at $1.1 billion, SuperValu Stores Inc. announced that it would buy Wetterau Inc., creating the largest food-wholesale company in the United States; Entergy Corporation, a New Orleans-based power company, agreed to buy Gulf States Utilities, of Beaumont, Texas, for $2.3 billion; and, in a leveraged buyout, Aetna Life & Casualty Co. will sell its American Re-Insuran ce unit to Kohlberg Kravis Roberts & Co. in a $1.4 billion deal.
Companies reportedly mulling future mergers include Child World and Lionel, two toy retailers, and First Union Corporation and First City Bancorp of Texas, both financial companies.
"In the roaring 80's we had mergers and acquisitions all over the place," says Perrin Long Jr., a financial analyst with First of Michigan Corporation, an investment house. The recession, however, helped to quell that activity. "We'll see more and more mergers and acquisitions, as the US economy slowly turns around," Mr. Long says.
Some companies are able to finance M&A activity through large internal cash holdings built up as firms held back from capital development programs in the risky climate of the past two years.
Much of the current takeover activity is sparked by a need for corporate restructuring following recession, Long says. Firms eager to shed divisions are courting acquisition firms. One major beneficiary: the top financial advisers for M&A activity, including Goldman Sachs, Morgan Stanley, and First Boston, who gain commissions on such transactions (see chart).
Unlike the merger mania of the 1980s, today's M&A activity is low-key and cooperative. In the mid-1980s, many mergers included hostile takeovers; also, about 25 percent of the mergers of the 1980s were financed by leveraged buyouts, which involved utilizing assets of the acquired firm to finance the takeover. The end result: Many companies taken over wound up with enormous debt.
The "blockbuster year" in M&A activity was 1988, says Peter Muenzen, a merger specialist with Securities Data Company Inc., a financial services firm in Newark, N.J. In that year there were about 3,730 M&A deals with a total value of $525 billion. By 1991, while the number of deals actually rose - to 4,575 - the cumulative value of the transactions had fallen sharply to about $151 billion. More mergers and acquisitions today involve relatively small firms and somewhat modest dollar values, a pattern Mr. Muenzen expects to continue.
Merger activity for 1992 will run about the same as last year, Muenzen says. As of June 15, for example, there have been about 1,976 M&A transactions; but the value is only about $51 billion. High stock-market valuations is discouraging Blue Chip mergers.
A similar pattern is occurring with the acquisition of overseas firms by US companies. In 1989, for example, there were 454 such deals with a total value of $38 billion. By 1991 the number had risen to 556, but the total value had plummeted to about $11 billion.
"Many economists had expected a strong effort by US firms to acquire European firms to take advantage of European economic unification, beginning in 1992; but so far that effort is not occurring," Muen-zen says. Since Jan. 1 there have been 277 deals involving the takeover of overseas firms, most of them European, by US firms; but the cumulative value is only around $5 billion.
Current M&A deals can have advantages. Case-in-point: last week's announcement of the acquisition of Wetterau by SuperValu.
Both firms are expected to gain from the merger, says Clare Zempel, an analyst with the investment house Robert W. Baird Company. Before the merger, the two firms ranked second and third in the food-wholesaler industry, behind Fleming Company. With the acquisition, the combined firm will become the dominant player in terms of annual revenues.
Not surprisingly, the stocks of both firms rose after the merger announcement.