Richard J. Peterson had an exciting week last week for the first time in ages. As chief market strategist for the U.S.-based data firm Thomson Financial, Peterson keeps track of companies around the world who are buying and selling each other. And after some very slow years, he saw the urge to merge suddenly come rushing back. On Monday, Canada's Alcan launched a hostile j3.4 billion takeover bid for France's Pechiney, only the second such attempt in France in the past decade. The combined firms would be the world's largest aluminum company. The next day, three companies in the U.S. announced separate acquisitions valued around $1 billion or more each. "That's the first time [for three in a day] since December 2001," enthuses Peterson.
Has the merger lovefest really returned and if so, is that a good or bad thing for average investors and the companies themselves? The mergers are widely regarded as one sign of impending economic recovery, but few want them to signal a return to the hysterical days of the late 1990s, when companies eager to create value snapped one another up like shoppers at a discount outlet. Spurred on by investment bankers, consultants and their own hubris, firms used their own inflated stock as currency or took on massive debt to pay cash. It was an easy way to get big quick, to diversify holdings, eliminate competition, or even to outsource tasks such as research and development.
Then the bubble burst, stock prices plummeted and many firms and their shareholders saw their merged dreams vanish. "People bought air," says Jean-NoŽl Vieille, equity research director at the French broker Aurel Leven. Companies slammed on the merger brakes which helped shut down an already dragging global economy.
Now a new flurry of eye-catching deals is pointing to a recovery. In the U.S., the software company Oracle has launched a $6.3 billion hostile bid for rival PeopleSoft. In Europe, BP and Russia's TNK have signed a $6 billion deal, and a Swiss orthopedics company, Centerpulse, which had an almost sealed deal with Smith & Nephew of the U.K., is suddenly being wooed by a U.S. firm, Zimmer Holding. Investors are thrilled, because all the activity suggests that the stock-market recovery of the past few weeks will continue. "It's exactly the sort of thing that should happen around the trough of the market," says Michael Hartnett, head of European equity strategy at Merrill Lynch in London. "If companies see value, then we should see value. It has to be good for sentiment." Some entire sectors, such as biotech (see next story), seem reignited. No, we're not reliving the frothy days of 2000, when there were almost 20,000 mergers and acquisitions valued at $1.5 trillion in Europe alone. But the long, steep decline over the past three years may have bottomed. Deal volume continued to drop slightly in the first half of this year, but early July has seen a big bounce.
The turnaround has been expected. Interest rates are at historic levels (last week the Bank of England restored the lowest rates since 1955), meaning that companies can finance acquisitions at a relatively low cost. Moreover, stock prices have fallen so far that the market value of some companies is less than the value of their assets. And even the European Union, which has a historically peevish attitude toward mega-mergers like General Electric and Honeywell, has more recently shown a softer side. But business has hesitated. "What was missing was the confidence of industry to believe in recovery," says Vieille. "This should open the way."
If the upturn in M and A activity continues, it'll be good news for beleaguered investment banks, who have laid off tens of thousands of their staff worldwide in recent years. But it's far less clear that merger mania is good for the companies themselves or their workers. The very consultants who touted mergers in the 1990s have since published studies about the outcome, and they make stark reading. One survey by consultants A.T. Kearney revealed that 58% of mergers failed to reach the value goals set by top managers. A McKinsey & Co. report found that 40% of mergers failed to capture the cost advantages that theoretically justified the takeover. Most starkly of all, Booz Allen & Hamilton concluded that "the likelihood of failure is greater than 50%, however you measure success shareholder value, stock price, profitability or attrition." In other words, mergers often do more harm than good. That sentiment is usually echoed by unions, who note the tendency of merged firms to lay off employees as they streamline operations and cut costs.
Despite the high risks, Michael Tršm, A.T. Kearney's managing director in Germany, says he fully expects another big wave of acquisitions. To compete in an ever-globalizing marketplace, companies must keep growing, he says, with many aspiring to become the leaders in their industry. That leaves them no choice but to buy up rivals. "You are forced to participate," he says.
The latest mergers are following a different pattern from ones at the height of the boom. In the heady late 1990s, M and A deals in telecommunications, technology and the media were based on guesses about consumer demand for new services. By contrast, many of the big deals at the moment involve old-school companies in cyclical industries such as oil or steel, and their logic is based on hard-nosed cost savings.
Alcan's bid for Pechiney is a case in point. The two companies attempted to combine operations in a three-way merger with a Swiss firm in 1999, only to be thwarted by the E.U.'s antitrust regulators in Brussels. Alcan ceo Travis Engen says that in order to consummate the deal, he's now willing to give up some of the aluminum-rolling operations that were the problem last time around. "The fit is really, really good," he says. Pechiney is holding out for now, and there's pressure on Alcan to raise its price.
The deal may not happen at all. Peterson at Thomson Financial says hostile takeover bids have a very low success rate: only one in five gets done. But stock markets have a short attention span. If the bid helps to spark a merger revival, everyone will have moved on by the time the deal runs into trouble. Is that about to happen? "There are many rumored deals out there," Peterson says. "But it's not a seismic turn of events. We'll have to see if one good day turns into one good week, and if one good week turns into one good month."