1995 Year-End Review of Markets and Finance
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Review of Finance:
Let ' s Do It: Disney to Diaper Makers Push
Mergers and Acquisitions to Record High
By Steven Lipin
01/02/1996
The Wall Street Journal
Page R8
(Copyright (c) 1996, Dow Jones & Company, Inc.)
Nineteen ninety-five smashed all records for mergers and acquisitions at home and abroad. An unprecedented $458 billion in deals were announced by U.S. companies, up 32% from the old record of $347 billion reached in 1994, according to Securities Data Co. Globally, a record $866 billion in transactions were struck, up 51% from the $572 billion announced in 1994.
The merger environment was ideal. Stocks soared, interest rates fell, the economy grew modestly, and corporations were willing to make strategic bets to boost the bottom line. Changes in regulation prompted activity in industries such as media and banking. "It was just a terrific year for M&A," said Dennis Hersch, partner at Davis Polk & Wardwell.
From diaper makers and drug makers to software sellers and cartoon creators, companies across the corporate landscape tied the knot, often resulting in tens of thousands of layoffs. Banks and basic industries were hot; consumer businesses such as food and retail were not. High technology, health care and media were strong, as were railroads, paper and utilities. Cross-border transactions increased, while leveraged buyouts remained subdued.
"A lot of companies are looking for double-digit earnings-per-share growth in an economy that has an inherent growth rate in the single digits," said Steven "Mac" Heller, partner in charge of U.S. mergers at Goldman, Sachs & Co. "For companies that have already cut costs, the greater boost to EPS growth will come from the cost cuts" generated by consolidation, he said.
It was the year of megadeals. Walt Disney Co. agreed to purchase Capital Cities/ABC Inc. for $19 billion. Chemical Banking Corp. agreed to a $10 billion merger pact with Chase Manhattan Corp. First Bank System Inc. and First Interstate Bancorp are trying to tie the knot in a $10 billion deal. Germany's Hoechst AG bought Marion Merrell Dow Inc. for $7.1 billion. Kimberly-Clark Corp. agreed to buy rival Scott Paper Co. When it was announced in July, it was worth $7 billion; thanks to Kimberly's soaring stock price, the deal was worth $9 billion when it closed in mid-December.
"It's been an unbelievably exciting year," said Richard Schneider, managing director at Highbridge Capital Management, a New York equity arbitrage firm.
The media world was turned upside down by the blockbuster deal between Disney and Cap Cities, which married programming with a strong network. Distiller Seagram Co. dumped its stake in DuPont Co. and bought 80% of MCA Inc. for $5.7 billion, and Westinghouse Electric Corp., which already held broadcast assets, bought CBS Inc. for $5 billion. Time Warner Inc. beefed up with its pending $6.8 billion purchase of Turner Broadcasting System Inc.
"The continued strength in media M&A can be traced to both the interest of new players and the effort by existing players to expand their distribution systems and array of entertainment assets," said Simpson Thacher & Bartlett partner John Finley.
Hostile takeovers picked up -- and an increasing number were successful as more blue-chip names made their maiden voyage into the hostile takeover torrent. They included International Business Machines Corp., which purchased Lotus Development Corp., Ingersoll-Rand Co., which bought Clark Equipment Co., and Johnson & Johnson, which is acquiring Cordis Corp.
"Household players used hostile deals like it was old hat to them," said Mr. Hersch.
Commercial banking was a surprising hot spot. Fifteen deals exceeding $1.1 billion in value were announced, according to SNL Securities. Banks across the country tied the knot as a way to cut costs and boost earnings. Among other factors, concerns about how to jumpstart earnings in the next couple of years "are causing many institutions to feel a need to make acquisitions as one way of growing their revenue base," said Herbert Lurie, co-head of financial institutions mergers at Merrill Lynch & Co. "This year's strong stock prices and high capital levels among acquirers have provided the unique wherewithal to complete transactions."
Unsolicited takeover bids became more common in the once clubby world of banking. To help thwart Bank of Boston Corp.'s attempted merger with CoreStates Financial Corp., Banc One Corp. lobbed in a $5 billion bid for Bank of Boston. San Francisco-based Wells Fargo & Co. put First Interstate "in play" by making a $10 billion bid for the Los Angeles-based company. First Interstate found a white-knight in First Bank System and now Wells Fargo is trying to break up the deal.
In 1995, it was stock -- not cash -- that was king. Nearly 60% of all companies used stock as acquisition currency, up from earlier years, aided by a booming stock market that effectively made purchases cheaper. Companies don't want to leverage themselves up with borrowed money, and stock swaps are tax free. Buyers' stock prices have often benefited, too.
"The trend is fueled by the high level of the U.S. stock market and the market's acceptance of stock as liquid acquisition currency," said Frederic Escherich of J.P. Morgan & Co.
It was also a year when investment bankers took a back seat. Some of the biggest deals were hammered out by chief executives, leaving bankers to write marginally profitable "fairness" letters to bless the deals. Even though deal volume is 35% above 1988, the best year of the 1980s, the merger boom had a muted impact on Wall Street's profitability. That's because 1995's deals generally were crafted without all the other businesses, such as junk bonds and bridge loans, that can generate big fees.
While mergers took off, it was also a record year for spinoffs. ITT Corp. broke apart into three companies, while AT&T Corp. and Minnesota Mining & Manufacturing Co. announced similar moves. General Motors Corp., meanwhile, said it would spin off its Electronic Data Systems Corp. unit. All told, $75 billion in spinoffs were pending in late December, according to J.P. Morgan.
Nineteen ninety six is shaping up to be another strong year. "When you look back at the reasons why there's been so much activity in 1995, most of those reasons seem to be sustainable in 1996," says Goldman Sachs's Mr. Heller.
While Mr. Hersch of Davis Polk agrees, he cautions that "periods like this don't go on indefinitely."
--- The Biggest Deals Announced in 1995
U.S. deals involving change in majority ownership
BUYER: EDS shareholders ACQUISITION: Electronic Data Systems TRANSACTION TYPE: Spinoff* VALUE (billions): $21.00
BUYER: Walt Disney ACQUISITION: Capital Cities/ABC TRANSACTION TYPE: Cash and stock acq.* VALUE (billions): $18.83
BUYER: ITT shareholders ACQUISITION: ITT TRANSACTION TYPE: Spinoff VALUE (billions): $11.60
BUYER: First Bank System ACQUISITION: First Interstate TRANSACTION TYPE: Stock swap* VALUE (billions): $10.05**
BUYER: Chemical Banking ACQUISITION: Chase Manhattan TRANSACTION TYPE: Stock swap* VALUE (billions): $9.87
BUYER: Hoechst ACQUISITION: Marion Merrell Dow TRANSACTION TYPE: Cash acquisition VALUE (billions): $7.12
BUYER: Time Warner ACQUISITION: Turner Broadcasting TRANSACTION TYPE: Stock swap* VALUE (billions): $6.88
BUYER: Kimberly Clark ACQUISITION: Scott Paper TRANSACTION TYPE: Stock swap VALUE (billions): $6.79
BUYER: Pharmacia ACQUISITION: Upjohn TRANSACTION TYPE: Stock swap VALUE (billions): $6.32
BUYER: First Data ACQUISITION: First Financial Management TRANSACTION TYPE: Stock swap VALUE (billions): $5.76
BUYER: Seagram ACQUISITION: MCA (Matsushita Electric) TRANSACTION TYPE: Cash acquisition VALUE (billions): $5.70
BUYER: NBD ACQUISITION: First Chicago TRANSACTION TYPE: Stock swap VALUE (billions): $5.30
BUYER: Crown Cork ACQUISITION: CarnaudMetalbox TRANSACTION TYPE: Stock swap VALUE (billions): $5.20
BUYER: First Union ACQUISITION: First Fidelity TRANSACTION TYPE: Stock swap* VALUE (billions): $5.07
BUYER: Westinghouse ACQUISITION: CBS TRANSACTION TYPE: Cash acquisition VALUE (billions): $5.04
*Pending
**Wells Fargo has announced a competing bid
Source: Securities Data Co.