Irresistible Forces Sweep World Into Merger Mania

The Sunday Times (London), August 22, 1999

Alcoa buys Reynolds for $4 billion; VNU buys Nielsen's television rating service for $2.5 billion; Food Lion buys grocer Hannaford for $3.3 billion; Lucent buys Excel Switching for $1.48 billion. Ho, hum. Just another boring day at the office.

There was a time when a one-billion dollar acquisition was news. Real news, generating feature stories and hours of punditry on the cable stations that cover business news on a 24-hour basis. No longer. And with reason. For one thing, mergers in the billion-plus dollar class are now so commonplace as to be almost unnewsworthy. For another, any threat to competition posed by most mergers can easily be ameliorated by tinkering around the edges of a deal to please competition authorities in Washington, London and Brussels. When John D. Rockefeller put together the Standard Oil Trust, the muckraking journalists were in full cry, and the trustbusters finally broke it up; when Exxon stitched its two largest components back together by buying Mobil, no one paid much attention.

John Shenefield, former head of the Justice Department's antitrust division and now a senior partner in the global law firm of Morgan, Lewis & Bockius, speaking from Frankfurt, says that the difference in attitude is due to a realization that globalization and rapid advances in technology in most industries make it easier than it once was for newcomers to challenge incumbents. So the authorities worry less about concentration resulting from a merger, so long as there are no artificial or other barriers to the successful entry of new competitors into the affected industry.

Besides, the current wave of mergers seems to be driven by two basic forces that cannot be denied by even the most intervention-minded competition authority. One is the need for some industries to shrink. It has always been the case that in dynamic economies some industries grow, whilst others contract. Firms that are in declining industries can either shut the door and walk away-the disused factory depicted in "The Full Monty" is not the only one of its sort-or merge with a rival and then trumpet a cost-cutting campaign, a dignified way of shrinking an enterprise without confessing management failure.

That's what is happening in the oil industry. British Petroleum's acquisition of Amoco, and its subsequent massive lay-offs and cost-cutting, are nothing more than a withdrawal of capacity from an industry that until recently was afflicted with declining prices, stagnant demand for its product, and a threat to its very existence from environmentalist using the threat of global warming to achieve its longer-term goal of slowing down the rate of economic growth.

But most of today's mergers are of a different sort. They are a response to the twin forces of globalization and technology. Start with globalization. Analysts at J.P. Morgan estimate that overseas purchasers plunked down a record $242 billion for US businesses in the first seven months of this year, in the process accounting for over one-quarter of all acquisitions of US firms. BP Amoco's acquisition of Arco and Vodafone's purchase of AirTouch between them accounted for $100 billion of that total.

Unites States' companies are not the only ones being wooed and won by foreigners. Foreign acquirers accounted for over 40 percent of the deals in the UK, even once-closed Germany has seen its leading companies both acquiring and being acquired as they enter world markets in a big way, and formally insular Spain saw its leading oil company, Repsol, jump into the international game, "big time," as investment bankers like to say, with a $13 billion acquisition of Argentina's YPF.

All of this international tooing and froing has increased the dependence of US companies on overseas revenues. Ford, General Electric, Citigroup and Philip Morris now get more than 30% of their revenues from overseas sales, and Hewlett-Packard over 50% (and 77% of its net profit), according to a tabulation by Forbes magazine.

Then there is technology, perhaps even a bigger driver of mergers than the increasing irrelevance of national borders. London-based Broadview Associates recently reported that information-technology, media, and telecommunications companies consummated 2,900 deals with an aggregate value of $545 billion in the first six months of this year, above the $488 billion concluded in all of 1998.

It is, of course, difficult to tell just what these figures mean, as companies that have never turned a profit, but benefit from high-flying share prices, snap up other companies that have never turned a profit, at prices that convert start-up entrepreneurs into instant paper millionaires. Companies that must amass huge customer bases for their Web sites "just can't do it fast enough through organic growth," Paul Deninger, Broadview's chief executive, told The Wall Street Journal. So a company such as Healtheon, which went public only six months ago, has since acquired three companies, including a $7.7 billion takeover of WebMD.

And companies must have the latest technology if they are to survive. Since American firms are far ahead of their rivals in other countries, they are likely to remain the targets of choice for overseas companies that are playing catch-up. That's why France's Alcatel has bought three US companies specializing in high-speed data transmission, Britain's General Electric paid $4 billion for Fore Systems, a broad-band company, and Germany's Siemens AG has been picking up high-tech US companies.

These mergers are simply another step in the restructuring of the world's companies. The move to spin off subsidiaries that detract from concentration on so-called "core businesses" is now more or less completed, although there is some mopping up to do: DuPont has yet to complete the sale of its oil interests, and Hewlett-Packard to dispose of its test and measurement-equipment business. And mergers in the energy, banking, health care and transport sectors seem to have run their course. What is left for investment bankers to do is to expand the global reach of companies that are no longer satisfied with the opportunities in their home markets, and to consolidate the .com sector of the international economy. They are busily at work doing just that.