The Merger Mania

...The two men couldn’t be more different in character, but as fellow airline bosses they started talking...

...All this might not matter so much if the economy were growing faster and there were numerous opportunities for new firms to get started...

...Certainly some mergers make sense for stockholders while providing genuine economic benefits for the rest of us...

...Esmark started buying Inmont stock in January 1977...

...That takes so long...

...There aren’t many other ways to make a 50percent or more profit in a few months or to obtain hundreds of millions of dollars worth in assets overnight...

...I‘his is a lot of money he never had to spend before...

...At the same time, however, most companies have factories, products, natural resources, and so on t h a t are enormously expensive, far outweighing the price of the actual stock...

...The Merger Mania by Tom Redburn The Setup Last May, Frank Lorenzo, the president of Texas International A’idines, happened to run into william E. Seawell, chairman of Pan American World Airways, on (where else...

...That is also one important reason many of America’s giant industries have lagged behind while competitors in foreign companies have become sleek and efficient and able to undersell us...

...Despite all the talk about a “capital crisis,” business enterprises have been accumulating mountains of cash...

...By the time it had acquired nearly ten per cent of the shares for an average price under of $20 a share, it made an offer to purchase the rest for $25 each...

...This is what Lorenzo was waiting for...

...In 1977, according to Commerce Department figures, there were only 30 public offerings of stock, most of them quite small...

...Unfortunately, that’s not the case...

...Mergers, of course, are not a recent phenomenon...

...The stock market is depressed, many stocks are at or near historic lows, yet many companies are worth far more in terms of their assets than the value assigned to the firm by stock traders...

...In contrast, in 1969 (admittedly, a hyperactive year) 698 companies issued new equity offerings to the public totaling nearly $ I .4 billion...

...For instance, Tenneco, Inc., a Houston-based $&billion conglomerate, wanted to expand in the auto parts field...

...A cash tender offer, even if it ignites a bidding war, can often gobble up those resources for far less than they’re worth...

...Still, most deals-even though firms sometimes have had to pay twice as much as the market value of their takeover target-are advantageous to those involved...

...Consider the case of Esmark’s attempt to take over the Inmont Corp...

...Build a new plant...

...What’s worse, TI was an upstart regional carrier only about one fifth the size of its intended target...

...Lorenzo wasn’t too serious about the idea, either...

...At the turn of the century, American industry went through a wave of consolidation as the Rockefellers and the Morgans sought to reduce the unsettling effects of market competition...

...This is a crucial point...

...It is much cheaper to try to buy a company, especially in an industry that requires a great deal of equipment and a handful of factories, than to duplicate those facilities in trying to break into a particular market...

...economy...

...R e Piay In June TI announced it had purchased nine per cent of the stock of another airline, Miami-based National Airlines, and a few days later said it wanted, with permission from the Civil Aeronautics Board, to acquire control...

...an airplane trip...

...If, as seems more likely, Pan Am’s bid is accepted by the shareholders, TI’S holdings will be worth far more than what it paid for them...

...Such a trend may well be a “bad thing,” but if so it’s been a fact of American life for decades...

...Later the bid was upped to $41, which induced National’s board to accept...

...The stock market thrives on rumors of potential takeover candidates...

...But now the company clearly finds it more attractive, and easier, to break into the domestic market via acquisition rather than take the time and money to build up their own domestic business...

...Oh, well...

...In that case, Lorenzo can’t lose...

...To try to break into a new market with a totally homegrown product would be very difficult,” Ketelsen said...

...Maytag, Tom Redburn is a business reporter for The Los Angeles Times and a contributing editor ofrhe Washington Monthly...

...Last year the volume of mergers topped $34 billion, very close to the previous record set in 1968...

...Atlantic Richfield acquired Anaconda Copper in 1977 for more than $500 million...

...There was a time when Pan Am had a legitimate gripe...

...I sense a lot of people have nw lowered their sights yet...

...The Payosf The three-way battle-further complicated recently when Eastern Airlines made an even higher offer for National in an effort to wreck Pan Am’s plans-still must be ruled upon by the CAB...

...Not much is known about what was s a i d , b u t d u r i n g t h e conversation Lorenzo proposed the possibility of a merger...

...While firms have continued to grow by buying out other firms, few companies are spending time making themselves more efficient, coming up with new technology that will allow their employees to increase productivity...

...Of course, when Congress was understanding of the problems of business and passed an extremely favorable tax bill, the stock market simply yawned...

...Is this really all our business leaders can think of to do with t h e i r money...

...Never mind, as former Federal Reserve Chairman Arthur Burns admits, that “such activity neither generates additional jobs nor additional capacity for our nation’s eco no my...

...If TI can somehow raise enough money to buy National, overnight the airline will grow to five times its own size...

...In many cases the only way to repel a black knight is to seek the protection of a white knight, who will rescue you from the enemy by arranging a friendly merger...

...No, mergers today are far more serious as a symptom of underlying changes among American businesses than as a problem in their own right...

...This eventually Ied-the sting again-to Carrier Corp., an a i r conditioner manufacturer, agreeing to buy Inmont for cash and securities worth $32 a share, four times what the company had been selling for only a year and a half earlier-before all the scrambling began...

...Yet much of it sits idle in bank accounts and Treasury bills, because industry executives can’t think of anything better to do with it...

...At Pan Am we believe we ought to get some today...

...But, as should be obvious by now, the big, cash-heavy deals of recent years aren’t being done for these reasons...

...When a steel executive thinks about building a new plant, he starts to dwell on the millions he will be spending on pollution equipment...

...Inspired by such deals, many corporate heads lost their inhibitions...

...Polite People Didn’t Do This’ I But the recent corporate takeover movement is different in some significant ways...

...Not, however, for the reasons you normally hear...

...Just a decade ago conglomerates raided firms by the dozen in a feverish effort to maintain dazzling (and in many cases, artificial) !profit growth rates...

...In contrast to t h e p a s t , U.S...

...nor will a few antitrust cases...

...According to most government officials, the great danger is economic concentration...

...For instance, a smaller firm may gain access to easier capital or benefit from better marketing after being taken over...

...Its investment in National was then more than $48 million, and L.B...

...For one thing, the mergers are likely to involve larger firms in bigger deals...

...and Gulf Oil bought Kewanee Industries in a $440-million deal...

...Instead of c r e a t i n g new j o b s , sponsoring new ideas, and building new products, the action has moved to shuffling financial assets from one pocket to another...

...It’s acquisitions strategies, one merger specialist told Business Week, that “are getting the chief executives’ attention...

...If the American public-and through it Congress and the bureaucracy-were more understanding of the problems of business,” Forbes said in a recent article on the attempt by Occidental Petroleum to take over Mead Corp., “the stock market and Mead shares might be a good deal higher...

...In Wall Street terminology, it was a “sleeping beauty”-ripe for takeover because its depressed stock price (due to poor earnings) fell far below the value of its lucrative assets, an almost debt-free aircraft fleet...

...corporations during this decade have shied away from investing in the new plant and equipment necessary to maintain the productive edge of the American economy...

...Esmark made a complex proposal designed to prevent a protracted legal battle...

...Over the summer, despite opposition from National’s suddenly aroused management, TI continued to buy stock at market prices, increasing its h o l d i n g s by t h e b e g i n n i n g of September to about 20 per cent...

...The average output of a worker rose more than 2.1 per cent a year from 1960 to 1970, enabling nearly everyone’s paycheck to grow considerably faster than the inflation rate...

...The takeover game, needless to say, goes on because it is still the best game in town...

...Esmark and Inmont Meanwhile, p r o d u c t i v i t y h a s slumped...

...It’s cheaper,”says a Wall Street lawyer, “to buy a plant than to build it...

...The reason for this is that the market value is deceptive these days...

...That’s true enough, but while hundreds of business executives are plotting their roles as Newman and Redford in their next merger movie, the rest of us have reason to worry...

...To National, TI was the “black knight”-an unfriendly company on the attack...

...In the end, what’s most troublesome about the merger movement is the desperation that animates it...

...The prob!em is that there is little evidence that going after acquisitions is very beneficial to real economic performance...

...Yet many economists have hardly noticed this productivity slowdown because-their eyes firmly fixed on the horizon of total GNP, which kept rising over the last decade at about the same average pace as earlier-they didn’t see that most of the GNP increase was simply due to a growing number of workers...

...Arkuing befcire the CAB about why its merger applicatibn for National should be approved (airlines need special government permission for one firm to acquire another), Pan Am’s Seawell captured the new spirit perfectly: “1 am tired of playing the role of the White Queen, who is told there is jam tomorrow, jam yesterday, but never anyjam today...

...In 1976, General Electric paid over $2 billion for Utah International...

...There’s no question that if you feel the pulse of the people,” John Shenefield, assistant attorney general for antitrust told The Wall Street Journal, “there’s a predominant sense that big business is getting too big...

...National’s chairman, was running scared...

...the Dreyfus Corp...

...CAB regulations wouldn’t let the company i n t o t h e domestic market...

...We cannot afford the cost or the time it would take to create our own domestic system from scratch...

...Too risky and inflation eats up your gains...

...In the late 1960s the target of 15-per-cent-a-year growth rattled around in more corporate boardrooms,” says Louis V. Gerstner Jr., a financial consultant...

...This is important for what it is saying to us a b o u t America’s technological capabilities and about the way our economy is growing...

...Such quick-hit thinking has been at the heart of many of the recent deals...

...From 1970 to 1977, however, average output per worker increased only 0.8 per cent annually...

...In late August, intrigued by the battle for National, Pan Am decided to offer to buy all of National’s stock for $35 a share...

...You can go down in business his t o r y , ” says Forbes magazine, delivering the current wisdom to its business audience, “as the genius who accomplished more ‘in a finger’s snap’ than your predecessor did in decades...

...and then Mobil’s purchase of a company that contrds Montgomery Ward, “the rest thought,” Flom says, “‘If it’s good enough for them, why isn’t good enough for me...

...There are a number of reasons for this trend, and one of the contributing factors is what business has come to see as the increasingly burdensome intervention of the federal government...

...New CAB policy would allow Pan Am a chance to begin some domestic routes...

...To many chief executives, the only solution seems to be to diversify to keep the “profits-now” directors at bay...

...even tried to set up a mutual fund to invest in likely targets until it began to worry about what the SEC would think about the potential for inside trading...

...A lot of people think the only way to satisfy those growth goals is by acquisitions...

...Instead of entering the shock absorber business on its own, however, Tenneco bought Monroe Auto Equipment, the leading maker...

...Expand operations...

...The emphasis on quick growth through merger has made them lose sight of that...

...But following the 1974 International Nickel takeover of ESB, Inc...

...The idea of spending all this extra money (and make no mistake, that is very much how he looks at it)’ makes the whole idea of investment much less attractive...

...Robert G r e e n h i l l , head of the merger department at Morgan Stanley, said “There are very few companies that are not looking today...

...It’s likely, though, that the federal agency will not interfere...

...In the late 60s, people in polite society didn’t do this,” says Joseph Flom, the premier takeover specialist of Wall Street and a lawyer retained by over 100 companies, for up to $40,000, just in case they are attacked by someone else...

...Nonetheless, because of t h e p a r t i c u l a r advantages to the bottom line or tax payments from many such deals, large manufacturing and mining companies have devoted nearly 15 per cent oftheir total new investment in the 1970s to acquisitions, using huge resources for takeovers rather than new ventures...

...If mergers continue to proliferate, says Shenefield, “there will be, over a period of time, a collection of economic power in a few decision points, and that’s a bad thing...

...Today companies are finding it harder to grow from i n t e r n a l business,” said Louis Gerstner, the f i n a n c i a l c o n s u l t i n g head f o r McKinsey & Co...

...The “market value” of a company means the price of a share multiplied by the number of shares...

...Lorenzo stands to make a profit of about $24 million...

...Cheaper to Buy Than Build Mergers and acquisitions are sweeping American business...

...National, despite its racy “Fly Me” ad image, is one of the stuffiest airlines in {he business...

...When you can’t beat ’em, buy ‘em...

...A lot of big mergers aren’t going to change matters much...

...Even the losers can make money...

...Inmont refused, so Esmark made a public tender, which sent Inmont’s board scurrying to its investment bankers in search of a white knight willing to pay more...

...What this indicates is that the takeover has become respectable among the old-line, conservative giants that dominate the U.S...

...Esmark made a profit of $8 million on the transaction...

...Why indeed...

...At the same time, however, an equally important factor is that many executives no longer seem capable of looking further than hext quarter’s earning report or of taking the risks necessary for long-term investmefits...

...It already owned Walker Manufacturing, a big automotive equipment firm, and, says president James L. Ketelsen, “shock absorbers fit right in...

...We could have spent a lot of money and many years before we would have been successful...

...That argument, however, doesn’t hold up anymore...

...The proposed solution to this dilemma by many business leaders is almost laughable...

...Even though the actual number of acquisitions has declined since the heyday of the 1960s, the dollars spent are much higher...

...More companies are saying that they are not in the right business...

...And in new, fast-growing i n d u s t r i e s like s e m i - c o n d u c t o r technology, mergers help bring together different research ideas...

...Seawell apparently didn’t take the idea very seriously, perhaps because Pan Am is about 15 times bigger than TI...

...According to a recent article in the Harvard Business Review, “the productivity of capital of many multi-business companies has lagged behind the economy...

...He had something else in mind-something in which Pan Am would end up playing a crucial role...

...R e Sting There aren’t many defenses to an unfriendly takeover bid...