Merger
Mania
Likely to Continue
by Andrew Leckey
Big,
bigger, biggest. Giant, enormous, colossal.
With traditional benchmarks rendered
meaningless by escalating merger mania, the only recourse is
to scream the latest figures out a window with a megaphone.
Already this year there's been
the biggest deal ever, America Online's acquisition of content
provider Time Warner, followed by the biggest pharmaceutical
deal ever in Glaxo Wellcome's purchase of SmithKline Beecham.
Both came on the heels of a record 1999 of 9,192 deals with total
value of $1.4 trillion.
"Whether the AOL-Time Warner
deal is a catalyst or not, we see a lot of consolidation coming,
perhaps in the second half of the year," predicted Alexander
Cheung, portfolio manager of Monument Internet Fund, Bethesda,
MD, which gained 273 percent in 1999. "The convergence of
voice and data is coming and, whether through outright mergers
or alliances, something will have to be done."
While garnering negative reviews
from analysts who fear AOL will no longer be a robust growth
company, that deal nonetheless validates Internet companies and
the use of their company stock to buy established businesses
with significant earnings and cash flow.
"We'll see more technologyand
Internet-related mergers because there are so many new players
and the natural evolution of markets is consolidation,"
predicted Gary Finger, director of mergers and acquisitions for
the Houlihan, Lokey, Howard & Zukin investment bank, whose
Mergerstat division analyzes merger activity. "As long as
corporate buyers have cheap financing in the form of high stock
prices and inexpensive debt financing, you'll have an active
M&A market."
It's a market investors should
monitor carefully.
"Pay attention to industries
where takeovers are already taking place, going where the trend
is already in force," advised Charles LaLoggia, editor of
the "Superstock Investor: Uncovering Takeover Targets"
newsletter (800-450-0551). "Then look for companies that
are already partially owned by other companies, since many times
those outside owners decide to acquire the rest of the company."
Among rapidly consolidating industries,
he currently recommends the stock of broadcasting companies Young
Broadcasting and Granite Broadcasting "because they'll eventually
be acquired." Other consolidation plays are grocery chains
Weis Markets and Marsh Supermarkets, bakery firm Interstate Bakeries
and water utility American States Water.
History's biggest merger and acquisition
deals, according to Mergerstat (www.mergerstat.com), have all
been recent events:
- America Online's deal for Time Warner announced Jan. 10 for $165.9 billion.
- MCI WorldCom's deal for Sprint announced last October for $116 billion.
- Pfizer's bid for Warner-Lambert announced last November for $82.3 billion.
- Exxon's deal for Mobil announced in December 1998 for $81.5 billion.
- Glaxo Wellcome's deal for SmithKline Beecham announced Jan. 17 for $75.7 billion.
- SBC Communications' deal for Ameritech announced in May 1998 for $75.2 billion.
- Vodafone Group's deal for AirTouch Communications announced in January of last year for $62.7 billion
- British Petroleum's deal for Amoco in August 1998 for $56.4 billion.
- AT&T's deal for MediaOne Group last April for $55.7 billion.
- Bell Atlantic's deal for GTE in July 1998 for $52.8 billion.
(The Exxon/Mobil, SBC/Ameritech,
Vodafone/AirTouch and British Petroleum/Amoco deals have all
been completed.)
"I try not to speculate, but
I think in the next 12 to 18 months we should see quite a bit
of movement in the e-commerce area," said Cheung. "When
dealing with the Internet, if you find a good company with good
fundamentals and an addressable market, you'll do fine whether
it's taken over or it just gets bigger."
Cheung has quietly continued to
buy well-known Internet-related firms AOL, Broadvision, CMGI,
Real Networks and Sun Microsystems for his portfolio of 65 company
names, using market corrections sock in a few additional dollars.
"There is consolidation in
pharmaceuticals, telecommunications, health care, financial services
and utilities," related Finger. "Smart investors can
look at lessons learned from earlier consolidations, such as
in the banking industry, and apply it to other industries."
For example, banks had economies
of scale that improved as they got bigger, helping them complete
in a global financial services market. The same is true in the
consumer-based Internet sector, he believes.
During 1999, the average transaction
for reported merger deals was $421.5 million, an 8 percent gain
over the previous year, according to Mergerstat. The communications
industry dominated deal-making. Broadcasting, drugs, medical
supplies, computer software, supplies and utilities combined
for one-third of the deal market.
It wasn't only companies and investors
that profited. Goldman Sachs was the top-ranked M&A financial
adviser, participating in 186 deals with total invested capital
of $631 billion. Morgan Stanley Dean Witter and Merrill Lynch
& Co. came next. Strong activity in 2000 is expected.
© 2000.
