Merger party: hold the confetti
Boston — American business has been throwing a huge merger party for the past five years. As many specialists have been predicting, the deals have become bigger and bigger, the controversy noisier and noisier. But at the same time, there is evidence that around the United States -- although perhaps not in Washington -- disgruntlement with the process is growing.
Three-quarters of the way through 1985, corporate mergers and acquisitions in the US had reached a value of $125 billion. That compares with only $12 billion in 1975 and $44 billion as late as 1980.
Two humongous new ones are on the boards -- one friendly, the other hostile.
General Electric plans to buy RCA Corporation for $6.28 billion, the largest merger in history outside the oil industry. The GE-RCA deal would be a ``friendly,'' all-cash transaction linking two giants in the electronics, defense, broadcasting, and satellite communications businesses.
Meanwhile, GAF Corporation says it wants to buy Union Carbide for $4.3 billion. This one, however, is ``hostile.'' To defend itself, Carbide is believed contemplating a move to acquire much-smaller GAF instead -- the so-called ``Pac-Man defense,'' whereby a company turns around to gobble up its foe.
What's responsible for the surge of mega-mergers?
Analysts say the Reagan administration's permissive reading of antitrust regulation, lower interest rates, and the availability of financing are key reasons.
Also, investment banking firms such as First Boston, Drexel Burnham Lambert, and Merrill Lynch now have large merger and acquisition departments that promote these deals.
And a new breed of arbitrageurs, exemplified by specialists such as Ivan F. Boesky, have come along to trade on speculation of mergers. Their money indirectly helps fuel takeovers. Mr. Boesky has predicted an ``explosion'' in mergers over the next five to 10 years.
In general, the Reagan administration has maintained a laissez faire attitude toward mergers, with the Justice Department and the Federal Trade Commission allowing most to speed through the review process. Congressional moves to tighten up on these activities have lagged, too. Sen. Alfonse M. D'Amato (R) of New York has been working on a bill to curb takeover abuses, but it is considered unlikely to pass this session of Congress.
Nonetheless, outside the Reagan administration there is evidence the pendulum is swinging the other direction:
Tightening up on leverage. The Federal Reserve Board, which is independent of both Congress and the executive branch, is proposing limits on the use of high-yield ``junk bond'' financing in leveraged buyouts (LBOs).
The Fed is worried that the collateral in LBOs, under which a corporate raider uses the assets of the company it wants to buy to help finance the purchase, is shaky. In the event of a recession, some of this junk-bond debt could be in danger of default.
Ethical questions. The Pennzoil-Texaco court case in Houston shows apparent dissatisfaction by at least one jury over the way bidding wars are conducted. Jurors bought the argument that Texaco had acted unethically in interfering with a planned deal between Pennzoil and Getty.
Clearly, the Texaco-Pennzoil case has sent the biggest chill through the ranks of businesses contemplating mergers. It indicates a jury can be swayed by criticism of the questionable ethics used in the takeover game.
Protecting their own. A bill giving New York corporations new defenses against hostile takeovers won legislative approval Tuesday in Albany. It bans leveraged buyouts in hostile takeovers. It is aimed at countering raids such as broadcaster Ted Turner's on CBS last summer. New York, with its numerous corporate headquarters and its stock exchanges, is considered a national pacesetter in financial legislation.
Countering preferential treatment. Judges have overturned some of the ``golden parachute'' severance agreements with the executives of companies that have been acquired. A number of suits have also been brought against managements and boards of directors of corporations that engage in controversial tactics such as ``greenmail'' and two-tier buyouts.
``There does seem to be a greater desire today to do something'' about hostile takeovers than there was a year ago, says James Fogelson, an attorney with Wachtell, Lipton, Rosen & Katz. But he thinks it is short of a groundswell.
Mr. Fogelson, who has helped corporations defend themselves, sees hostile takeovers as profiting ``a group of financial entrepreneurs.'' Shareholders are induced to tender their stock, thus forgoing long-term potential gains by a company, he says, and ``management has to spend enormous amounts of time defending itself.''
Throughout the US, corporations have adopted ``sharkproofing'' tactics and have voluntarily restructured -- sometimes buying new businesses, sometimes selling current assets, sometimes buying back their own stock -- to look less vulnerable to raiders.
One of the best defenses against takeovers today, says Louis Thompson, president of the National Investor Relations Institute in Washington, is a stock ownership program for workers.
``The old notion that the individual investor was a safeguard from hostile takeovers is proving unreliable,'' Mr. Thompson says. Employees who own part of the company, he says, ``are where the loyalty base is.''