The Business & Finance section reported Sunday that the Federal Trade Commission permitted Exxon Corp. to acquire Reliance Electric Co. The merger did take place in 1979 but an FTC administrative hearing to consider reversing the takeover continues.
The day of the big corporate merger has returned.
After something of a lull in 1980, the multibillion-dollar acquisition is back in the news.
Just last Monday the Du Pont Co., the nation's largest chemical company, announced what will be the largest merger in history, if it comes off. Du Pont plans to spend more than $7 billion in cash and stock to buy the larger Conoco Inc., the nation's ninth-biggest oil company.
The Conoco-Du Pont courtship -- a "friendly" link-up -- is merely the largest of a host of gigantic mergers and merger attempts in the past few months.
Standard Oil of California (Socal) wanted to pay $3.9 billion to buy Amax Inc., a deal that Amax spurned, although Wall Street sources say Socal may make another run. Societe National Elf Aquitaine, the oil company 67 percent owned by the French government, has made a $2.8 billion offer for Texasgulf Inc., a leading sulfur producer that has endorsed the purchase.
Standard Oil of Ohio bought Kennecott Corp., the big copper producer, for $1.8 billion. Nabisco and Standard Brands -- the giant food packagers -- engaged in a true merger, combining to become Nabisco Brands Inc.
Seagram, the big Canadian distiller, has played a major role in two of the recent mergers, and one highly placed Standard Brands source said fear of a Seagram bid helped propel the Nabisco merger. Seagram made an unsuccessful $2 billion bid for St. Joe Minerals Corp., which St. Joe fended off by finding a white knight, Fluor Corp. Seagram's $2.55 billion attempt to gain control of Conoco drove the oil company into the arms of Du Pont, which has long had a desire to find a secure source of petroleum for its petrochemical operations.
Two years ago, however, it is doubtful corporations would have entertained the idea of a combination as big as Du Pont-Conoco, let alone actually make the offer.
In those days a Democratic-controlled Congress appeared willing to put the clamps on big corporate combines, while the Carter administration, at least publicly, also looked askance at two big businesses merging. One bill supported by liberals would have limited all conglomerate mergers, while another would have blocked large purchases by oil concerns of nonpetroleum companies.
But Congress never passed the threatened legislation, and today only the House remains in the hands of the Democrats. The antitrust attitude in the Reagan administration toward mergers is significantly looser. But even the Federal Trade Commission, run by a Carter appointee, permitted Exxon Corp., the giant oil company that is the world's largest industrial corporation, to spend more than $1 billion two years ago to buy the giant electrical equipment producer, Reliance Electric Co.
Even if companies looked at what the Carter administration said rather than what it did, they must feel more comfortable with Reagan. Attorney General William French Smith two weeks ago said that bigness was not necessarily bad.
"You knew that the pendulum would swing because antitrust doesn't have a constituency supporting it," said one liberal former government antitrust official. "When in a period of economic crisis, you need a whipping boy. The pendulum started swinging tree or four years ago, but it has now swung farther than it should have."
The antitrust philosophy espoused by Reagan's Justice Department, through Smith's comments and the words and deeds of Assistant Attorney General for Antitrust William Baxter, leaves little doubt that the administration believes big mergers can often aid the economy by producing greater business efficiency.
In fact, Baxter believes "there is no such thing as a vertical problem." or a competition problem caused by companies buying pieces of the corporate production chain. Further, Baxter directly challenges theories, generally put forth by the FTC, that economic concentration is sharply increasing. Baxter believes there has been "very very little change in aggregate concentration over the last century."
"Although the behavior of firms in industries with relatively few competitors will always deserve the attention of our Antitrust Division, evidence of anticompetitive behavior of barriers to entry should be carefully analyzed prior to government's intervening in the private economic process," Smith said in a recent speech.
In the world of antitrust, these speeches are more than simple public appearances. "Ninety percent of antitrust enforcement is a result of speeches and testimony," noted one practitioner. Clearly, then, the Baxter and Smith remarks are in some measure responsible for the takeover trend.
Will Washington effectively giving the go-ahead signal, Wall Street is rife with rumors of companies on the make. "The kids are in the candy store," said a Washington antitrust lawyer. "Corporate executives who never would have thought of deals two or three years ago are thinking of billion-dollar deals now."
David Kay, who heads the mergers and acquisitions department at the big brokerage firm Drexel Burnham Lambert, said the Exxon acquisition was the first indication to big companies that "megabuck mergers" would not be quashed on their face. "It came at a time when oil companies were being screamed at by the public and the companies were arguing that they needed higher profits to search for oil." Exxon took a lot of those profits and instead invested in a totally new line of business.
Of course, for the most part, the factors that impel the giant mergers are little different than those that spark smaller, less-publicized combinations or acquisitions.
Companies, expecially in a time of inflation, find it easier to get into a new line of business by purchasing an existing business rather than building from scratch.
Furthermore, many companies, after studying their operations discover that one or another line of business does not measure up to their needs, although the business may fit in well with another company's operations. U.S. Steel, for example, is selling $700 million of coal mines and coal reserves to Standard Oil of Ohio. International Harvester, which is facing severe financial difficulties, sold one of its divisions to Caterpillar Tractor for $505 million.
The basic business decisions behind mergers haven't changed. But big companies today feel less constrained in taking merger steps.
Texaco is said to be shopping. The company denied it is interested in Cities Service. Gulf is said to be looking for acquisitions too. In fact, there is hardly a major oil company in the country that is not rumored at one time or another to be ready to pounce on something. Despite the recent glut in oil supplies and consequent trimming of profits, most of the major oil companies have lots of cash in the till as a result of oil-price decontrol.
The wave of big mergers is occurring despite the continuation of record-high interest rates that only a few months ago common wisdom held would continue to hold mergers in check because of the high cost of obtaining funds. Companies now seem willing to pay the high cost of capital, in part, Kay said, because they are confident that costs soon will come down.
Joseph G. Fogg III, co-director of mergers and acquisitions at the giant investment banker Morgan Stanley & Co., said there are two major new factors that are driving large mergers.
Not only is there a changed climate in Washington, Fogg said, the recent surge of Canadian money into the United States is a major element in some transactions. Seagram, which is sitting on nearly $3 billion since selling its U.S. oil and gas operations to Sun Oil Co. last year, has been the most persistent, if unsuccessful, Canadian suitor of U.S. companies.
But Calgary-based Dome Petroleum spent $1.7 billion to buy up 22 percent of Conoco, then last month forced Conoco to swap its Canadian holdings to gets its stock back. Nu-West Group Ltd. is playing a similar game with Cities Service Co. today.
The Belzberg brothers of Vancouver made a run at the big broker The Bache Group Inc. Bache found its own white knight in the nation's largest insurance company, Prudential, which bought the brokerage firm for $385 million. Canadian Pacific made a bid for the Hobart Corp. of Troy, Ohio, wo found Dart & Kraft Inc. to come to its rescue.
What Drexel Burnham's Kay calls the "megabuck mergers" not only have been grabbing headlines in recent months, they have been inflating the value of corporate asset transfers.
For example, according to figures compiled by Morgan Stanley, through July 5, 100 major acquisitions have been completed -- 58 of them for purchase of a company outright and the remaining 42 the purchase of a line of business being divested by another company. The value of those 100 acquistions was $23.987 billion, or an average of nearly $240 million per transaction.
If the big merger is back, the medium-sized merger never left, according to Robert Jepson, who heads the mergers and acquisitions department at Chicago's giant Continental Illinois National Bank. In the $50 million-to-$500 million range, activity has remained strong and is getting stronger, he said, in large part because foreign investors "desire to put money into this marketplace."
Foreigners, he said, and not just Canadians, perceive the United State as an attractive place to do business, both on its own merits and when compared to their countries. "Half our clients are overseas-based," Jepson said.