A corporate takeover spree is signaling a new aggressiveness on the part of U.S. executives, who suddenly appear less concerned about the economy and fear of strategic missteps...
A corporate takeover spree is signaling a new aggressiveness on the part of U.S. executives, who suddenly appear less concerned about the economy and fear of strategic missteps.
Kmart is swallowing Sears. Cellular-phone giant Sprint and Nextel Communications are tying the knot. Johnson & Johnson is taking over Guidant, a maker of pacemakers and heart stents. Security-software giant Symantic snapped up tech-storage firm Veritas.
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And on Monday, software company PeopleSoft ended its yearlong fight to remain independent, agreeing to a $10.3 billion buyout by rival Oracle.
But as corporate dealmaking ramps up, so do worries that business consolidation will mean more lost jobs in an economy still struggling to generate healthy employment growth.
Experts say a confluence of factors is driving the surge in deals. Many companies are flush with cash after deep cost-cutting in 2001 and 2002 helped profits soar. Rebounding stock prices since 2002 have given executives spending money.
“For those companies in industries that have good stock prices, they have good currency,” said Kent Kresa, chairman emeritus of Northrop Grumman in Los Angeles.
More important is that many corporate managers are gaining confidence in the economy and in the prospects of their own businesses, say investment bankers, lawyers and others who advise executives. President Bush’s re-election, widely supported by business leaders, also helped kick-start the acquisition trend.
“It’s a sign of a different attitude in terms of companies’ perception of the future,” said Ned Riley, chief investment strategist at investment firm State Street Global Advisors in Boston.
That increased confidence is translating into a willingness to take more risks a big change from the mentality that prevailed after the stock market crumbled beginning in 2000.
After several years of caution in the executive suite, “I think a lot of companies have already wrung out costs, and now it’s a question of, how do you grow?” said Steve Arcano, a partner and merger adviser at the law firm Skadden, Arps, Meagher and Flom in New York.
The dollar volume of announced takeover deals involving U.S. companies is expected to reach $700 billion this year, according to data-tracker Thomson Financial in New York. That would be an increase of 29 percent from the level in 2003 and a jump of 62 percent from 2002.
At $700 billion, takeover deals still would be less than half the annual levels in 1998, 1999 and 2000, when the stock market was soaring amid the dot-com boom.
But the latest batch of deals is setting the stage for more to come in 2005, many experts say.
“There’s a new sense of urgency to get deals done that I haven’t seen in several years,” said Brooks Dexter, senior managing director at USBX Advisory Services, an investment bank in Los Angeles.
Some of that urgency may stem from pressure from company shareholders: As cash has built up to record levels on corporate balance sheets, executives must decide whether to reinvest it in the business or pay it to investors in the form of dividends, Riley said.
“Companies are trying to show that they can earn a lot more than 1.25 percent” on their cash, Riley said, referring to typical rates paid on short-term bank accounts.
The total level of cash in the coffers of the biggest U.S. industrial companies reached $590 billion as of Sept. 30, more than twice what it was at the end of 1999, according to Standard & Poor’s in New York.
Companies seem increasingly willing to spend that money.
On Monday, soft-drink and snack-food leader PepsiCo said it would spend $750 million to buy control of Europe’s biggest snack maker.
Honeywell International agreed to pay $1.5 billion to buy a British maker of fire and security devices.
Investors’ reaction to these and other takeover deals in recent weeks has generally been favorable. Yesterday, the Dow Jones industrial average finished above 10,700 for the first time since February. A favorable response from Wall Street can be critical, because it validates executives’ decisions and may encourage rivals to look for deals of their own.
“All it takes is a couple of marquee names in deals to trigger more,” said Richard Peterson, market strategist at Thomson Financial. Many executives say the forces driving buyouts haven’t changed from the 1990s, although they may be intensifying.
Richard Heckmann, chief executive of sporting-goods maker K2, a Carlsbad, Calif.-based company that has a bike unit on Vashon Island, said he’s been forced to beef up the company to keep up with demand from retailing giants such as Wal-Mart and Target.
“How does a little guy put 30 products in 3,000 stores?” said Heckmann, whose firm has made 26 acquisitions since he took over in November 2002, including 10 this year. “The retailers want bigger, stronger, fewer vendors.”
Semiconductor maker International Rectifier in El Segundo, Calif., has completed eight acquisitions since 2000, said chief executive Alex Lidow. He said the firm expects to make several more in 2005 as it assembles a “mosaic of energy-saving technologies” for products ranging from hybrid cars to home appliances and fluorescent lights.
“We have the means and we have the desire, and there is a supply,” said Lidow, noting that his company has about $800 million in cash on hand.
As the 1999-2000 tech bubble recedes into memory, target companies are more willing to accept reasonable valuations from acquirers, Lidow said.
“It’s kind of like the real-estate market,” he said. “Everybody always wants to sell at the peak, but it takes a few years to realize that we’re not going to see the peak again.”
For shareholders of takeover targets, deals can mean an instant windfall. In most cases today, deals are friendly rather than hostile.
For shareholders of an acquiring company, the question is whether a takeover will be a benefit or a curse to the business in the long run. The history of big takeover deals is littered with transactions that turned out to be duds, Peterson and other analysts noted.
Some analysts worry about the effects of a new takeover wave on the economy overall. Further business consolidation could boost the productivity of the surviving companies, but compared with using capital to create a new plant or product line, such deals may not add to the nation’s economic base, said Thomas McManus, investment strategist at Banc of America Securities in New York.
And corporate takeovers often lead to layoffs, he noted. “I’m not sure it definitely argues for continued economic growth,” he said of the latest deal wave.