Slow Economy Means Fewer Deals

MERGERS AND AQUISITIONS

THE pell-mell merger-leveraged buyout-momentum of the 1980s is fizzling out, for now at least. Takeovers and acquisitions can still be found - such as recent mergers within the publishing-entertainment sectors. But corporate dealmaking has dropped off considerably in recent months, reflecting the slowing of the United States economy as well as investor qualms about junk bonds used to finance many deals.

``I wouldn't be surprised if M&A [merger and acquisition] activity slows throughout 1990, and possibly for 18 months or so, before the next round of mergers,'' says Perrin H. Long Jr., a Wall Street analyst with Lipper Analytical Securities Corporation. ``The cost of money for mergers is increasingly expensive, and with a slowing economy, the senior managers of corporate America are now worried more about keeping their companies above water than about arranging financing to take over some other company.''

Leveraged buyouts (LBOs) were probably the most conspicuous element of the merger boom of the 1980s. But for now, ``there is a severe abatement in LBO activity,'' says James Van Horne of the Stanford Graduate School of Business, a leading expert on banking and finance.

``Premiums on junk bonds have skyrocketed, which makes it very difficult to put together the costly packages required in these types of takeovers,'' Professor Van Horne notes. Moreover, corporate America is finding a need for a period of ``digestion'' of the mergers, Van Horne says. Still, he believes that the level of LBOs and other corporate restructurings ``will resurface in a year or so, although probably not at the levels of the late 1980s.''

Van Horne notes that LBO activity is currently accelerating in Europe. Merger activity there is in part the result of companies seeking to shore up their market strength prior to increased economic competition after 1992 under a united Europe.

``What we're now seeing, in the way of new merger activity [in the US] is a `merger of strategy,''' says Larry Wachtel, an equities analyst with Prudential-Bache Securities. ``These are mergers that make sense strategically for both sides, rather than mergers where the big shots in a firm walk away with a big financial score.''

During the 1980s many individuals did just that. In corporate terms, the decade of the 1980s was marked by fervent dealmaking; the '80s was perhaps the most intense decade for mergers since the 1920s, according to some experts.

Activity ranged from traditional friendly acquisitions to management buying stock back from shareholders and going ``private,'' to hostile takeovers by raiders or cash-rich corporations. Many deals were justified by the dealmakers in terms of tapping ``the hidden assets'' of corporations for shareholders, usually involving selling off certain profitable divisions to help finance the takeover package.

In 1980, close to 2,000 deals were announced, with a dollar value of around $45 billion.

By 1987, the number had shot up to 4,007 with a dollar value of around $178 billion, according to M&A Data Base, MLR Publishing Co., Philadelphia. In 1988 there were 3,987 deals worth around $236 billion; for the first nine months of this year there were 2,542 deals worth around $164 billion, according to M&A Data Base. Some deals involved a foreign company.

But the costly $28.3 billion RJR Nabisco deal in the early part of this year may have represented the high water mark, for now, of the LBO drive. That deal not only used up a huge amount of finance capital, but prompted a number of anti-LBO and merger bills in Washington.

The main concern revolves around the massive debt levels resulting from corporate restructurings. In a major recession, it is feared, many firms would face bankruptcy, threatening the jobs of thousands of workers.

Van Horne notes that one financial rule of thumb prior to the 1980s was that the total value placed on a LBO - the debt plus equity - should not be more than six to eight times operating cash flow. But in many LBO deals in early 1987, he says, multiples were well in excess of eight.

Have the many corporate restructurings of the 1980s been beneficial to the US economy? Van Horne believes that the jury is still out, and that economists will need to carefully study such corporations during a full business cycle and a full interest rate cycle.

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