Barreling Toward A $1 Trillion Year: M&A Completions Scored a Value Record Of $357.9 Billion in the Third Quarter

While the stock market swooned, capital markets were in flux, and new dealmaking stuttered in the third quarter of 1998, the mergers and acquisitions market scored the largest dollar volume of completed transactions in history. Based on prices revealed in only 976 deals – out of 2,323 completions — confirmed dollar value reached $357.9 billion in the July-to-September leg. The first verified $300 billion quarter in history brought dollar value for the first nine months ahead of the total for all of 1997 and put the m&a market well on the way toward notching its first confirmed trillion-dollar year of done deals. Third-quarter dollar value shattered the high point of $261.3 billion which, set in the second quarter of 1998, didn’t last long. The record values were swollen in part by accidents of timing, including the completion of two massive deals that had been in the works for a while and alone accounted for more than $100 billion in combined volume. There were the NationsBank Corp.-BankAmerica Corp. merger valued at $61.6 billion and WorldCom Inc.’s acquisition of MCI Communications Corp., a deal characterized by fluctuating values since it was announced last year but wound up with a price tag of $41.9 billion. There were two other 11-figure completions — USA Waste Services Inc.’s purchase of Waste Management Inc., $13.1 billion, and AT&T Corp.’s acquisition of Teleport Communications Group for $11.2 billion. Every other transaction in the quarter’s Top 25 Deals was in the megadeal class, with $2.3 billion as the cutoff point. The stock market decline did claim some casualties — Tellabs and Ciena, Venator and Sports Authority — that were linked directly to stock-price nosedives (see page 12). And the $35 billion American Home Products-Monsanto deal came apart, presumably for problems other than the stock market. But even while the m&a market limped along for a few weeks in August and September, the pace of announcements and completions continued to reflect enduring strength. The suggestion was that for many acquirers and divestors, the strategic imperative to set their companies’ compasses for the 21st Century overrode temporary volatility in the capital markets and global economies. Dollar value of completed mergers, acquisitions, and divestitures in the third quarter zoomed 69.2% from the same period in 1997 while completed transactions were up 11.7% The totals reflected lasting strength in the m&a marketplace bulked up by strategic imperatives. This momentum was further affirmed by the data for the first nine months of 1998. Powered principally by the eye-popping third quarter, aggregate value of completed deals for which prices were announced — less than half of the total — reached $840 billion, a whopping 55% above the $541.8 billion level for the January-to-September span of 1997. The number of completions climbed to 6,791 for the first nine-months of 1998 from 5,807 a year earlier, scoring a pickup of 16.9% However, the m&a market actually set a new one-year dollar-value record every time it logged a deal completion in the fourth quarter. That is because the total nine-month volume of $840 billion already was well ahead of the $791.3 billion originally reported for all of 1997, although the latter figure probably will be revised upward when new information on completed deals ultimately is factored into the figures. As a result, the known dollar value figure was within hailing distance of the trillion-dollar mark for all of 1998. That is another first-time achievement that attests to the strategically driven strength and resiliency in the m&a market. Despite the topsy-turvy conditions of the late summer of 1998, dealmakers were hardly idle. Few deals of consequence were announced while the stock market seemed to be in a free fall and gloomy news from abroad — i.e., Russia, Asia, Latin America — appeared to proliferate. But the lull was short-lived and major transactions resurfaced by mid-September. There were 3,065 mergers, acquisitions, and divestitures with prices of at least $5 million each announced in the third quarter — a total that matched the disclosures of the second quarter. If the difficult environment did not brake dealmaking entirely, it apparently prompted buyers to proceed with more caution and shoot for smaller deals. The dollar value of announced deals — based on prices revealed in a little more than one-third of the transactions — came to $367.7 billion. That was down sharply from the awesome $684.8 billion level of the second quarter. But it was still the second-highest quarterly dollar figure for announced deals, exceeded only by the second quarter. By the start of the fourth quarter in early and mid-October, megadeal disclosures were in a significant upturn — paced largely by transactions in industries marked by intense m&a activity and consolidations. McKesson Corp., thwarted by a Federal Trade Commission challenge to expand through acquisition in its core health care products distribution business, moved to beef up its service offerings by agreeing to acquire HBO & Co., leading provider of health care information systems, for $14.8 billion. Consolidation in the bitterly competitive supermarket industry took another giant stride when Kroger Co., concentrated in the Midwest and South, expanded to the West Coast with a $12.8 billion agreement to buy Fred Meyer Inc. In other deals of note, Newell Co. agreed to acquire Rubbermaid Inc. and its stable of branded consumer and office plastics for $5.8 billion; Clear Channel Communications Inc. stepped up the consolidation pace in radio broadcasting with a deal to absorb Jacor Communications Inc. for $4.6 billion; and health care supplies distributor Cardinal Health Inc. strengthened its institutional channels with plans to acquire hospital supplies wholesaler Allegiance Corp. A somewhat unusual pricing development emerged in the tug-of-war between the soft stock market and basically firm m&a market. Purchase price premiums over stock prices for m&a targets actually declined in the third quarter. For example, on a 12-month moving average basis ended with the third quarter of 1998, premiums over target stock prices four weeks prior to deal announcements were 31.5%, and 23.1% one day before the wraps were taken off the deal. These levels compared with 36.7% at four weeks before announcement and 25.6% one day before disclosure that were logged for the 12 months ended June 30, 1998. Surprising in those results is that over the last decade premiums over stock prices have risen during declines in the stock market and contracted when equities turn bullish. Obviously, the inverse correlation did not show up in the third quarter. That could have been a function of more cautious dealmaking which included a preference for targets that could be purchased for less than out-sized premiums or a temporary flame-out of intense competition in the m&a market. However, dealmakers have exercised enormous pricing restraint throughout the m&a boom of the middle and late 1990s for fear that they will be stuck with the overpriced failures that littered the 1980s landscape. Indeed, the showing on premiums over stock prices is a reminder that m&a pricing typically turns on a multiple of some internal measure of performance — e.g., EBIT-DA, cash flow, etc. — and that stock price premiums are derivatives of these calculations and applicable only to publicly traded targets. Despite all of the buzz about megabuck stock-for-stock transactions in recent years, cash continued to be the dominant currency in sealing m&a deals. Many cash-rich acquirers are in position to do deals if their strategic imperatives flash acquisition green lights. Corporate divestitures, which only a few years comprised about half of total deals, continued to slide in the third quarter as a proportion of all transactions. Sell-offs accounted for 27% of deals during the July-September period — 627 of 2,323 transactions — the lowest percentage in memory. The evidence suggests that corporate restructuring has not crested despite the hectic sell-off, spin-off, and equity carve-out ventures of the last five years. Companies continue to reconfigure as marketplace and economic trends evolve and sell-offs figure heavily in their plans. Today’s strong business may be tomorrow’s divestiture candidate or a coveted acquisition by another potential owner. Mergers and Acquisitions Activity by Number of Transactions and Dollar Value* 3rd Q 1998 2nd Q 1998 No. of Value No. of Value All Activity Deals ($ bil) Deals ($ bil) U.S. acq. U.S. 1,791 $287.1 1,773 $207.0 Non-U.S. acq. U.S. 215 44.0 208 22.1 U.S. acq. Non-U.S. 317 26.8 350 32.2 Total 2,323 357.9 2,331 261.3 No. With Price 976 1,067 979 1,081 Divestitures Only* 627 59.6 635 69.1 No. With Price 301 334 LBOs Only* 14 0.2 21 3.9 No. With Price 6 13 cont’d 1st Q 1998 4thQ 1997 No. of Value No. of Value Deals ($ bil) Deals ($ bil) 1,659 $175.2 1,778 $175.1 170 20.2 208 25.8 308 25.4 299 24.0 2,137 220.8 2,285 224.9 979 1,081 588 79.6 714 73.5 338 414 18 1.7 26 3.7 9 11*Divestitures and LBOs are included in All Activity data.<\TBL> Most Active Divesting Industries by Dollar Value 3rd Q 1998 ValueIndustry* ($ bil)**Real Estate; Mortgage Bankers & Brokers $8.1Nondurable Goods Wholesaling 4.6Food 4.4Business Services 3.4Insurance 3.3Radio & TV Stations 3.2Drugs 2.8Electric, Gas & Water Utilities 2.5Metal & Metal Products 2.5Health Services 2.3*Industries are determined by target companies.**Data are based on 30.1 transactions that disclosed purchase price.<\TBL> Most Active Divesting Industries by Number of Deals 3rd Q 1998 No. ofIndustry* DealsBusiness Services 51Real Estate; Mortgage Bankers & Brokers 46Radio & TV Stations 35Oil & Gas 27Electronic & Electrical Equipment 26Health Services 26Hotels & Casinos 25Printing & Publishing 22Food 21Measuring, Medical & Photographic Equipment 20*Industries are determined by target companies.<\TBL> Divestiture Share of M&A Activity 4th Q 1997 to 3rd Q 1998 % of % ofQuarter Total No. Total Value3Q98 26.9% 16.6%2Q98 27.2 26.41Q98 27.5 36.04Q97 31.2 32.7<\TBL> Number and Dollar Value Of Announced Deals4th Q 1997 to 3rd Q 1998 No. of No. With Value Deals Price ($ bil)3Q98 3,065 1,143 $367.72Q98 3,065 1,297 684.81Q98 2,738 1,230 281.34Q97 3,067 1,325 310.0<\TBL> Sales Volumes of Target Companies 3rd Q 1998Sales No. ofVolume ($ mil) Cos.*$1.0-5.0 28$5.1-10.0 24$10.1-15.0 17$15.1-25.0 25$25.1-35.0 15$35.1-50.0 19$50.1-75.0 36$75.1-100.0 20$100.1-500.0 64$500.1 and over 47*Data are based on 298 transactions that disclosed sales volumes of target companies, divisions, and units. Acquisitions of partial interest are excluded. Of the 298 transactions, 295 had targets with sales volumes of $1 million or more.<\TBL> Sales Volumes of Target Companies4th Q 1997 to 3rd Q 1998Sales No. ofVolume ($ mil) Cos.*$1.0-5.0 112$5.1-10.0 110$10.1-15.0 78$15.1-25.0 127$25.1-35.0 91$35.1-50.0 99$50.1-75.0 115$75.1-100.0 77$100.1-500.0 322$500.1 and over 185*Data are based on 1,336 transactions that disclosed sales volumes of target companies, divisions, and units. Acquisitions of partial interest are excluded. Of the 1,336 transactions, 1,316 had targets with sales volumes of $1 million or more.<\TBL> Most Active Industries By Dollar Value 3rd Q 1998 Value Industry* ($ bil)**Commercial Banks $71.5Telecommunications 64.6Sanitary Services 20.1Real Estate; Mortgage Bankers & Brokers 14.7Machinery 14.6Investment & Commodity Firms 12.3Oil & Gas 12.0Business Services 11.0Computer & Office Equipment 10.6Health Services 9.1*Industries are determined by target companies.**Data are based on 976 transactions that disclosed purchase price.<\TBL> Most Active Industries By Number of Deals 3rd Q 1998 No. ofIndustry* DealsBusiness Services 363Real Estate; Mortgage Bankers & Brokers 179Prepackaged Software 95Durable Goods Wholesaling 92Measuring, Medical & Photographic Equipment 71Health Services 70Investment & Commodity Firms 70Insurance 66Electronic & Electrical Equipment 65Commercial Banks 63*Industries are determined by target companies.<\TBL> Most Active Industries By Dollar Value4th Q 1997 to 3rd Q 1998 ValueIndustry* ($ bil)**Commercial Banks $135.4Telecommunications 95.6Investment & Commodity Firms 61.0Electric, Gas & Water Utilities 58.0Oil & Gas 55.2Real Estate; Mortgage Bankers & Brokers 51.5Hotels & Casinos 48.8Business Services 46.4Machinery 30.2Measuring, Medical & Photographic Equipment 30.1*Industries are determined by target companies.**Data are based on 4,103 transactions that disclosed purchase price.<\TBL> Most Active Industries By Number of Deals4th Q 1997 to 3rd Q 1998 No. of Industry* DealsBusiness Services 1,338Real Estate; Mortgage Bankers & Brokers 733Prepackaged Software 386Durable Goods Wholesaling 349Health Services 323Investment & Commodity Firms 271Commercial Banks 266Printing & Publishing 259Oil & Gas 259Metal & Metal Products 252*Industries are determined by target companies.<\TBL> Mode of Payment4th Q 1997 to 3rd Q 1998Quarter Cash Stock Combination*3Q98 552 240 1762Q98 604 291 1791Q98 567 225 1594Q97 606 267 154*Includes mixtures of cash and securities and any other mode of payment except for straight cash or straight stock.<\TBL> Purchase Price Breakdown 3rd Q 1998Price No. of($ mil) Deals*$5.0-10.0 146$10.1-15.0 109$15.1-25.0 122$25.1-50.0 145$50.1-99.9 142$100.0 and over 312*Data are based on 976 transactions that disclosed purchase price.<\TBL> Purchase Price Breakdown4th Q 1997 to 3rd Q 1998Price No. of($ mil) Deals*$5.0-10.0 634$10.1-15.0 417$15.1-25.0 546$25.1-50.0 645$50.1-99.9 586$100.0 and over 1,274*Data are based on 4,103 transactions that disclosed purchase price.<\TBL> Industries Most Frequently Acquired in by Foreign Companies4th Q 1997 to 3rd Q 1998 No. of Value Industry Deals ($ bil)Business Services 86 $7.9Real Estate; Mortgage Bankers & Brokers 62 6.3Prepackaged Software 44 2.3Electronic & Electrical Equipment 36 1.4Investment & Commodity Firms 32 7.4Metal & Metal Products 30 2.3Machinery 30 5.8Durable Goods Wholesaling 30 1.2Insurance 29 6.9Printing & Publishing 27 5.8<\TBL> Countries Most Active in U.S. Acquisitions4th Q 1997 to 3rd Q 1998 No. of ValueCountry Deals ($ bil)*Canada 241 $27.9United Kingdom 148 21.5Netherlands 50 15.7France 47 18.1Germany 43 4.0Switzerland 26 3.7Ireland 22 1.7Japan 21 0.8Sweden 17 4.9Australia 15 3.1*U.S. dollars<\TBL>