A Throttle on Open In the M&A Market Records Topple but Aggressive Buyers Gear for Another Dealmaking Onslaught

In 1997, there were 355 completed mergers, acquisitions, and divestitures in computer software, 204 in medical, measuring, and photographic equipment, 192 in electronic and electrical equipment, 95 in computers and office equipment, 81 in communications equipment, and 30 in aerospace and aircraft. Transactions in these sectors totaled 957 and the targets commanded an aggregate price tag of $85.2 billion, just for the deals in which values were disclosed. Add the telecommunications industry which posted 146 deals worth $68 billion. Combine all these sectors and you have a reasonable approximation of the technology tier within American industry. A decade ago, it was a haven for the “not invented here” (NIH) syndrome, and barely represented in m&a statistics. Buying products and technologies compromised brainpower and skills that could be devoted to generating a technology company’s needs from its own laboratories and commercial development teams. Times have certainly changed and technology’s attitude toward m&a has shifted with it. In 1997, this loosely defined technology bloc accounted for 1,103 deals, or 14.1% of all m&a completions, and garnered an even wider share of the known dollar value with collective prices of $153.2 billion, or a 19.4% chunk of confirmed volume. Driving the data is the realization that in the environment of the 1990s the pride epitomized by the NIH syndrome goeth before disaster. The quick acquire when they must; the dead stand pat. As the world approaches the millennium of the 21st Century, technological breakthroughs are materializing at such a breakneck pace that product life cycles often are shorter than r&d cycles. Corporations dependent on information systems and other technological applications are not only getting bigger and expanding globally but demanding full packages of products and services to drive their operations. Investment in new technologies and product commercializations is constantly increasing and becoming harder for smaller concerns to hack. And hundreds of upstarts are constantly being formed to snipe at the established technologies offered by the veteran players. Two telecom deals linking Baby Bells topped the dealmaking rolls in 1997. Bell Atlantic Corp. acquired NYNEX Corp. to form an Eastern-Seaboard telephone giant at a cost of $21.3 billion, while SBC Communications Inc. and Pacific Telesis Group Inc. merged in a $16.5 billion transaction to create a colossus ranging across the American Southwest and Pacific Coast. Third place went to Boeing Co.’s $13.4 billion acquisition of McDonnell Douglas Corp. which consolidated the American airplane manufacturing industry in one swoop. In addition, Raytheon Co. obtained the Hughes Aircraft Co. affiliate of General Motors Corp. at a cost of $9.5 billion in still another major consolidation move in the aerospace and defense sector. Network Packaging There were more technology combinations of megadeal proportions, including two transactions in which companies joined forces to develop full-line suppliers of computer network products and systems (called “solutions” in the trade) to rival market-leader Cisco Systems Inc. 3Com Corp. acquired U.S. Robotics Corp. for a cool $6.5 billion while Ascend Communications Inc. snapped up Cascade Communications Inc. for $3.5 billion. Compaq Corp. extended its awesome position in personal computers with the $2.8 billion purchase of Tandem Computers Inc. Active in the m&a market since being cut loose from AT&T Corp., Lucent Technologies Inc. absorbed Octel Communications Corp. for $1.8 billion and Livingston Enterprises Inc. for $650 million. McAfee Associates Inc. forked over more than $1.1 billion to take over Network General Inc., and develop a wide range of computer network services. Even mighty Microsoft Corp. nailed down nine acquisitions in 1997 mostly of modest size, but still significant steps to fill product line and technology gaps while IBM Corp. added six properties. Continuous Beat And they continued to hunt for compatible businesses in the 1998 m&a market. Compaq moved to become a full systems organization by agreeing to buy beleaguered Digital Equipment Corp. for more than $9 billion. Intel Corp., the virtually unchallenged power in microprocessors for PCs and a rare buyer, snapped up Chips & Technologies Inc. to gain a major stake in laptops and other smaller computing and calculating devices. AT&T is seeking to create a seamless long- distance local telephone network by agreeing to buy Teleport Communications Group Inc. for $11.3 billion, while SBC is planning to follow up its 1997 coup by hurdling over competitors to acquire Southern New England Telecommunications Corp. as its East Coast arm. Yet, all are dwarfed by the pending WorldCom Inc. acquisition of MCI Communications Corp., with its record $37 billion price tag. If the technology sector has come in from the cold to become one of most high-profile dealmaking areas, it represents only one tier of the m&a market. In its fullest dimensions, the market embraces transactions of every style and format, including thousands of consolidating deals in industries ranging from the relatively glamorous, high-priced sectors such as commercial and investment banking, insurance, media, and retailing to the lower-profile areas such as smokestack trades and the rather mundane fields characterized by extensive fragmentation. All had their prize-winners in 1997. Two of the largest investment banking deals of all time were executed last year. The $10.6 billion merger of Dean Witter Discover & Co. with Morgan Stanley Group Inc. is a unique marriage of a retail securities house with one of the foremost corporate-oriented investment houses. And Travelers Group Inc. spent nearly $9 billion to acquire Salomon Inc. on behalf of its Smith Barney Inc. subsidiary, and create still another investment banking powerhouse. Given the freedom to branch into investment banking by a Federal Reserve Board ruling, major commercial banks busily snapped up regional houses Alex Brown Inc. was acquired by Bankers Trust New York Corp., Robertson Stephens & Co. by BankAmerica Corp., Wheat First Butcher & Singer Inc. by First Union Corp., Montgomery Securities by NationsBank Corp., and Oppenheimer & Co. by Canadian Imperial Bank of Commerce. Quest for Consolidation The deacade-long consolidation juggernaut actually picked up steam in commercial banking, with nearly $42 billion worth of transactions led by such interregional combinations NationsBank Corp. and Boatmen’s Bancshares Inc. at $9.7 billion and First Bank System Inc. and U.S. Bancorp at $8.9 billion. There’s more where that came from in 1998. First Union is buying Philadelphia-based CoreStates Financial Corp. in a $16 billion transaction that will become the highest-priced banking transaction in history and National City Corp. has hammered out an agreement to absorb First of America Bank Corp. for $6.8 billion. In still another crossover, investment banker Dain Bosworth Inc. is being taken over by U.S. Bancorp, the new postmerger identity of First Bank System. On the bigger-deal side, there also have been scores of highly visible consolidation moves in insurance, utilities, pipelines, paper, oil and gas, retailing, radio and TV broadcasting, car rentals, apparel, and, of course, the multiple sectors of the health care industry e.g., hospitals, pharmaceuticals, and medical equipment. But the numerical dominance rests in the thousands of smaller transactions pacing the consolidation move in a seemingly unlimited number of disparate markets that share the common characteristic of fragmentation. A sampling would include office supplies distribution; office equipment repair; document storage and services; heating, ventilation, and air conditioning services; travel services; funeral homes; automobile dealerships; employment agencies; bill collecting; community newspapers; oilfield services; equipment rental; industrial gases; and outdoor advertising. Some added starters in 1997 included floral products distribution, limousine service, and delivery services where hard-driving acquisition-minded platform companies are trying to morph themselves into giant organizations with both market share and market power. Record Performance With rivers and rivulets streaming into the deal flow from all sides, the m&a market put up record numbers in 1997. Dealmakers racked up 7,834 completions worth a minimum of $5 million each, up 10.7% from the upward-revised total of 7,077 in 1996. Dollar value, powered by a barrage of epic transactions the cutoff point for the 100 highest-priced deals was nearly $1.3 billion jumped 20.5% to a confirmed total of $791.3 billion from an upward-revised $656.5 billion. And that outsized total sprang from announced prices in only 3,449 transactions in 1997, or just 35% of all completions. If experience is replicated, the initially reported 1997 figures should expand as new information is received, suggesting that the actual number of deals in 1997 exceeds 8,000 and the confirmed dollar value is north of $800 billion. The reported market would be even larger if researchers could get their arms around the m&a netherworld where dealmaking information never sees the light of day, notably in sectors where private companies change hands in secrecy. Inevitably, the question that recurs in the wake of such a glittering performance is whether the peaks of the previous year can be matched or beaten in the year ahead. In 1998, that is an extremely tough call. But less important and easier to project than the pure numbers is the trend. It’s a safe bet that 1998 will shape up as another very strong m&a year, continuing a streak of superactive dealmaking that began in 1993 following a three-year hiccup that interrupted the dealmaking binge of the 1980s. The principal reason that the m&a should continue to proceed with gusto is that the dealmaking drivers the strategic rationale for merging and acquiring continue to hammer at business with untempered power. Quick, cost-effective, and versatile, the acquisition offers a most potent response to the impact of these forces which includes the ability to position a well-managed company against both concurrent and future fallout. Most of these forces have been at work for a while, and as long as they show no signs of letting up, they offer challenges but also extraordinary opportunities to tune value-bent through timely, finely scripted mergers and acquisitions. Technology is one of the most broad-based pile-drivers with an influence wielded far beyond just the technology companies themselves. Expensive technological investments and their importance to business operations have driven dealmaking in their customer industries, such as banking, retailing, publishing, radio and TV broadcasting, and manufacturing. Industry globalization continues briskly, with m&a remaining a preferred path to expansion beyond home markets for companies around the world. Global strategies are being pursued on many levels from the companies that must go abroad because competition in their industries is being waged globally to vendors of goods and services that must follow their primary customers to all reaches. Foreign buyers worked their way quietly back into the U.S. mainstream in 1997 with more than 20 deals priced at more than $1 billion. Conversely, American firms ratcheted up their sights abroad with an outburst of megadeals led by U.S. investments in foreign utilities. Lots of opportunities are still on the plate as a result of deregulation in telecommunications, radio and TV, transportation, utilities, and other industries, and consolidation has a long way to go in industries ranging from big-ticket banking and insurance transactions to the mom-and-pop style targets that populate the fragmented distribution and services segments. Don’t forget the industry consolidations spark-plugged by the narrowing of supplier lists by huge corporate customers., e.g., auto parts, capital goods components; the hegemony of the “big box retailer,” e.g., sporting goods, stationery, apparel, hardware, and home furnishings; the disinflation trends which prompt businesses to grow sales; the outsourcing trends that have generated a family of contract manufacturing organizations; and the huge war chests amassed by leveraged buyers that are still to be invested. Remember also that companies answering to the acquisition cues continue to restructure through divestiture, hawking often-attractive properties that keep the market’s sell-off segment humming. Downside Threats While these reasons to buy and sell businesses remain intense, there is always concern that an explosion of adversities that could chill acquisition ardor. These worries center around non-strategic elements that are dealmaking strongpoints in early 1998 but are beyond the direct control of players in the m&a market. The mid-1990s outburst of mergers and acquisitions received an additional shot in the arm from the steaming American economy, which generated the confidence and the excess cash for businesses to buy, the bullish stock market that has freed shares for use as acquisition currencies, low interest rates, plenty of lendable funds for cash deals, and the accommodative stance of loan-hungry bankers. Throw in for good measure the capital gains tax cut of last year which could induce more entrepreneurs to cash in via a lucrative sale. A very tempting menu of positives for now. But should the stock market droop, interest rates climb, capital tighten, that could spell trouble for ambitious dealmaking. A sour economy emerges as a two-edged proposition cooling big-bet ambitions among acquirers but potentially surfacing targets for sale that can’t make it through the down times. There’s a late starter here, too, with multiple implications in the form of the economic/financial crisis in Asia. Conventional wisdom is that the Far East problems would chill plans for American firms to move into those countries while stalling proposed moves by Asian companies to buy more in the U.S. But again, some promising firms overseas that are in need of a new owner could become acquisition targets. On the regulation front, the increasing vigilance of antitrust enforcers the Federal Trade Commission and the Department of Justice which claimed a few publicized scalps in 1997 worries some acquirers. In fact, only a handful of deals the Staples Inc. and Office Depot Inc. megadeal as Exhibit A were stopped by Washington, but regulatory fears, real or psychological, could stymie some acquisition initiatives. Balancing Act A consistent worry more in the purview of the dealmaker is acquisition pricing. Despite the steady upward spiral of m&a activity and the relentless graduation of deal size, buyers have managed to exercise considerable discipline and refrain from massive overpayments in the wake of intense competition for the best firms. That is demonstrated by a basic steadiness in key internal multiples as well as fairly modest levels of premiums over stock prices (fostered in part by the bull market). The constant worry is overkill that pricing will be thrust into the stratosphere by the antsiest buyers anxious to make deals at any cost. To be sure, sellers would love it. But it could knock the m&a market out of whack. A pricey market would drive large numbers of buyers to the sidelines and dry up a key competitive element.