The Panorama of M&A

The mergers and acquisitions deal flow was trickling along at the start of the new decade – and then the dam broke. With only 10 days gone in 2000, the news exploded that America Online Inc. was acquiring Time Warner Inc. for stock initially valued at $160 billion – the highest acquisition price on record. Just a week later, British-based pharmaceutical producers Glaxo Wellcome PLC and SmithKline Beecham PLC, which scuttled a proposed deal two years earlier, came back to the table and agreed on a $76 billion combination using Glaxo stock. In between, the pharmaceuticals business also was rocked when Warner-Lambert Co., which had worked out a merger with American Home Products Corp., agreed to negotiate with Pfizer Inc., an unsolicited bidder that had been trying to upset the combination with an offer north of $70 billion. Even in an era when the megadeal has become commonplace, these epic transactions are in a class by themselves – although the prognosis is that they soon may be rivaled by more acquisition bets of great size, complexity, and audacity. The trend underscores the pressure on survival-minded companies to hit m&a grand slams if they are to counter the accelerating swirl of technological, economic, geographic, and sociological forces pounding business operations in the 21st Century. The Glaxo Wellcome-SmithKline Beecham combination, moreover, underscores the solidification of m&a as a worldwide exercise. Whether they are responding to communications technology, opportunities in emerging markets outside of home territories, the need to compete on a global scale, or domestic industrial consolidation, companies around the world increasingly are thinking international and are executing world designs through m&a. One major breakthrough was achieved in 1999 when for the first time more deals were done abroad than in the U.S. Atop the upsurge in overseas dealmaking activity comes transactions of the magnitude of Glaxo Wellcome/SmithKline – competing in one of the most truly internationalized industries – suggesting that the log of super-sized transactions is ready to explode. Even the AOL/Time Warner tie-up has international implications because of the worldwide spread of the Internet and other media, entertainment, and communications businesses. Joining AOL, premier Internet access firm, with Time Warner’s stable of magazines, books, cable TV systems, music recordings, and TV and radio networks, represented a high-stakes response to the information revolution and its relentless advancement of cutting-edge technology. In the pharmaceuticals area, competitors are challenged by requirements that they develop viable new drugs to fight wide ranges of ailments and diseases, control large development expenses, and keep down costs to the consumer. Aside from the record-smashing price, the AOL/Time Warner combination had more angles than a decagon. For openers, it was the first big-time marriage of a new-age communications operative with a “traditional” media giant, a classic case of the minnow swallowing the whale, and the trigger of enormous controversy over its business efficacy as well as the social desirability of putting so many media outlets under one corporate roof. There was no shortage of pro and con opinions. Investors were cool, pummeling the AOL stock that was to be used as the acquisition currency. Many analysts questioned, while others applauded, the strategic rationale of the pairing – most visibly proxied by AOL’s potential for adding subscribers through Time Warner’s cable TV infrastructure and Time Warner’s ready access to an increasingly popular distribution outlet for its diverse stable of print, film, and music products. Consumer advocates decried the concentration of media in one corporation. The antitrust police were widely expected to put the huge combination through a stiff regulatory screen. Traditionalists sniffed that the deal did not demonstrate proven synergies typically demanded of a merger. And there was the inevitable concern over the threat of culture clash pitting AOL’s freewheeling style against Time Warner’s more button-down organizational approach. Is the AOL/Time Warner linkage an audacious gamble based on rickety logic? Or a bold, daring move elegantly crafted to catapult the combined firm to the leading edge of the information revolution? Only time will tell – assuming that the deal is completed, the transaction goes through without demands by antitrust regulators for massive divestitures, and the strategy is successfully implemented after closing. Regardless of the outcome, the issue for professional dealmakers is the dramatic impact of the deal on the m&a market – echoes of which should reverberate throughout the marketplace in 2000 and several years beyond. Prognosticators already are predicting more megamergers of “orthodox” media firms and Internet-related operators. Rich price, although hardly irrelevant, may be less of a barrier to doing deals across the board when the combined assets of merger partners offer rock-solid competitive advantage. And AOL/Time Warner may have epitomized an m&a trend in which sheer speed to keep up with technological and market changes is favored over traditional synergistic benchmarks such as reduced costs, expanded market share, and commonality of supply chains. Indeed, if there is one ubiquitous characteristic of current and near future deal flow it is the pressure on operating companies to execute a quick kill or be swept under by a plethora of powerful, often interrelated sea changes. Persistent technological advance and convergence in the delivery of media and communications – sparked by the rise of the Internet, faster and more versatile information systems, wireless communications, miniaturization, and a relentlessly increasing supply of new products and materials to make it all work – is one primary driver. Key aims of the AOL/Time Warner merger are to create a complex capable of weathering the volatility of the information revolution and being in position to capitalize on whatever technologies and delivery mechanisms survive the shakeout, and assembling the financial and other resources to make it all work. In that respect, AOL/Time Warner is not exactly unique. Similar rationales have undergirded a host of telecommunications and information systems mergers. In 1999 alone, completions included Baby Bells SBC Communications Inc. and Ameritech Corp., $63 billion; Vodafone Group and Air Touch Communications in wireless, $60.3 billion; AT&T Corp. with cable TV giant Tele-Communications Inc., $53.6 billion; and information systems specialist Lucent Technologies Inc. with network products maker Ascend Communications Inc., $21.3 billion. A sampling of megadeals pending at yearend included the tie-ups of MCI WorldCom Inc. and Sprint Corp.in telecommunications, $129 billion; Comcast Corp. and Lenfest Communications Inc., cable TV, $7 billion; and Whittman-Hart Inc. and USWeb/CKS in Internet services, $5.7 billion. But vast technological innovation wields a heavy influence beyond information and communications. Ceaseless scientific and technology developments impact pharmaceuticals, medical devices, genetic engineering, chemicals, electronics, automobiles, metal products, machinery, and a long menu of business services as well as such non-technology competitors as banks, insurers, securities brokerages, retailers, and distributors which are increasingly dependent on good information systems. Not surprisingly, all of these industries have been hotbeds of m&a activity under rubrics ranging from product/service market consolidation to assembling companies with the talent and power to compete in the 21st Century. The hotly contested battle for Warner-Lambert between AHP and Pfizer and the revival of a Glaxo-SmithKline merger after a two-year hiatus spotlights the importance of winning in pharmaceuticals, as well as related science-based areas like chemicals and biotechnology, where breakthroughs are coming with rapidity. The m&a response includes the $50 billion proposed merger of drug maker Pharmacia & Upjohn Inc. and biotech firm Monsanto Co., Dow Chemical Co.’s pending acquisition of Union Carbide Corp., and chemicals behemoth Du Pont Co.’s 1999 purchase of seed maker Pioneer Hi-Bred International Inc. for $7.8 billion. Taken together, these, and thousands of smaller transactions, epitomize the pressure to accelerate management of the challenges in the 21st Century. Change may be a historical constant but rarely has business had to respond as quickly as today. Buggy whips did not disappear as soon as the first automobiles hit the streets. Black-and-white TVs hung around long after color sets became dominant. Typewriters still can be bought long after they were “replaced” by the word processor and personal computer. But modern executives no longer enjoy the luxury of holding back to see how things shake out, so numerous and so strong are the forces driving decisionmaking. In that super-heated environment, timely acquisitions have become increasingly preferred components of the corporate game plan. Acquisitions can be jet engines of growth and development, especially when compared with the often-anachronistically slower pace of building a business in-house from the ground up. Thanks to the formation of a mergers and acquisitions market, there is an accessible supply of target companies offering the wide range of attributes coveted by the survival-minded companies, e.g., technological know-how, talent, breakthrough products, efficiencies, manufacturing skills, customers, market share, distribution systems, etc. In spite of escalating prices, acquisitions can, in the long run, be relatively cost-efficient because they can generate payoffs faster than alternative formats. To a great degree, the m&a market at the dawn of the 21st Century represents a synthesis of the myriad forces impacting business and the expeditious way managements are dealing with them. The fallout should include more combinations of giant competitors, escalating price thresholds for mega-transactions, increasing incidences of hostile bids and contested bids, an obsession among corporate survivors to seek first-mover advantages and beat competitors to the punch for the most desirable targets, and, perhaps, less worry about strategic niceties like pure synergies. With the heavy impact at the high end of the m&a market, combined with thousands of smaller, less publicized deals done for both traditional reasons and the need for smaller firms to meet change as swiftly as their larger brothers, a strong deal flow is in the cards for 2000, sustaining the momentum of recent times. Although intensifying and requiring ever-greater agility, the most identifiable drivers have been propelling the m&a market for several years, leading to an unprecedented tidal wave of dealmaking over the last decade. Activity actually showed an odd statistical face in 1999 – deal completions falling markedly while dollar jumped to another record level. According to the Thomson Financial Securities Data Co. Merger & Corporate Transactions Database, merger, acquisition, and divestiture completions priced at $5 million and over totaled 8,695, down nearly 14% from an upward-revised and record-setting 10,092 deals in 1998. Dollar value edged up nearly 4% to $1.39 trillion from an upward-revised $1.34 trillion. When all results are in, 1999 may look even better as the database incorporates new information to expand both numbers and dollar volume. And big numbers are virtually assured for 2000 by the backlog of megadeals that are either awaiting regulatory okay or that will be concluded in the normal course of events. The 1999 data clearly flash that if fewer deals were being executed, more transactions were taking place at the top-price tier. The average purchase price per deal climbed to $388.2 million from $306.7 million in 1998. There were 1,223 completions priced at $100 million and over, down slightly from 1998, with dollar volume mirroring the overall results by rising to $1.33 trillion from $1.25 trillion. If the 1990s ended with a slight glitch, the decade remained a storehouse of eye-popping statistics. Buyers and sellers completed at least 62,048 transactions with an incredible $5.39 trillion changing hands as cash, currency, or other modes of payment – a statistical ratification of the spiraling use of the m&a option. While the seeds have been planted for a lengthy extension of a hot m&a marketplace for this year and beyond, a host of other influential and interlinked factors must be monitored to determine how well it will flower. The scorecard of pluses and minuses includes: General Economy – A psychological throw-off of the nation’s lengthy economic expansion is the confidence by executives to commit to huge and bold acquisitions. Any signs of slowing could put transaction timetables on hold – an excruciating decision given the prognosis for no easing in strategic pressures, even in a down economy. Stratospheric Stock Market – Historically high stock prices have been major drivers of m&a because lofty multiples allow acquirers to pay for deals with an essentially cheap currency that minimizes dilution or generates accretive deals. It was AOL’s high multiple that cast it as the acquirer in the deal with Time Warner. Any sag in the market could mar the appeal of stock-based acquisitions, especially in their stronghold at the megadeal level. Elimination of Pooling-of-Interest Accounting – This is the last gasp for pooling treatment of stock swaps which allows merger survivors to escape goodwill overhangs and the depressing effects of writing them off against earnings. The Financial Accounting Standards Board (FASB), chief rulemaking body for the accounting profession, last year voted to scrap the method by the end of 2000. In the wake of the FASB pronouncement, widespread predictions erupted that the timing would create a year-and-a-half window to do a barrage of stock deals before the deadline. Statistically, there is little evidence of that action to date. In 1999, cash deals exceeded stock swaps by more than two-to-one and the number of stock-for-stock transactions actually fell to 896 in 1999 from 1,112 in 1998. Erasure of pooling does not change the tax-free nature of a stock deal, and strategic pressures to acquire may overwhelm the distaste for earnings hits. Glass-Steagall Repeal – Tearing down the nearly 70-year old wall that forced the nation’s financial services industry into a series of specialized turfdoms opened the way for a barrage of cross-sector deals. Under the law passed in late 1999, banks, insurance companies, and investment banks can operate under the same corporate banner. Citigroup stole a march on the crowd when it preempted the repeal by bringing banker Citicorp together with insurer/investment banker Travelers Group. Competitors – principally commercial banks – are expected to be out of the gate fast to stalk acquisitions. Globalization – Competition in key industries – every field from automobiles to food, machinery to pharmaceuticals, financial services to information systems – is increasingly being waged on a worldwide basis. This requires nothing less than global presence, either to compete in the primary industries, keep in step with valued customers that are spreading their wings, or tap emerging growth markets (e.g., Eastern Europe, Latin America), and m&a is an extensively used vehicle for reaching those goals. Data for 1999 underscore that m&a is no longer a predominantly American game, with deal completions outside of the U.S. – and without an American partner involved – surpassing the domestic total for the first time in history. Dealmakers rang up a total of 10,413 transactions – beating the preliminarily reported American total by about 1,700. Dollar value trailed the U.S. volume but still came within a hair of the trillion-dollar mark at $979.3 billion. The implication is that while jumbo-sized transactions are on the rise overseas – particularly in Europe, where huge deals have powered the overhaul of the financial services, telecommunications, and industrial sectors – the typical deal is lower-priced than in North America. That pattern could change. Europeans are playing catch-up ball to consolidate industries across national borders – a recipe for larger, bolder, and richer-priced m&a transactions. The expectation is that acquisition-hungry overseas firms also will be hitting the U.S. m&a market in greater numbers and with heavier bets this year to set North American links for their global networks. In 1999, nearly three out of every 10 deals done by American firms were inbound and outbound transactions, up from one in four the year before, while combined dollar values paralleled that increase in market share. Foreign acquisitions in the U.S. reached 1,034 deals valued at $246.6 billion. U.S. companies venturing abroad maintained a longstanding pattern of more, but smaller, transactions, with 1,452 deals valued at $149.8 billion. The largest inbound deals included Vodafone’s acquisition of AirTouch, the $12.6 billion purchase of utility PacifiCorp by the U.K.’s Scottish Power PLC, and Transamerica Corp.’s $10.8 billion absorption by Dutch insurer Aegon NV. TRW Inc. spearheaded the outbound parade by shelling out $6.8 billion to buy LucasVarity, followed closely by General Electric Co.’s $6.6 billion buy of Japan Leasing Corp. Volatile Markets – Product and service markets are in a continual state of flux. Today’s cutting-edge product may be tomorrow’s commodity – tracked most strikingly by the odyssey of the personal computer. Changing customer demands, cost-cutting, new merchandising techniques, economic pressures, and improved products also ceaselessly roil markets while creating m&a opportunities for buyers that want to cope and sellers that can’t keep up. The biggest deal of 1999 – Exxon Corp.’s $79 billion acquisition of its closest rival, Mobil Corp. – was a product of the long turmoil in an oil industry hammered by sagging demand and lower crude prices. Yet, it was not the first megadeal executed by oil giants to withstand the market’s rigors – following British Petroleum PLC’s acquisition of Amoco Corp. and the resulting BP Amoco’s antitrust-snagged effort to buy Atlantic Richfield Co. When traditional retailer Federated Department Stores bought catalog and Internet merchandiser Fingerhut for $1.1 billion, it was ratification of a customer shift from the store to the Internet for important purchases. Stiffer Antitrust Enforcement – A potential drag on dealmaking in 2000. The Justice Department and the Federal Trade Commission, while basically accommodating all but a fraction of major deals, have become more hard-nosed in screening m&a proposals and increasingly willing to put up their dukes in court if necessary to stop a deal deemed anticompetitive. Prominent exhibits include forcing Exxon and Mobil to sell a large packet of Northeast service stations and other assets as a price for swinging their deal and the holding up of the BP Amoco-Atlantic Richfield blending. Yet, the regulators’ stance may represent only a natural shift of focus engendered by the escalating size and complexity of deals. Consolidation – Dwindling competitor populations figure in scores of industries, with m&a pacing the shrinkage in several channels. At the top tier, consolidations are being aggressively executed in banking, oil and gas, utilities, health care, and other venerable industries. At another level, dedicated consolidators are rolling up dozens of small players a year and are attempting to forge giants in historically fragmented industries – as varied as veterinary services and electrical contacting, funeral services and office supplies distribution, bill collecting and railroad maintenance. In still another tranche, LBO sponsors are committing to buy-and-build projects that return value by forming larger players through continual acquisitions. Deregulation – If antitrust enforcement may make the m&a waters somewhat rougher, other government actions have smoothed the way for dealmaking – the Glass-Steagall repeal being the latest. Deregulation is helping power brisk deal activity in telecommunications, broadcasting, utilities, and transportation, and more is on the way. Leveraged Buyouts – LBO sponsors are flush with cash to put into equity investments and hope to use the money aggressively to do significant large acquisitions. Meanwhile, look for leveraged buyers to continue to seek creative alternative investments, such as partial investments to fund growth of operating businesses and recapitalizations. Corporate Restructuring – The beat goes on. Reconfiguration of major companies through divestitures and spin-offs was supposed to have peaked a few years ago, according to adherents of conventional wisdom. Not so, the data say. In 1999, there were 2,554 sell-offs, three out of every 10 deals, while their value, $265.7 billion, captured a nearly 20% share of all dealmaking. Many more are expected.