Merger experts expect the torrid pace of takeover activity to continue in 1985. However, they also expect the number of multibillion-dollar deals and leveraged buyouts will decline from 1984's record levels.
Wall Street experts say the underlying factors that have led to increased merger activity recently, including deregulation in several key industries and the Reagan administration's relaxed antitrust policy, will continue to encourage takeovers.
The public debate over the level of merger activity is expected to continue, although congressional sources said legislation that would alter the takeover process will not be introduced in the House before late this year. A House subcommittee is planning to begin extensive hearings next month on the impact of the increased level of takeover activity.
To put the level of activity causing the debate into perspective, consider the following data compiled by W. T. Grimm & Co.: During the first nine months of last year, the value of reported mergers totaled $103.2 billion, almost twice the $53.3 billion value of mergers reported in the first nine months of 1983 and $20.6 billion more than the old record for an entire year set in 1981.
The biggest mergers in history, the $13.4 billion acquisition of Gulf Corp. by Chevron Corp. and the $10.1 billion acquisition of Getty Oil Co. by Texaco Inc., took place in 1984. In both mergers, the acquiring company said it could buy oil for less on Wall Street than it would have to spend to drill for new reserves.
Congressional hearings on merger activity will focus on shareholder rights in mergers, the impact of mergers on employes and communities, hostile takeovers, defensive tactics by companies trying to remain independent and the dramatic increase in debt on the balance sheets of companies that have gone private in leveraged buyouts. Recent suggestions by the chief executives of America's largest corporations that they would support legislation to make the companies they manage immune to unwanted suitors also will be examined.
The implications of the belief that the only defense against an unwanted takeover is a high stock price also will be debated.
Finally, the hearings will address the concern that the explosion in takeovers is damaging the global competitiveness of U.S. industry because corporate executives are forced to pay more attention to takeover prevention than the operations of their companies.
"I anticipate another good year for merger activity, and I think it will be broad-based from an industry standpoint," said Geoffrey T. Boisi, head of mergers and acquisitions at Goldman, Sachs & Co., the firm that arranged the most mergers in excess of $100 million last year.
"I think you will see more proxy fights, and the kind of tender offers you will see will be more aggressively priced. I also think you will see a continuation of transactions where investors believe the breakup value of a corporation is much greater than the going market price, even in cases where they offer a fairly hefty merger premium over the market price," Boisi said.
Joseph G. Fogg III, director of mergers and acquisitions at Morgan Stanley & Co., agreed with Boisi's analysis. He said the discrepancy between the asset value of companies and their stock market value will continue to drive corporate breakup deals, in which a corporation is purchased by investors and restructured through a sale of most of the assets.
Fogg said he would prefer to see corporations experiment with new provisions, such as requiring a shareholder vote if a hostile bidder's stock is repurchased at a premium by a target company, rather than legislation that alters the takeover process. Such stock repurchases, known as "greenmail," stirred public debate last year as hostile bidders pocketed millions of dollars in quick profits while public stockholders watched the price of their stocks drop after greenmail occurred.
"Most of what is going on is driven by fundamental forces in the economy," Fogg said. "If you believe a market economy works best, when you deregulate an industry you are going to see consolidation by participants seeking to increase their efficiency by eliminating inefficient facilities."
In six months, Eric Gleacher, who joined the firm late in 1983 from Lehman Brothers, will replace Fogg as director of Morgan Stanley's M&A department. Morgan's M&A specialists advised Chevron when it acquired Gulf last year, for which the firm earned $16.5 million.
Ken Miller, head of mergers and acquisitions at Merrill Lynch Capital Markets, said he thinks mergers will surge in the health-care industry this year. He said the only thing that could hamper merger activity would be a slowdown in the economy, which would reduce the confidence of senior executives. In last year's largest merger, Merrill Lynch earned approxmately $18 million for advising Gulf.
William Brian Little, a partner in the leveraged-buyout firm of Forstmann Little & Co., said a large number of buyouts announced in the last six months are not closing because banks are being more selective in extending credit. He said the environment for leveraged buyouts is good, because the stock market is sluggish and interest rates are lower than they were during most of last year.
In a leveraged buyout, a small group of investors purchases a public company and makes it private, using mostly borrowed money. Usually, the borrowed funds are repaid with cash generated by the company's operations and the sale of some assets.
Forstmann Little participated in two leveraged buyouts last year, the $650 million purchase of Dr Pepper Co. and the $100 million buyout of Topps Chewing Gum, Inc.
An increasing number of companies will use Employe Stock Ownership Plans in leveraged buyouts, according to Peter Solomon, chairman of mergers and acquisitions at Lehman Brothers, a division of Shearson Lehman/American Express. Solomon said ESOPs also may be used as a tactic to prevent hostile takeovers.
Stock purchases by employes through ESOPs receive preferential tax treatment because banks can exclude half the interest income they earn by lending money to these plans. They are an attractive vehicle to finance stock purchases because banks, which receive this tax break, can offer lower interest rates to finance the employe stock purchases without hurting their after-tax profits.
Solomon said he thinks that the food industry, where several large mergers took place last year, will continue to consolidate as firms seek to buy, rather than build, channels of distribution for their products.
One merger expert, Arthur Young partner James M. Needham, said he believes leveraged buyouts will help the economy by returning ownership of companies to the executives who manage them, giving them increased incentives to do whatever it takes to operate profitably.