No Brakes on Merger Train - Yet. ANTITRUST QUESTIONS LURK
BOSTON — AFTER a wild year in which an estimated $200 billion worth of buyouts gushed onto Wall Street, investment bankers aren't afraid to expect big things from 1989. With what may have been a banner year for mergers and acquisitions just past, and with the economy chugging along, analysts say corporate and leveraged buyouts will likely continue on the same heady course traveled last year.
``The general feeling is the first quarter will be pretty good,'' says Perrin Long, an analyst with Lipper Analytical Services in New York. Mr. Long qualifies his overall optimism, saying he expects some cooling in the number of deals during the second and third quarter ``based on current levels of potential deals in the pipeline.''
Insiders like Long say the only major proviso is that the economy remains fairly steady, and politicians keep their noses out of Wall Street's business.
Several factors, however, have potential to affect this year's expected high level of corporate shotgun marriages and leveraged buyouts:
Interest rates are the most important indicator to watch in order to gauge the level of merger activity, analysts say. But what worries Wall Streeters nearly as much is government intervention.
``The government is committed to the free market - I would expect anything they do to be neutral,'' says Norman Brown, a senior vice-president in the mergers and acquisitions department of Donaldson, Lufkin & Jenrette, a New York investment banking firm.
But variable factors like antitrust policy, tax policy, and securities regulation could affect mergers, says Robert Bruner, associate professor at the University of Virginia's Darden School of Business.
Congress, spurred largely by concerns over deals like the buyout of RJR Nabisco Inc. by Kohlberg, Kravis, Roberts & Co., may eliminate the tax deductibility of the interest expense paid on the money borrowed to finance such deals. This would make deals more expensive, and fewer would be viable.
``This thing is the big enchilada,'' Mr. Bruner says. ``If you nuked that tax deduction, you'd take a great deal of steam out of the merger and acquisitions movement.'' Still, he says, ``I don't think it's going to happen.'' He cites banking and securities lobbies in Congress opposing such a move, and expects a bill with few teeth.
As to antitrust questions, ``I don't myself see how ... enforcement can be any more lenient than it's been,'' says Robert Pitofsky, dean of the Georgetown University Law Center. He echoes a widely shared view.
But few indications exist to hint at what president-elect George Bush will do.
There is also agreement that there could be a political/economic down side to December's mammoth $25 billion leveraged buyout of RJR Nabisco by Kohlberg, Kravis.
``The high visibility of the very large deals toward the end of last year put more pressure on the banking system and the government,'' Mr. Brown says.
Still, Brown and others remain upbeat. ``We're expecting at least the first half of this year to be as active as last year. From there on it's hard to predict.''
The biggest uncertainty, and potential impact, is with interest rates. Short-term interest rates have been rising. In January 1987, interest rates paid on three-month United States Treasury bills was 6.08 percent. By December, the rate was 8.38 percent. Long-term T-bill rates remained flat.
But any sharp jump in short-term securities could eventually be followed by increases in medium-term rates - affecting the typical 7-to-12 year ``junk bonds'' widely used to finance leveraged buyouts. If the junk became more expensive, due to higher interest rates, buyouts would also become expensive and be harder to justify.
Interest rates will be sensitive, particularly if the Bush administration shows any sign it can't keep its economic house in order by controlling such things as inflation, the federal budget deficit, and the value of the US dollar overseas.
Economists estimate that each percentage-point rise in interest rates adds $5 billion to the federal budget deficit.
Also, if the US dollar declines further, there is concern that Japanese and other foreign buyers of US Treasury bills might buy less of the nation's debt.