The Dow Jones average of U.S. industrial stock prices is down 10 per cent from its early 1984 peak and rising interest rates are haunting Wall Street. But corporate merger activity in the United States has reached a pace that Kenneth Miller, the chief of mergers and acquisitions for Merrill Capital Markets, describes as “torrid.” Already this year mergers and other buyouts promise to surpass their record peak of 2,861 deals, set in 1974. At the same time, the price tags on current deals are setting new records. Since January there have been 15 mergers or takeovers worth more than $1 billion (U.S.). The deals are producing large profits for individual and corporate investors, as well as their lawyers and bankers. But the new merger wave is also stirring unease in political circles. Some critics and politicians contend that the mergers may be harmful to the U.S. economy as a whole.
In Canada recent mergers and acquisitions have not matched the enormous dollar value of those in the United States. But the bureau of competition policy of the consumer affairs department estimates that there were a record 628 mergers last year. And in the first five months of this year, there were 211 mergers, just slightly below the 1983 level. While Canada’s already high level of corporate concentration makes the merger upsurge particularly worrisome to some economists, it has not provoked the intense political criticism that has arisen in the United States. Indeed, a bill designed to strengthen Canada’s competition laws will disappear from the Commons order paper when Prime Minister John Turner calls a federal election and Parliament adjourns. In the United States concerns about the effects of the takeover wave extend into the boardrooms of Wall Street itself. Among the critics: Felix Rohatyn, a senior partner at the influential investment bank Lazard Frères.“All this frenzy may be good for investment bankers now, but it is not good for the country or investment banks in the long run. We seem to be living in a 1920s Jazz Age atmosphere,” Rohatyn declared last week.
One aspect of the takeover wave that has particularly troubled politicians and business experts alike has come to be known as greenmail, a play on the word
blackmail. It is a process under which an outside investor purchases a large block of stock in a company, threatens to gain enough control to outvote its management or stage a complete takeover and finally agrees to sell back its shares and abandon the threatened merger in exchange for a hefty profit. Among the most prominent North American financiers who cashed in on the greenmail
system: Samuel, William and Hyman Belzberg, who have turned a family used-furniture business into a $2.2-billion empire of real estate, trust and leasing firms run by a family-controlled parent company, First City Financial Corp., of Vancouver. While a series of their recent financial moves fits the greenmail pattern, the brothers insist that such an action was never intended. Said Samuel Belzberg: “We never, ever set out to do that. We are not stock players. I do not believe anybody makes money in the long
term playing the stock market.” Three years ago Samuel Belzberg announced that the three brothers intended to turn their attentions toward the United States. “You reach a stage when it is very hard to grow much further in Canada,” he declared. Two years earlier, in 1979, the three brothers first came to the attention of Wall Street when they purchased a 5.1-per-cent
stake in the Bache Group, a leading investment firm. First City insisted that it did not intend to take over the firm, but it soon raised its holdings to 22.6 per cent. Eventually, Bache management sold out to the Prudential Insurance Co. of America. First City’s ultimate profit from the sale of its Bache shares to the insurance giant: $33 million (U.S.). Since then the Belzbergs have made other, similar deals. As well, they teamed up as partners with Texasbased T. Boone Pickens Jr. in his bid for Gulf Oil last winter. The Pickens-led
group sold the 13-per-cent share of Gulf it had accumulated to the Standard Oil Co. of California (Socal), which bought Gulf for $13.3 billion (U.S.). The Belzbergs’ estimated share of the windfall: $40 million. Currently, the Belzbergs’ acquisitive drive is directed at Blue Bell Inc., a Greensboro, N.C.-based clothing manufacturer best known for its Wrangler jeans and Jantzen swimwear. They have bought just over nine per cent of the company, but recent filings with the U.S. government indicate that First City might try to acquire as much as 49 per cent of the company’s stock.
For his part, Pickens made a profit of $500 million on the Socal-Gulf deal for his firm, Mesa Petroleum of Amarillo, Tex. At the same time, New York financier Saul Steinberg is also raking in huge profits from the buy-in, sell-out sweepstakes. His most recent success involved Walt Disney Productions of Burbank, Calif. Through the company he controls, Reliance Group Holdings Inc., Steinberg launched a joint takeover bid with motion picture financier Kirk Kerkorian—who controls the MGM/ UA Entertainment Co.—for Disney this spring, and after 76 days of financial dealing sold back his 12.1-per-cent stake in the company to the firm’s management for a profit estimated at $59.8 million, in addition to $28 million to cover his expenses on the deal. Like the Belzbergs, Steinberg denies that he intended to carry out greenmail. A court document made public last week quotes the financier as claiming that he only dropped his bid for Disney after the entertainment and real estate company threatened to make a move that would have loaded the firm up with $2 billion worth of debt and left Steinberg in sole control.
Also prominent in recent merger
moves is Australian newspaper owner Rupert Murdoch. Like Steinberg, his target was another firm with major entertainment holdings: Warner Communications Inc. After 100 days of financial manoeuvres with Warner’s stock, he sold the company back his shares for a $40-million (U.S.) profit this spring, as well as receiving $8 million to cover his legal bills.
The latest trend in mergers in both Canada and the United States is leveraged buyouts (LBOS). In those operations a small investors’ group acquires a company largely by borrowing the purchase price. Ultimately, the buyers pay off their takeover debt with funds generated by their new holding or by selling off the acquired company’s assets. Because the deals effectively transform the acquired company’s equity into debt, bankruptcy is always a risk if interest rates climb sharply or the firm’s busi-
ness drops off. But that potential problem has not discouraged investors. Indeed, at least two Toronto-based financial firms—Onex Capital Corp. and Enfield Corp. Ltd.—have been created in the past year to arrange financing for LBOs. In the United States, LBOs have been used to finance deals on a large scale. The management of the City Investing Co., a New York-based firm, is considering taking the company private by buying out shareholders in an LBO worth $2.3 billion (U.S.).
Although greenmail and LBOs attract the most controversy, the whole acquisition process concerns financial experts. Among the charges that critics raise: the multibillion-dollar bank loans required to finance takeovers are pushing up interest rates. As well, critics say that takeover wars are diverting man-
agement’s attention away from production, weakening the finances of merged companies and undermining investor confidence. Said Rohatyn: “We are turning the financial markets into a huge casino.” But defenders of the takeover trend contend that borrowed funds are quickly recycled back through the financial system and, as a result, the loans have little impact on interest rates. As well, some experts argue that the threat of a hostile takeover actually puts pressure on the management of the company under attack to perform better. Declared Alfred Rappaport, a business professor at Chicago’s Northwestern University: “An active market for corporate control is an important discipline for management to act in the best interests of shareholders.”
Analysts say that it is difficult to measure the impact on the Canadian economy of the recent upsurge in merger activity. And the only real record of the country’s merger activity is an informal list compiled by the bureau of competition policy, mostly from newspaper clippings. Existing legislation, said Don McKinley, a senior adviser at the bureau of competition policy, is a weak and ineffective tool for preventing takeovers that clearly reduce competition. William Stanbury, an economist at the University of British Columbia, said that Canadians now are vulnerable to the effects of mistakes made by managements of conglomerates that hold a dominant presence in vital economic sectors. Said Stanbury: “It is monstrous, the intensity of concentration in this country. And if you concentrate financial power that tightly, any errors become larger and more enduring.” That concern has done little to cool the merger fever, which gives every indication of spreading in the coming years.
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