The corporate merger boom, which dominated the U.S. business landscape off and on for the last three decades, may be nearing an end.
It seems it's getting too hard to find good companies to acquire, according to a survey of 217 directors of major corporations.
Seventy percent of the directors expect "merger activity to decrease in coming years. . . . The major deterrent to mergers, say 72 percent, is the difficulty of finding good acquisition candidates," said the big accounting firm Touche Ross & Co. in reporting the results of its survey conducted by Columbia University Professor James H. Scott Jr.
But the high cost of financing mergers and stricter government controls on merger activity also will play important roles in the reduction, the directors said.
The merger craze already seems to have tapered off. According to W. T. Grimm & Co., the Chicago firm that specializes in mergers, there were 11 percent fewer acquisitions in 1980 than in 1979, although activity picked up during the final three months of last year.
There were, however, more "big deals" -- transactions of $100 million or more -- last year than in 1979. Yet many of the so-called big-deal mergers did not involve one company absorbing another, but rather one company buying a subsidiary that another company wanted to get rid of. In many cases, companies who played the merger game several years ago are finding that what once seemed like attractive purchases don't fit at all into their plans.
Bendix Corp. -- which made the news last year because of the rumors surrounding the relationship between its chairman, William Agee, and his now-departed protege, Mary Cunningham -- has been trying to sell off subsidiaries in forest products and mining in an attempt to convert Bendix into a high-technology company.
Seagram, the big Canadian distillers, sold Texas Pacific Oil Co. to Sun Oil Co. for $2.3 billion.
RCA Corp., whose chairman, Edgar Griffiths, either resigned or was forced out last month, has been selling acquisitions in areas such as food to concentrate its resources in fields it knows better, such as electronics.
According to Grimm's Tomislava Simic, in the coming years "more companies will divest subsidiaries to . . . cut capital needs, raise cash or concentrate resources in emerging growth industries."
The demise of the merger craze may well be a sanguine development. From a purely economic point of view, many companies found that it is neither easy nor efficient to operate in widely disparate industries.
Furthermore, the concentration of social and economic power that can occur when companies merge is of immense social concern. While the merger of Chrysler and Ford may make eminent social sense so long as Japan and Germany provide competition, the aborted 1979 merger between American Express Co., and McGraw-Hill Inc. may have presented a severe test to the First Amendment.
But especially in the 1970s, the economics that triggered the merger boom seemed unassailable from a dollars-and-cents point of view. With stock prices low -- even today many companies would be worth more to their shareholders if their assets were sold and the proceeds distributed -- companies found it far sounder to buy a going concern than to build their own facilities.
According to a director quoted in the Touche Ross study, "The odds are enormously in favor of buying an old, competent, successful and underpriced company rather than taking the risk of building a new plant and wondering if you can get environmental approval, meet OSHA [Occupational Safety and Health Administration] requirements and penetrate a competitive market. You can accomplish the same growth at less cost and with more chance of success through an acquisition."
Stock prices have rebounded in the last few years, but more than a few major U.S. companies have book values (what their assets are worth) far higher than the total value of their outstanding stock.
The directors, most of whom serve on the boards of three or more companies, identified other factors in the merger movement, including an undervalued U.S.-dollar which made it cheaper for foreign companies to buy U.S. firms (as well as other U.S. assets).
Many of them also pinpointed "management's desire for self-aggrandizement. The larger a company grows, the higher the compensation for executives, even if earnings per share remain flat. Also, enlarging a company tends to reduce the influence of major shareholders."
Even though stock prices have risen in the last year and the dollar has strengthened markedly, nearly all factors that help propel the merger boom remain nearly as potent as in 1978. Nevertheless, most directors expect merger activity to slacken.
The factors that impel mergers will be outweighed by the lack of good merger candidates, continued high interest rates that makes financing so prohibitive that even undervalued companies are too expensive to buy, and an expected increase in government hostility to mergers, although the new administration's attitude toward the subject is as yet untested.