The pace of big company mergers and acquistions has been quickening lately, characterized by large cash tender offers that shareholders apparently can't refuse.
Kennecott Copper Corp.'s winning acquisition bid last week for Carborundum Corp. stock at $66 a share, double the price the shares were trading at only two weeks ago, is the latest and most spectacular "deal of the week."
Cash-flush corporations, with access to easy credit, are gobbling up other companies under the notion that it is cheaper, easier and more profitable to put their funds to work through an acquisition than through internal investment and expansion. Pallid plant and equipment spending figures reflect this situation, the economy's most worrisome soft spot at the moment.
"You've got the basic fact that, because of inflation, it costs more to build something from scratch than to buy the assets of an existing business," explained Joseph R. Perella, head of the merger department at First Boston Corp.
"But if you spend money to take over a company, you don't add to growth in the economy," he added. "The ownership changes hands, and that's not bad, since stockholders who get the money can then use that to spend for other things. However, like the housing market, it's one thing if a person sells a house to another person, and another thing if someone builds a new house."
A stuck stock market meanwhile has provided numerous acquisition opportunities - companies with good growth and earnings records which have nevertheless been trading at low price-earnings multiples, often below their per-share book value and considerably below what it would cost to replace the assets of the company at current prices.
Hardly a day pases without at least one new takeover rumor, if not an actual tender offer. And acquisition candidates have been the main source of excitement in a depressed and depressing stock market as companies have made tenders at substantial premiums over the market price, usually in cash.
The initial bid in turn often has brought out even higher offers from competing bidders. Stockholders in the target companies have benefited handsomely, along with Wall Street arbitrageurs who gather in the shares on the chance the offer will go forward.
These supposed risk-takers have been assuming few risks because the target companies who have succeeded in fending off tenders are singular exceptions - like Gerber Products Co., which used tricky legal maneuvering to put off Anderson, Clayton & Co. With increasing frequency, the initial bidder loses out in a hostile tender offer as a company seeks another more desirable suitor at a higher per-share price. But this only adds to the arbitrageur's profits.
The $550 million Kennecott offer for Carborundum especially fired investor's imaginations and agitated Wall Street professionals because the winning tender offer price of $66 a share topped the previous bid for Carborundum by Eaton Corp. by a breathtaking $19 a share, and represented a 100 per cent rise over the recent stock market price of $33.
The premium for Carborundum exceeding even the one generated by this summer's dramatic multi-stage bidding battle for Babcock & Wilcox Co. that began with a $42-a-share tender by United Technologies Corp. when Babcock was at $35. Several bids later, it was capped by a winning $65-a-share offer by J. Ray McDermott and Co.
A similar bidding battle took place for Carborundum, a manufacturer of industrial abrasives and high-technology ceramics with an enviable profit and sales growth record. But the ante reportedly was raised behind the closed doors of investment banking house Morgan Stanley and Co. and not in the public arena.
Several other undisclosed corporate giants also were involved in the bidding besides Kennecott, which triumphed in part because of the $1.2 billion bankroll it had to work with from its forced divestiture of Peabody Coal Co. earlier this year.
"Companies are no longer selling on the basis of fundamental financial analysis but on the basis of scarcity value," commented Martin Lipton, a New York securities lawyer who often is found in the thick of a takeover attempt. "There are a limited number of companies that are attractive acquisitions, and there are more companies looking for such acquisitions that what is actually available."
"Takeover activity has increased rather dramatically in the last two or three months, and continues to increase," Lipton said. More and more, the targets are the larger companies, and the natural concomittant is that the raiders are also larger.
The handful of investment banking firms which specialize in this area - Morgan Stanley. First Boston, Goldman Sachs, Salomon Brothers and Lehman Brothers - also indicate that the action is becoming more heated, with corporations seeking advice for either an aquisition or a defense.
"It's reached a pretty active level," said J. Ira Harris of Salomon Brothers. "Most of us don't have many hours left in the day."
W. T. Grimm and Co., the Chicago firm which tabulates mergers and acquisitions, reported that such announcements in the third quarter of 1977 picked up 22 per cent to 616 compared with 506 a year ago. For the first nine months, corporate combinations are actually off 6 per cent, but the total dollars involved has inceased by 15 per cent to $6.8 billion. And the number of very large aquisitions - more than $100 million - has increased to 32 from 26 in the same nine-month period last year. In all of 1975, there were only 9 mergers this large.
The consolidation trend is a continuation of the concentration of business activity within a shrinking number of giant corporations that began in the 1960s. But analysts caution that the current merger wave is qualitatively different than the conglomerate merger binge of the last decade when a score of unrelated companies would be strung together haphazardly by a predatory conglomerateur.
"Acquisitions today seem better thought out than the ones we saw in the 1960s," said First Boston's Perella. "There is usually a business fit or rationale for the acquisition, and people just aren't doing deals for the sake of doing them."
Typical of what has been occurring is the single, major acquisition, often involving a resource company, as a corporation tries to diversify its profit base, either to shrink the amount of business subject to government regulation, or to compensate for up-and-down earnings cycles. The latter was the case with Kennecott's bid for Carborundum.
The acquisitions are carefully structured in advance to avoid combinations with horizontal or vertical overlaps of production activity that might bring an antitrust action.
Both the Justice Department Antitrust Division and Federal Trade Commission routinely scrutinize the biggest mergers. But they have shown no inclination to challenge mergers merely on the basis of size as General Electric Co.'s acquisition of Utah International last year for $2 billion proved.
Other sizeable acquisitions in recent years include Mobil oil's purchase of Marcor and Atlantic Richfield's tender for Anaconda - both in the half-billion-dollar category.
Foreign corporations also have become increasing factors in making tender offers. Several years ago the Rothschild family won a bitterly contested battle for Pittsburgh's Copperweld Corp. and got a major industrial foothold in this country.
More recently Bayer AG, the German chemical firm, tendered for Miles Laboratories, and Nestle S.A., a Swiss company added to its large U.S. presence by pruchasing Alcon Laboratories. German, Swiss and Japanese companies find their strong currencies go further when purchasing in dollars, making undervalued companies that much cheaper.
Some industries have been especially active when it comes to mergers, not all of it related to tender offer activity.
Companies in the media field, in particular, have been searching feverishly for acquisitions, raising concern that consolidations of formerly independent broadcasting, publishing, newspaper and enterainment companies under umbrella ownerships are reducing the number of independent creative and journalistic outlets.
John D. Backe, president of CBS, Inc., the largest communications conglomerate, last week spoke out in defense of bigness in the communications industry as a necessary trend that he said actually has strengthened diverse and independent voices.
The recent merger proposal between LTV Corp. and the Lykes Corp., both parents of large financially ailing steel producers - Jones & Laughlin and the Youngstown Sheet and Tube Co. - signals further concentration in the troubled steel industry, but raises fears that the creation of a Penn Central of steel might be the result.
The brokerage industry - due to increased competition and slack business - has been consolidating at a rapid pace as structural changes in the securities business have favored creation of large, well capitalized and diversified firms.
Economist John Kenneth Galbraith sees the latest wave of merger activity as an acceleration of "a broad curve of development that's a century old" and thinks that it amounts to nothing more than "pure empire building."
"It affirms the point I've been arguing that size and power are more important than profits," said Galbraith. "There is no proof whatever that the takeovers result in better management. And the general performance of the conglomerate stocks is an indication that they usually do worse."
Other observers also worry that dynamic, entrepreneurial companies are being swallowed by corporate giants that find their ability to grow internally flagging and who use acquisitions as a kind of fix. This goes counter to the traditional argument that takeovers result in increased efficiency and productivity as more aggressive businessmen sweep out sleepy, entrenched managements.
But the investment bankers see the wave of tender offers at ever higher premiums as "a good example of capitalism in its truest form," in the words of Ira Harris.
To the extent shareholders wind up with more money as a result of the tender offers, said Gordon McMahon of Goldman, Sachs, "This represents a very positive development for the economy."
He conceded that, in these bidding battles, "The company with the financial muscle is usually able to win out. But the free market system has always favored the one who has the most money - it's one of the bases of the competitive free market system."
Meanwhile, the Wall Street merger experts think the current takeover phenomenon also could subside quickly.
"If interest rates tighten up, if companies don't have a lot of excess cash on their balance sheets, or if the stock market moves up sharply, you're sure to see a smaller number of tender offers," McMahon said.