Old-line industries in merger craze

Consolidations in chemical and aluminum sectors could affect the prices

The companies that are the meat and potatoes of industry are now joining the merger stew.

For the economy, this consolidation could result in fewer producers of raw materials such as chemicals, aluminum, steel and oil. For the consumer, the new combinations may ultimately affect the price of everyday products such as cars, toys, antifreeze or aluminum foil.

Many of the moves are strengthening the US manufacturing base at a time of growing competition from foreign firms. But they are also likely to result in lay-offs and plant closings.

The latest companies to join in the merger craze are Union Carbide, which makes the chemicals used in crayons and cosmetics, and Dow Chemical, which makes the chemicals used in antifreeze and plastic-lined pipe.

Also, last week three aluminum manufacturers, representing about 25 percent of the world's production, also announced a global merger. On the same day, Alcoa, Inc., the world's largest aluminum company, made a $5.6 billion offer for Reynolds Metals Co., the third largest producer of aluminum.

"Each of these companies is fighting the fact there is an oversupply of their commodity in the world," says David Bliss, vice chairman of New York-based Delta Consulting Group. "There is only so far they can go with cutting costs through layoffs and new equipment."

In addition, Mr. Bliss says the companies are reacting to the giant industrial companies, such as Daimler-Chrysler, that are flexing their muscles when they buy industrial commodities. By shopping worldwide, such giant companies can squeeze suppliers, forcing them to lower prices even more.

This kind of leverage, combined with the glut in supply, is forcing commodities suppliers to look at merging so they can try to retake control of supply. "You have to have force to meet force, scale to meet scale," says Bliss.

Good for consumers?

And the healthy stock market is allowing companies to do just that. "Many companies' stocks are fairly high and they are using their stocks as currency for acquisitions," explains Harry Quarls, of Booz-Allen & Hamilton, one of the largest management consultants.

While these mergers might be good for shareholders, are they good for consumers?

Not necessarily, says Jerome Hass at Cornell's Johnson School of Management. For example, in the aluminum mergers, he points out that Alcoa says its proposed merger would save about $500 million in costs.

But it also gets rid of a competitor. The result, Mr. Hass says, would substantially strengthen the merged companies industrial muscle. "When you get two big players like this, they don't have to talk about prices, they just know it's in their best interest to raise prices."

However, Gordon Anderson, editor of Hoover's Online, a business information service, says the merged companies should be viewed in global terms. He estimates the merged companies would only amount to about 15 percent of the global market.

"All are major in their home markets but not dominant in a global sense," Mr. Anderson says. "A buyer of aluminum can readily buy from other suppliers in the world because the market is more efficient."

Decreased competition

This issue is likely to be decided by either the Federal Trade Commission (FTC) or the Department of Justice. Charles Still, head of the merger practice at the law firm Fulbright & Jaworski, expects the Alcoa bid for Reynolds to "get a lot of scrutiny." If it does, the companies may be asked to "submit every piece of paper in the company that has a bearing on whether or not the merger has the effect of lessening competition."

What's happening in aluminum is also taking place in chemicals. According to Hoover's, last year there were 59 mergers valued at $37 billion in the chemical business, up 11 percent from the 68 mergers the prior year. The trend continues this year with such mergers as the $11.6 billion marriage of Union Carbide and Dow Chemical. If the government approves the merger of Exxon and Mobil, the new company will include one of the world's largest chemical companies since both companies are in the business.

Many of the basic industry mergers are taking place is because companies are in a rush to become global players. "To become a global player, a certain critical mass has to be achieved," says Jeff Hooke, an investment banker in Tyson's Corner, Va.

"You can do it by internal growth, but it takes too long for most CEOs," says Mr. Hooke. "So buying your way is the fast way of doing it."

Good for the nation?

Merrill Lynch & Co. securities analyst John Russell believes the mergers in the chemicals business are ultimately good for the nation.

"A bigger company might be better able to afford innovation," says Mr. Russell, "and the more financially strong a company is, the better it is for environmental programs."

But the mergers are also spawning layoffs. When chemical company Hercules, Inc. bought BetzDearborn Inc. for $3.1 billion in 1998, it projected laying off 5 percent of its workforce for a cost saving of $100 million. According to the company, it has actually reduced its workforce by 7.6 percent for a saving of $150 million.

The irony, say many observers, is that these mergers are flying fast and furiously despite the fact many of them don't work. David Lanciault, a vice president at A.T. Kearney, a management consultant based in Chicago, says the results have been "pretty gruesome."

After looking at mergers three years after they took place, Mr. Lanciault found nearly two-thirds had failed to add 10 percent market value to the new company.

"When two companies who are competitors join together it might seem to be pretty easy to put it together, but that's not always the case," he says.

(c) Copyright 1999. The Christian Science Publishing Society

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