Companies Seek Greater Efficiency Through More and More Mergers
AMIDST all the turmoil in stock and bond markets lately, another financial story has been playing itself out: Merger and takeover activity involving scores of corporations and businesses are approaching the record highs of the mid-1980s in the United States.
Mergers, partial acquisitions, or proposed takeovers have involved major corporations such as Paramount Communications Inc., Viacom Inc., Grumman Corporation, Northrop Corporation, Woolworth Corporation, Wal-Mart Stores Inc., Revco drug stores, and Continental Bank Corporation.
And more can be expected, financial experts say, resulting in infusions of cash for some troubled companies, in savings through economies of scale, and in lost jobs for workers in positions now classified as redundant.
``These new mergers are `strategic mergers' for the enhancement of a company,'' says Larry Wachtel, a vice president with Prudential Securities Inc. ``[They are] not the `mercenary mergers' that occurred back in the 1980s that were designed mainly to enhance the [financial positions] of a few corporate leaders. We are now in a competitive, highly technical global economy. Companies are going to have to find efficiencies through more and more mergers.''
During the first quarter of 1994, which ended March 31, merger and acquisition announcements ``were up 70 percent over the prior year's first-quarter period,'' says Robert Liu, an official of Securities Data Company, a financial firm based in Newark, N.J.
Mergers and acquisitions numbered 1,647 in the first quarter of 1994, at a value of $52 billion, Mr. Liu says. That is up from 1,408 transactions at a value of $30.5 billion in the first quarter of 1993.
Merger and acquisition activity has been on the upswing over the past several years. Last year, these transactions were valued at $239 billion, compared with transactions valued at $152 billion in 1992, Liu says.
Earlier this week, Grumman Corporation agreed to a $2.17 billion takeover bid by Northrop Corporation. Grumman, based in Long Island, N.Y., and Los Angeles-based Northrop, are two of the nation's largest defense contractors. The combined company will be called Northrop Grumman Corporation.
The two firms, which currently employ 47,000 workers between them, announced a number of job reductions prior to this week's agreement. But new layoffs can be expected as the firms mesh their payrolls, company officials say.
In accepting Northrop's bid, Grumman turned down a $1.9 billion takeover proposal from Martin Marietta Corporation. Martin Marietta is expected to seek out smaller acquisitions in the shrinking defense sector.In other merger actions this week, Revco D. S. Inc. agreed to buy Hook-SupeRx Inc. for $600 million, creating the nation's second-largest drugstore chain after Walgreen Co. In addition, a Malaysian-based company said it would buy a 20 percent stake in Satellite Technology Management, a communications equipment maker.
The defense, high technology, food processing, financial services, and retail sectors are all facing new merger activity. In many cases, companies are buying parts of other firms, rather than an entire company.
In March, Woolworth Corporation sold its Woolco operations in Canada to rival Wal-Mart. While the sale made sense in terms of shedding operations that were no longer as profitable, it also opened up the potential for major market-share gains by one of Woolworth's strongest competitors, experts say.
``Retailers are finding that efficiencies are greater through combining operations in a slow-growth economic environment,'' says Janet Mangano, a retail specialist with investment house Burnham Securities Inc.
``Sales growth is not coming through greater inflation or take-home pay,'' she says. ``That means [corporate earnings] will have to come through cost controls.'' But achieving such controls facilitates mergers, Ms. Mangano says. Retailers find that after a merger, they have greater bargaining clout in making purchases from wholesalers.
Looking ahead, R. H. Macy & Company may split off some of its units to outside buyers, rather than be acquired intact in a new merger, Mangano says.