In the silliness that permeated Wall Street during the record $7.5 billion takeover battle for Conoco Inc. last July and August, each day seemed to bring new rumors that this or that major oil company was ready to launch its own bid for a "second-tier" petroleum concern.
So far, more than a month after E.I. du Pont de Nemours & Co. bested Mobil Corp. and Seagram Co. for control of the nation's ninth-largest oil company, the splurge of anticipated energy takeovers has yet to occur.
"That doesn't mean we won't see some more activity in the oil industry," said a Wall Street analyst. "But when things are flying hot and fast, as they were during the Conoco thing, there's a tendency to extrapolate. If Mobil the nation's second-biggest oil company had won, other majors might have felt forced, for competitive reasons, to seek out a smaller merger candidate. But Mobil didn't win."
Major oil companies did nothing to cool speculation that they would follow Mobil's lead and try to buy one of their smaller brethren and the millions of barrels of oil reserves each of the smaller companies controls. Instead, many big oil companies helped fuel the rumors.
Texaco tapped its bankers for a $5.5 billion line of credit. Gulf hit its bankers up for a $5 billion commitment. Mobil has $6 billion on the hook, money it would have borrowed if it had won the bidding war.
Those lines of credit are still outstanding, banking sources said, and presumably could be drawn on today if a major oil company decided to try to buy another second-tier firm (only in the oil industry could an $18.3 billion company such as Conoco be considered second-tier).
But those outstanding lines are "less ominous than you would think," said a major banker. When those huge lines of credit were put together, in a matter of days last July, most banks demanded that the oil companies pay for them for a minimum of 90 days at a commitment fee of 0.25 percent a year, or $3 million for a $5-billion line.
The banker said he expects the big oil companies to let those lines expire next month. Not only did Mobil lose, he said, the Justice Department did not make it clear whether it would approve a merger of a major oil company and a second-level producer, and by pointedly failing to approve Mobil's bid on the same day it approved Du Pont's, the government made major oil companies shyer about shopping.
At the same time, smaller oil companies -- like Conoco, preferring to stay indepedent -- have girded themselves to fight off potential takeovers. Many smaller oil companies, among them Marathon and Cities Service, have their own multibillion-dollar lines of credit that they could use to thwart a suitor. And Canadian oil firms, which have sparked much of the energy-takeover activity in the United States, are now under a go-slow order from the Canadian government, wary of U.S. retaliation because of Canada's regulations on foreign investment.
While the big companies likely will let their expensive lines of credit expire, the smaller oil companies probably will keep theirs, a banker said. "The majors know any acquisition attempt will be a damned expensive game."
Oil companies aren't the only firms whose billion-dollar merger maneuvers have captivated the public. The French giant Elf Aquitaine bought Texasgulf. Fluor Corp., in much the same White Knight garb that Du Pont wore in acquiring Conoco, bought St. Joe's Minerals. Nabisco and Standard Brands merged. But if the public's attention is riveted on the big mergers, most of the merger activity is among smaller concerns or involves the purchase of one portion or division of another company.
Beatrice Foods, for example, has sold off about a score of its lines of business in recent years, including last June's sale of Dannon yogurt to BSN-Gervais Danone, a French firm. Bendix, the Detroit conglomerate, is looking to rid itself of forest products and mining subsidiaries to convert itself to a high-technology firm.
A line of business that is not sufficiently profitable for one company may be transformed by another. Many firms that bought a wide variety of businesses in the 1970s to insulate themselves from the business cycle are finding it harder to manage a "conglomerate" than executives thought it would be.
Assets of firms are being shifted around more frequently than in the past, and more frequently than entire firms are being swallowed by predators.
As the economy sours, some mergers may be forced by circumstances or even engineered by federal regulatory agencies.
With interest rates high, many savings and loan associations are losing money on their low-yielding portfolios of home mortgages. Two weeks ago a subsidiary of National Steel Corp., with government assistance, bought two big but sinking savings and loans to create the largest federally chartered association in the country. Dozens of other mergers are likely.
A number of rural banks with big agricultural loan portfolios are feeling the squeeze of low farm prices, and some may be candidates for mergers.
A number of airlines are caught between the Scylla of rising costs and the Charybdis of falling passenger loads. Although the disastrous merger between Pan American and National last year probably will give pause to any combinations of major carriers, the growing market share smaller airlines have been garnering may make them attractive to another line. Air Florida, for example, has made a major investment in Western Air Lines.
Publishers are likely to merge or be acquired as that business becomes increasingly risky and expensive. Warner Communications owns a big piece of Harcourt Brace Jovanovich.
"Most of the merger activity we've seen so far this year has been inspired by inflation and undervalued stock prices," said Stewart Pillette of the brokerage firm Drexel Burnham Lambert Inc. "Boards of directors, betting on inflation, are willing to pay high prices to buy those undervalued assets."
But many analysts, including Pillette, think the economy may be headed into a period of lower inflation and business decline. That may change the attitudes of companies toward many acquisitions. "With the price of crude oil going down, Conoco and its vast oil reserves must look less attractive today than 90 days ago," said the head of research at a major brokerage firm, although Du Pont's reasons for buying the company included assuring itself of a steady flow of oil in the event of another supply disruption similar to those that occurred during the Arab oil embargo and the Iranian revolution.
Will the merger mania subside? During the first six months of this year companies spent $35.7 billion to buy whole companies or pieces of other companies. During all of 1980 the takeover tab was $44.3 billion.
"What happens to mergers during the upcoming months depends on many factors, most of which we cannot or do not know," said the chief arbitrageur at a major securities firm who makes his living buying and sellings stocks of companies that are involved in takeovers. "Would anyone have gone after Conoco if Dome Petroleum, a Canadian company that bought 22 percent of Conoco, then exchanged its shares for Conoco's Canadian holdings hadn't made the first move? I think not."
Trying to divine likely takeover candidates is an impossible game, the arbitrageur said.
Even though many analysts think economic decline will make asset purchases less attractive, others think the merger boom will stay alive for a while.
Richard Scott-Ram, vice president of Chemical Bank, said the factors that impelled mergers in early 1981 remain in force. He said more favorable attitudes toward big business on the part of the Reagan administration will influence companies in "compatible" industries to merge for efficiency reasons. In particular, he cited the financial services industry.
Already this year the biggest insurance company, Prudential, has purchased the eighth-largest broker, Bache, and the giant American Express bought the second-biggest broker, Shearson Loeb Rhoades. Phibro, the largest publicly traded commodities firm, bought the giant investment banking partnership Salomon Brothers, while the investment banker Donaldson, Lufkin & Jenrette just acquired the large but troubled commodities firm ACLI International Inc.
Merrill Lynch & Co., the largest brokerage firm in the country, noted recently that many acquiring companies make their bids only after they first establish "positions in the stocks of other companies." Merrill Lynch has composed a list of 60 companies in which other companies already have sizable investments.
For example, American Financial Corp. has a 14 percent share of Wheeling-Pittsburgh Steel. Brascan Ltd., the big Canadian firm, owns 21 percent of Scott Paper, while Gulf & Western controls 19 percent of General Tire & Rubber and 7 percent of B.F. Goodrich. Gulf & Western, a big conglomerate, has major stakes in a number of other companies as well.
Experts tout metals companies and middle-sized retailers as being ripe for acquisition. Garfinckel, Brooks Brothers, Miller and Rhoads just succumbed to Allied Stores Inc.
Several months ago the big Washington chain, Drug Fair, was purchased by Gray Drug Stores of Cleveland. But as Gray just discovered, sometimes the bigger fish isn't the biggest fish. A few days ago Sherwin Williams Co., the big paint company, swallowed Gray. The $55 million price tag doesn't match the $7.5 billion Conoco deal, but none have and few are likely to in the near future.