BUSINESS

The return of the big deal in mergers

TOM FENNELL,JOHN DALY October 25 1993
BUSINESS

The return of the big deal in mergers

TOM FENNELL,JOHN DALY October 25 1993

The return of the big deal in mergers

The deals evoke heady images of the 1980s—corporate raiders in Italian suits, junk-bond wizards being led off to jail, and giant, once-invincible companies being bought and broken up. Certainly the numbers— over $40 billion in mergers and takeovers in little more than a month in New York City and Toronto—would seem to indicate that big deals are back in fashion on Wall Street and Bay Street.

But analysts say that a spate of such corporate deals in the past year, including the $37-billion merger between Bell Atlantic Corp. and Tele-Communications Inc. (TCI) announced in New York last week, and the union of five Canadian companies to create a $5-billion real estate giant in Toronto, were motivated more by economic forces and technological change than financial manipulation. But now that the takeover

boom is gathering momentum, some industry analysts warn that the wheeling and dealing might get out of hand again, like it did in the swashbuckling 1980s. Says Peter J. Solomon, chairman of his own New York-based investment banking firm: “There

North American companies join forces to gain growth and financial power

is a pure fear—a fear of being left out.”

So far, however, the current flurry of takeovers appears to be based more on companies seeking competitive advantages and quick growth by joining forces, rather than

fear. The boom has also been encouraged by a combination of the low cost of borrowing money to fund the deals, troubled corporate giants shedding subsidiaries and growth companies on the prowl for new partners. According to the Toronto financial support and advisory firm Crosbie & Co. Inc., 635 deals worth $25.5 billion have been announced in Canada so far this year—-just shy of the record of $26.3 billion in the first nine months of 1989. But in contrast with the 1980s, much of the new merger and acquisition boom on Bay Street—and Wall Street—is being propelled by sellers, rather than buyers. Many of the biggest deals involve huge conglomerates selling off vast chunks

of their businesses to raise cash. Among them: beleaguered Northern Telecom Ltd., which agreed to sell its British underwater telephone cable division, STC Submarine Systems, to Alcatel Cable SA of France in July for $1.1 billion. As well, in February, the troubled Hees-Edper group sold its controlling stakes in brewer John Labatt Ltd. and forestry giant MacMillan Bloedel Ltd. for almost $2 billion to a consortium of Bay Street brokerage firms. Because of the glut of sellers, none of those big deals degenerated into an acrimonious 1980s-style takeover battle. Declares one investment banker: “There are so many willing sellers out there, you don’t need to go hostile.”

In the United States, the value of mergers and acquisitions has reached $283 billion so far this year and is expected to eclipse the $330-billion record that Wall Street set in 1988. Analysts said that the mergers in that country are largely being driven by a slow economy, which is forcing companies to become more efficient—even if that means acquiring greater market share and expertise by marrying a rival. As well, the pressure to enter strategic partnerships is intense in such sectors as communications. Major telephone and cable television firms are jockeying for position on the so-called electronic highway of the future. Over the next decade, telecommunications and cable firms will be able to deliver a wide variety of electronic signals to every home, giving consumers access to a wide array of entertainment and information services on their computers and televisions.

Despite the high stakes and high volume of recent transactions, the strategies, financing, and even the style of negotiations behind the mergers in Canada and the United States differ greatly from the past decade. In the 1980s, financial engineers like Drexel Burnham Lambert Inc.’s junk-bond supremo, Michael Milken, became the most powerful men on Wall Street. Backed by money borrowed through high-yield, high-risk securities—so-called junk bonds—corporate raiders managed to take over dozens of huge companies. Once in control, the firms were often broken up and sold to help pay down the massive debts that were piled up to finance the deals. And Canadian real estate developer Robert Campeau, who borrowed $14 billion to acquire the Allied and Federated department store chains in an attempt to become the biggest raider of them all, came to symbolize not only the era’s turbulent rise—but also its sudden collapse.

Now, however, a new, conciliatory style of takeover has emerged. In fact, analysts say that many investment houses have eliminated their once-aggressive mergers and acquisitions teams altogether, or folded them into more conventional corporate finance departments. Even the corporate executives involved in some of the biggest deals are taking a more co-operative approach. In the TCI/Bell Atlantic case, John Malone, TCI’s president, who experts say is one of the toughest and brightest executives in America, will become vice-chairman of Bell Atlantic. In the 1980s, by contrast, victors in takeover battles usually cleared out the executive offices of the companies that they acquired as quickly as possible.

Above all, mergers are now being more conservatively financed than five years ago. Independent Toronto investment banker Andrew Sarlos notes that the strong stock market is allowing companies to finance transac-

tions by issuing shares instead of acquiring new debt. And when they do have to borrow, the banks are offering money at low rates for deals with a sound financial basis. Says Solomon: “The action is being driven by guys who have cheap currency, both in terms of cash and stocks. And they are able to use their stocks to finance the deals.”

The slow growth of the economy is also luring companies to the altar. Wall Street investment banker Guy Wyser-Pratte, president of Wyser-Pratte & Co. Inc., says that to compensate for the slow economy and sluggish earnings, firms are trying to raise profits by merging or taking over firms with better production or distribution systems.

That strategy has underpinned a number of recent mergers in the communications sector. The trend began in August when AT&T of New York acquired McCaw Cellular Communications Inc. in a $15.7-billion deal. McCaw is the largest cellular telephone company in the United States and AT&T dominates the long-distance telephone service market. Their deal was quickly followed by a takeover battle for Paramount Communications Inc.—the entertainment and publishing giant. In September, Viacom Inc., a major cable television supplier, offered $10 billion for Paramount. Shortly after, QVC Network Inc., a firm controlling home television shopping networks and other specialized cable services, offered $11.8 billion for the firm. By purchasing Paramount, QVC would

have access to top-quality entertainment for cable distribution.

Last week’s merger of Bell Atlantic Corp. and TCI was partially motivated by the need to form a strategic alliance.

In fact, the combined company would offer cable and telephone services to 59 per cent of the 100 largest metropolitan areas in the United States. “We think this is the perfect Informational Age marriage,” said Bell Atlantic’s Smith at a news conference in Washington. “The combination will be a model for communication companies in the next century.”

Furthermore, the Bell Atlantic giant has potential for continued growth. TCI already owns Liberty Media Corp., which in turn holds 23 per cent of QVC Network Inc. Analysts suggest that the Bell Atlantic merger will erase any doubts about QVC’s ability to finance its $11.8-billion run at Paramount. And the prospect of Bell Atlantic dominating the future of interactive television could trigger yet another round of mergers in the telecommunications industry.

The need to form such new alliances in a fiercely competitive industry and a conglomerate’s desire to shed a weak division were both factors in the merger in Toronto last week between the Canada Trust chain of 219 real estate offices and California-based Coldwell Banker Corp.’s 113 Canadian offices. The new company will be called Coldwell Banker Affiliates of Canada Inc. With about $5 billion in annual sales, it will be the secondlargest chain in Canada after Re/Max Ltd. CT Financial Services Inc., Canada Trust’s parent company, lost money in the real estate brokerage business in 1991 and 1992, largely be-

cause it still owns and services 113 Canada Trust offices, whereas most of its competitors are networks of independent franchises. As part of last week’s deal, CT Financial will sell those 113 offices to individual real estate agents.

So far this year, however, the lion’s share of the mergers and acquisitions in Canada has occurred in the oil and gas industry—a total of $4.1 billion worth, up $1.2 billion from the same period in 1992. And most of those deals have been

between so-called junior I oil and gas companies— I fast-growing small and r medium-sized companies. The stampede of investors into the stock market this year has al-

lowed those companies to raise quick cash for acquisitions by selling stock, rather than going into debt by selling junk bonds or borrowing from banks. In one deal, Calgarybased Tarragon Oil & Gas Ltd. announced on May 18 that it had agreed to buy Opinac Exploration Ltd., also based in Calgary, for

$122 million. That move doubled the size of the six-year-old company in one fell swoop. The next day, a Tarragon issue of $85 million worth of new stock to help finance the deal was snapped up by investment dealers within a few hours. “If you put a hot stock market together with a good deal it’s very easy,” said Raymond Chan, Tarragon’s vice-president of finance. He added: “I don’t think our appetite now is totally satisfied.”

Like Tarragon’s purchase of Opinac, most of the recent mergers and acquisitions in the oil and gas industry, and elsewhere, have been among companies in the same business seeking strategic alliances. Said Mike Jamani, a senior partner with the Torontobased accounting and management consulting firm Ernst & Young who specializes in mergers and acquisitions: “It’s not like it was in the 1980s, when financial players would say, ‘We can get you $1 billion in the junkbond market, so why not buy these guys?’ ” Jamani added that, so far, buyers and sellers are agreeing on more realistic prices for companies compared with the hugely inflated amounts paid in some deals in the 1980s. “Back then, it didn’t matter what you paid because many people assumed that the next sucker was going to buy it,” Jamani said jokingly. Today, the “suckers” may be gone, but the appetite to make money is as strong as ever.

TOM FENNELL JOHN DALY