Why Sellers Still Like to Take Cash: Although Big-Buck Stock Swaps Command The Spotlight, Cash Wins More Deals

Given the gigantic size of scores of deals these days and the continued high levels of the stock market, the impression outside of m&a circles is that exchanges-of-shares transactions have attained total dominance in mid-1990s dealmaking. Not so! The impression is fostered by the fact that stock swaps indeed are the principal mechanisms for executing megadeals, the highest-profile transactions that command the heftiest share of ink in the print media and air time on TV and radio. But there is a much broader market than that, and if all the numbers are rolled out, cash, if no longer the absolute king of acquisition currencies that it was in the 1980s, is far from surrendering the throne. Over the latest four quarters, ended June 30, when the acquisition currency is know, all-cash completions consistently have beaten all-stock deals by a 2-to-1 margin or better and also have been more numerous than all-stock and stock/cash packages combined. One of the problems in calculating the true currency mix is that the form of payment invariably emerges in less than half of the deals. If information was disclosed in more deals, it is possible that the cash proportion of paid transactions would be even higher than can now be confirmed. In the second quarter of 1998, for example, the number of all-cash completions totaled 520, or nearly twice as many as the 259 straight stock swaps. Another 160 deals were swung for a combination of cash and securities. Together, the three categories contained 939 transactions, or just 47.8% of the total number of deals completed in the April-May-June period of 1998. Compared with the three preceding quarters, that was a period of high disclosure. In the third quarter of 1997, currency was disclosed in only 42.6% of the transactions while the subsequent proportions were 45.6% in the final quarter of 1997 and 43.9% in the first quarter of 1998. Certainly, the tendency – or the requirement – to disclose is greatest in the very large deals. In the second quarter, for instance, all-stock transactions figured prominently in the 25 highest-priced completions, led by the First Union Corp. absorption of CoreStates Financial Corp. valued at $17.1 billion. Other stock swaps at the top of the rolls included Household International Inc. and Beneficial Corp., $8.7 billion; Conseco Inc. and Green Tree Financial Corp., $7.4 billion; the merger of Brooklyn Union Gas Co. and Long Island Lighting Co. into Keyspan Energy, $4.7 billion; Qwest Communications Corp. and LCI International Inc., $4.4 billion; and St. Paul Cos. Inc. and USF&G Corp., $3.8 billion. The Texas Utilities Co. acquisition of U.K. utility Energy Group PLC for $10.9 billion, runner-up for the second quarter, was the main cash deal to crash the top ranks. Compaq Computer Corp.’s $9.1 billion acquisition of Digital Equipment Corp., ranking third, was the largest stock/cash combination deal. In addition, more than two dozen deals priced at $1 billion or more were announced in June and July, and stock swap transactions predominated. Among the biggest proposals were AT&T Corp. and Tele-Communications Inc., $48.3 billion (including the assumption of debt); American Home Products Corp. and Monsanto Co., $35 billion; Norwest Corp. and Wells Fargo & Co., $31.4 billion; and Berkshire Hathaway Inc. and General Re Corp., $23.5 billion. Targets in all-stock deals tend to be large – and expensive – and to be publicly held companies with both great breadth of ownership and well-established trading liquidity in their shares. And if the merger partners compete in capital-intensive industries such as telecommunications, stock also tends to be the preferred currency. But the m&a market is far broader than the recognized megadeals and the other sectors – such as divestitures and closely owned targets – are more likely to be magnets for cash as opposed to stock. Cash gets the nod in many cases because it affords more liquidity than stock and allows recipients to get a better handle on opportunity cost through the ability to reinvest the money quickly. In some cases, the high stock market can be a turn-off since sellers taking shares believe they run the risk of losing value in a sharp market downturn. More specifically, companies divesting businesses generally like cash which can be redeployed to finance surviving operations while selling entrepreneurs regard cash as a way of cutting ties completely with their old businesses. A key factor that has favored stock swaps historically has been taxes. Stock is tax-free, cash is taxed at the capital gains rate. But a relatively new wrinkle on the tax front could further tilt the mix toward cash. That is the reduction in the cap gains rate to 18%, which could prompt more sellers to accept cash and its liquid advantages. Whether cash or stock is the favored medium of exchange, the overall m&a market continued moving at a strong pace in the second quarter of 1998 with the confirmed dollar value of all completed mergers, acquisitions, and divestitures setting a quarterly record at $253.1 billion. That brought the total dollar value for the first half of 1998 to $469.2 billion and put the market in position to hit the $1 trillion mark for the full year for the first time in history. The current one-year record of $791.3 billion was set in 1997. The number of completed deals, priced at $5 million and over, in the second quarter was 1,966, the first time in four quarters that the total slipped below the 2,000 mark. That brought the number of transaction completions for the first half of 1998 to 3,975. Even though the number of completed deals has slipped for two successive quarters since touching a record 2,228 in the final three months of 1997, the first-half total put the market in a position to set a one-year record for completions as well. The current one-year record on completions was 7,834 in 1997. Deal announcements continued to be very strong, paving the way for another big second half that could lead to new records. There were 2,707 announcements of proposed deals in the second quarter with their known, collective price tags reaching an astounding $735.1 billion. Those types of numbers reflect the increasing sizes of m&a transactions being tried today. Indeed, many of the most publicized megadeals of early 1998 were packed into the April-May-June span. Announcements in the first quarter totaled 2,633 with a value of $281.6 billion, with the first-half level of proposals encompassing more than 5,300 deals and more than $1 billion in combined value. Many of the first-quarter announcements were completed by the time the quarter ended but others were still pending. To a large degree, the delays reflected the lag between announcement and closing that is inherent in deals in regulated industries where governmental screening can be time-consuming. Even in non-regulated industries, some hold must be built into the timetable for doing megadeals because the once-over from antitrust authorities is virtually axiomatic. Despite the heavy activity, m&a pricing remained disciplined on balance. But an inevitable uptrend has materialized over the last year – at least on the basis of purchase price premiums over stock prices. The stock market itself has not risen much over this one-year period, so the uptick in premiums seems purely a function of m&a pricing. Based on a 12-month moving average of purchase price premiums over stock prices, the premium level started to move up with some significance in the first six months of 1998. As a result, the premiums in the second quarter were at the highest levels in years. The premium over the stock price four weeks before deal announcement reached 45.9% in the second quarter after cracking the 40% mark with a 43% average in the first quarter. The level was 38.37% in the third quarter of 1997. The average premium a week before the deal announcement was 39.61% in the second quarter – versus 31.8% in the third quarter of 1997. The average premium a day before announcement followed a similar one-year climb to 33.52% in the second quarter of 1998 from 26.32% in the third quarter of 1997. Purely domestic activity continued to dominate the m&a landscape in the second quarter. U.S. acquisitions of other American businesses accounted for 75.4% of all completions and 79.7% of the dollar value. In the cross-border segments of the m&a market, Americans also led the way in outbound deals. U.S. acquisitions abroad accounted for a sixth of all deals in the second quarter and a strong $30 billion in value, or about an eighth of the total value. Mergers and Acquisitions Activity by Number of Transactions and Dollar Value* 2st Q 1998 1st Q 1998 No. of Value No. of Value All Activity Deals ($ bil) Deals ($ bil) U.S. acq. U.S. 1,483 $201.6 1,572 $171.6 Non-U.S. acq. U.S. 177 21.5 153 19.5 U.S. acq. Non-U.S. 306 30.0 284 25.0 Total 1,966 253.1 2,009 216.1 No. With Price 943 906 Divestitures Only* 526 64.3 562 78.4 No. With Price 287 320 LBOs Only* 15 3.7 16 0.5 No. With Price 11 8 cont’d 4th Q 1997 3rd Q 1997 No. of Value No. of Value Deals ($ bil) Deals ($ bil) 1,765 $174.4 1,594 $178.4 206 25.2 174 17.8 257 24.2 277 17.8 2,228 223.8 2,045 214.0 1,069 882 703 73.3 666 43.1 409 337 23 1.8 28 0.8 9 12*Divestitures and LBOs are included in All Activity data.<\TBL> Most Active Divesting Industries by Dollar Value 2nd Q 1998 ValueIndustry* ($ bil)**Electric, Gas & Water Utilities $7.2Real Estate; Mortgage Bankers & Brokers 5.8Telecommunications 5.8Credit Institutions 5.3Printing & Publishing 5.3Stone, Clay, Glass & Concrete Products 4.3Mining 2.9Food 2.7Oil & Gas 2.4Investment & Commodity Firms 1.8*Industries are determined by target companies.**Data are based on 287 transactions that disclosed purchase price.<\TBL> Most Active Divesting Industries by Number of Deals 2nd Q 1998 No. ofIndustry* DealsReal Estate; Mortgage Bankers & Brokers 51Business Services 45Hotels & Casinos 26Oil & Gas 26Prepackaged Software 21Chemicals 18Printing & Publishing 18Insurance 18Electronic & Electrical Equipment 17Health Services 16*Industries are determined by target companies.<\TBL> Divestiture Share of M&A Activity3rd Q 1997 to 2nd Q 1998 % of % ofQuarter Total No. Total Value2Q98 26.8% 25.4%1Q98 28.0 36.34Q97 31.6 32.83Q97 32.6 20.1<\TBL> Number and Dollar Value Of Announced Deals3rd Q 1997 to 2nd Q 1998 No. of No. With Value Deals Price ($ bil)2Q98 2,707 1,202 $735.11Q98 2,633 1,174 281.64Q97 3,016 1,315 311.33Q97 2,772 1,118 220.1<\TBL> Sales Volumes of Target Companies2nd Q 1998Sales No. ofVolume ($ mil) Cos.*$1.0-5.0 6$5.1-10.0 11$10.1-15.0 19$15.1-25.0 19$25.1-35.0 20$35.1-50.0 17$50.1-75.0 15$75.1-100.0 19$100.1-500.0 68$500.1 and over 47*Data are based on 246 transactions thatdisclosed sales volumes of target companies,divisions, and units. Acquisitions of partialinterest are excluded. Of the 246 transactions,241 had targets with sales volumes of $1 millionor more.<\TBL> Sales Volumes of Target Companies3rd Q 1997 to 2nd Q 1998Sales No. ofVolume ($ mil) Cos.*$1.0-5.0 126$5.1-10.0 124$10.1-15.0 89$15.1-25.0 167$25.1-35.0 100$35.1-50.0 101$50.1-75.0 102$75.1-100.0 67$100.1-500.0 325$500.1 and over 198*Data are based on 1,426 transactionsthat disclosed sales volumes of target companies, divisions, and units. Acquisitions of partial interest areexcluded. Of the 1,426 transactions,1,399 had targets with sales volumes of $1 million or more.<\TBL> Most Active Industries By Dollar Value2nd Q 1998 Value Industry* ($ bil)**Electric, Gas & Water Utilities $29.3Commercial Banks 27.5Credit Institutions 21.5Telecommunications 14.7Business Services 14.3Real Estate; Mortgage Bankers & Brokers 13.2Investment & Commodity Firms 11.9Computer & Office Equipment 9.1Radio & TV Stations 8.8Oil & Gas 7.1*Industries are determined by target companies.**Data are based on 943 transactions that disclosed purchase price.<\TBL> Most Active Industries By Number of Deals2nd Q 1998 No. ofIndustry* DealsBusiness Services 319Real Estate; Mortgage Bankers & Brokers 176Prepackaged Software 88Metal & Metal Products 65Miscellaneous Retail 64Hotels & Casinos 62Durable Goods Wholesaling 62Investment & Commodity Firms 62Printing & Publishing 61Health Services 56*Industries are determined by target companies.<\TBL> Most Active Industries By Dollar Value3rd Q 1997 to 2nd Q 1998 ValueIndustry* ($ bil)**Commercial Banks $77.5Electric, Gas & Water Utilities 63.2Telecommunications 61.9Investment & Commodity Firms 54.3Oil & Gas 53.3Business Services 50.0Hotels & Casinos 45.4Real Estate; Mortgage Bankers & Brokers 41.3Measuring, Medical & Photographic Equipment 32.2Credit Institutions 29.0*Industries are determined by target companies.**Data are based on 3,800 transactions that disclosed purchase price.<\TBL> Most Active Industries By Number of Deals3rd Q 1997 to 2nd Q 1998 No. of Industry* DealsBusiness Services 1,164Real Estate; Mortgage Bankers & Brokers 629Health Services 362Prepackaged Software 355Durable Goods Wholesaling 352Oil & Gas 254Commercial Banks 253Investment & Commodity Firms 251Printing & Publishing 242Machinery 233*Industries are determined by target companies.<\TBL>