Counting Transactions In the Trillions Dealmakers Take Aim at the M&A Record Of $1.3 Trillion Set in Up-Tempo 1998

The mergers, acquisitions, and divestitures juggernaut shattered all statistical records in 1998, and dealmakers showed no signs of slowing their blistering pace in the final year of the 20th Century. For the first time in history, the confirmed dollar value of completed transactions cracked the $1 trillion level reaching a staggering $1.32 trillion, or 72.1% greater than the previous record of $768.9 billion in 1997. The number of consummated deals reached 9,149, up 12.2% from the prior high of 8,156 a year earlier. The unprecedented dollar volume was manufactured by a combination of heavy across-the-board action that brought the number of deals big, small, and in the middle to within sight of the 10,000 mark and an exceptional log of megadeals. There were 185 completed transactions priced at $1 billion or more during 1998. Their aggregate value was $919.1 billion, or a 70% share of the total confirmed dollar value. The eight highest-priced deals of all time involving American companies were logged in 1998, reaching levels rarely envisioned by traditional deal prognosticators. The new champion is the formation of Citigroup, through the merger of giant insurer and investment banker Travelers Group and banking behemoth Citicorp, which carried a price tag of $72.6 billion. Others in the m&a murderer’s row were NationsBank Corp.’s merger with BankAmerica Corp., $61.6 billion; British Petroleum PLC’s acquisition of Amoco Corp., $48.2 billion; WorldCom Inc.’s long-delayed wrap-up of its acquisition of MCI Communications Corp., $41.9 billion; the cross-border automotive pairing of Germany’s Daimler-Benz AG and Chrysler Corp. of the U.S., $40.5 billion; Norwest Corp.’s acquisition of Wells Fargo & Co. in banking, $34.4 billion; BANC ONE Corp.’s merger with First Chicago NBD, $29.6 billion; and Berkshire Hathaway Inc.’s absorption of insurer General Re Corp., $22.3 billion. Unquestionably a tough act to follow. But not unthinkable, considering that m&a is the late 20th Century’s preferred flavor for spicing strategic and corporate development plans aimed at value-creating growth. The m&a solution offers a fast-lane for an operating business to obtain the resources it needs products, technology, talent, market share, scale, overseas outposts, greater competitiveness, etc. at a time when companies must execute a quick-tempo response to the key strategic drivers that have been relentlessly pounding and reshaping product and service markets and are projected to keep going and going well into the 21st Century. The deal and dollar numbers are useful mostly in clocking the total results of the myriad strategic forces that are impounded in the m&a market. The big stats signal not only that there are lots of deals but also plenty of reasons to do them. But even if the 1999 statistics don’t match or beat last year’s awesome marks, the coming year still should shape up as one of the best in m&a history because, absent any sudden and pronounced depressants that might develop, there are solid rationales for continuing to acquire. Indeed, 1999 already has a superb head start. A spate of major deals unveiled in December and still pending at the start of the new year was followed by the brisk pace of headline announcements in January, leaving an impressive backlog to be worked off. Deal proposals already include a prospective new pricing champion $76 billion if Exxon Co. completes its acquisition of oil industry rival Mobil Corp. Vodafone Group PLC of the U.K. won a bidding contest with a $58 billion offer to acquire Air Touch Communications Inc. and spread its cellular phone services to international dimensions. And Lucent Technologies Inc. moved to extend its communications and information systems technology by agreeing to acquire computer-network equipment player Ascend Communications Inc. for $19 billion. These come atop a group of jumbo telecom deals announced earlier in 1998 and still awaiting the regulatory green light. They include the move by former “Baby Bell” Bell Atlantic Corp. to acquire GTE Corp. in a telephone industry consolidation; SBC Communications Inc.’s $56 acquisition of Ameritech Corp. in a marriage of former “Baby Bells” still centered on regional telephone service; and AT&T Corp.’s unique plan to absorb cable TV leader Tele-Communications Inc. for $48.3 million and reformat its capitalization into a series of tracking stocks. Interestingly, the huge deals awaiting completion exemplify several of the strategic forces impelling mergers. Exxon and Mobil are seeking to combine during a prolonged era of flat pricing and gasoline demand so that they can reduce costs, increase market share in a fragmented industry, and add marketing clout on a worldwide basis. Their merger would follow the BP acquisition of Amoco which created a firm with giant stakes in both the U.S. and abroad. In tandem, oilfield services and equipment firms, impacted by the same trends, have been heavily involved in mergers to create companies that offer a diversity of products and services to production and exploration customers and the resources to weather current problems. Vodafone’s willingness to foot a huge bill for buying Air Touch reflects such trends as the globalization of communications, continual advances in technology, and the high costs of developing wireless and online service networks. The SBC-Ameritech and Bell Atlantic-GTE deals represent consolidation to manage relatively slow growth in standard telephone service and reach the scale required to invest in new forms of communications. AT&T sees Tele-Communications as a channel for distributing large amounts of information through cable television systems. Lucent is acquiring Ascend to meet demands of corporate customers for complete computer network solutions as their operations expand globally. In those and thousands of other cases, regardless of price level, the buyers have bet that high-stakes acquisitions are more efficient in responding to strategic pressures than slower-development formats such as internal development and joint ventures. Hardly an industry is immune from the powerful forces of change and virtually each has been a hotbed of mergers, acquisitions, and divestitures. Hosts of industries are consolidating often in response to customer demands. Banks are moving to gain size, cut costs, and finance technologies as they rev up the engines of big companies that can operate internationally. Auto parts makers are joining forces to cement positions with car makers and capital equipment producers that are narrowing their lists of vendors. Hardware, consumer products, and stationery firms are merging so that they can have the prowess to supply “Big Box” retailers with large quantities of quality products at low prices. Retailers such as supermarkets, department stores, and drug store chains are uniting for scale, share, and geographic stretch as the extremely low rate of inflation checks price increases amid bitter competition. Pharmaceuticals firms are seeking mergers to become bigger, pool talents and meet requirements for more disease-fighting drugs at reasonable costs while their health care cousins in medical and surgical equipment are growing via m&a to be in a better position to serve a customer base shrinking because of the consolidation of the hospital industry. Although its transactions seldom make the big leagues, business services was the most active dealmaking category in 1998 by and large traceable to consolidations sparked by customer demands. As customers get bigger, they want service from larger, more technically adept companies, including the ability to outsource internal functions beyond the fringes of their core competencies. Environmental services firms are merging because customers want them to have the capability to handle all types of pollution problems. Software developers are expanding to offer customers more complete information systems packages. Distributors of all types are combining to gain mass in their thin-margin business and take on additional service functions. Billing services firms are looking for the size and efficiency to take on bigger assignments from their growing customers. The ceaseless advance of information and other forms of technology throws off scores of deals in an arena once dominated by internal development. Acquisitions gained prominence because product life cycles have become shorter than development periods and development costs have risen in line with the technological leaps forward. The old-fashioned way doesn’t cut it any more. New technological segments continue to join the m&a mix the latest example being Internet firms, highlighted by At Home Corp.’s plan to shell out $7.5 billion to acquire Excite Inc. and Yahoo! Inc.’s deal with GeoCities Inc. Globalization continues on the march. The Daimler-Chrysler hook-up, the largest cross-border deal to date, exemplifies the globalizing of the auto industry and suggests not only follow-up deals among competing assemblers but still more activity, on an international basis, among auto components makers that want to follow their customers geographically. And one less automaker on the world scene was projected for 1999 after Ford Motor Co. agreed to pay $6.5 billion for the auto division of AB Volvo. Restructuring remains a big contributor to m&a through divestiture. Industries such as chemicals and insurance are consolidating and restructuring at the same time. And some of the megadeals now being done could throw off dispositions of non-core assets in the future. Yet, there are factors that could brake the m&a boom often without warning. If the U.S. economy wanes, that might cool corporate passions for acquisitions. The stock market has suffered a series of stutters since rebounding from last summer’s plunge and a truly bearish market could put a kibosh on stock deals. Capital availability always is subject to change. While pushing tougher enforcement, federal antitrust regulators actually have killed few deals to date, but the casualty list could grow as transaction sizes get bigger. The Financial Accounting Standards Board (FASB) is considering elimination of pooling-of-interest accounting and changes in purchase accounting while the Securities and Exchange Commission (SEC) is looking to tighten corporate financial reporting, including practices related to m&a and restructuring. The increasing incidence of giant deals is an interesting phenomenon to measure in gauging future m&a trends. Clearly emerging from the slate of highest-priced completions in 1998 was that in many cases big begets bigger. Take the three bank deals that achieved stardom. Each of the partners — NationsBank and BankAmerica, Norwest and Wells Fargo, and BANC ONE and First Chicago had themselves been aggressive acquirers and sparkplugs of consolidation. Yet, they still hadn’t reached the size they determined was optimal. The Mobil-Exxon plan atop the BP-Amoco deal suggests that the oil and gas industry is undergoing a similar realignment, and there have been rumbles in other industries. A key question on the future of m&a is “How big is big?”