Yes, Virginia, There Is Limit on Big Deals

NEW YORK —  With the current corporate merger wave surpassing even that of the 1980s Decade of Excess, it may be comforting to consider that there is a limit to how big these takeover deals can get.

For now, it’s about $250 billion--or the amount it would probably cost General Electric Co., the nation’s largest company, to buy Microsoft Corp., the second largest.

The last five weeks have seen five deals valued at more than $25 billion--a size reached only once in history before this year.

Every Monday seems to bring a new record-shattering announcement, and this week it is the proposed $56-billion takeover of Ameritech Corp. by SBC Communications Inc., which would reunify three of the local-telephone giants created by the court-ordered 1983 split-up of the Bell System.

Earlier, there was the $69-billion Travelers Group-Citicorp deal, the $57-billion NationsBank-BankAmerica deal and last week’s $43-billion Daimler Benz-Chrysler Corp. deal.

Stock-Market Drop Could Halt Spree

Where will it all end?

The most likely scenario, experts say, is that a stock-market drop finally will deprive would-be empire builders of the “currency”--their high-flying stock--that has fueled this record acquisition spree.

Less likely is that the unprecedented string of billion-dollar deals suddenly will provoke a broad antitrust crackdown in the name of consumer protection.

The Federal Trade Commission is on track to undertake a record number of full-dress antitrust investigations this year, but William Baer, chief of the FTC’s bureau of competition, said size is not the issue.

“Antitrust is about acting where we have good reason to suspect a merger will cause higher prices or inferior products,” Baer said in an interview Monday. “There’s no evidence that size alone is a problem.”

Some deal-watchers, including University of Chicago economist Steven N. Kaplan, have argued that the current merger wave only seems bigger than the 1980s version because the dollar value of the deals is inflated by the rising stock market.

But Kaplan now contends that 1998 is shaping up to be a record merger year by any measure.

He notes that 1988’s $247 billion of merger deals equaled a record 10% of the total U.S. stock-market valuation at the time. Last year’s $657 billion worth of mergers was an all-time high dollar amount but represented only 7% of stock-market valuation.

With $526 billion worth of deals already announced this year, 1998 is on track to post a stunning $1.4 trillion of merger activity, which would be a record 12% of stock-market valuation, according to Kaplan.

The 1980s takeovers, often fueled by high-interest, junk-bond borrowing, were mainly aimed at squeezing costs and inefficiencies out of flabby or badly run companies. But years of restructuring have left fewer easy targets for corporate raiders.

Instead, today’s merger wave is predominantly financed with stock instead of debt and is being carried out for strategic reasons, such as entering a new market or teaming up with a rival to gain greater competitive power.

The latest deals span the whole spectrum of industries. On Monday alone, billion-dollar deals were announced or hotly rumored in telecommunications, banking, chemicals, oil services, electric utilities and entertainment.

Faced with this kind of tsunami, the government could, of course, attempt to set limits.

It has already done so in some industries. For example, federal regulators are blocking Lockheed Martin Corp.’s proposed acquisition of Northrop Grumman Corp. on antitrust grounds. Last year, the FTC halted the proposed merger of the nation’s No. 1 and No. 2 office-supply discounters, Office Depot and Staples.

And any day now, the federal government and a group of state attorneys general are expected to file new antitrust charges against software titan Microsoft.

In the banking business, a 1994 federal interstate banking law effectively limits the size of American banks by capping at 10% the maximum share of U.S. bank and thrift deposits that a single institution can control.

The proposed merger of NationsBank and BankAmerica Corp., announced last month, would create a bank holding about $280 billion in deposits, or about 8% of total U.S. deposits. So that combined institution conceivably could be precluded from merging with another mega-bank.

But Clinton administration regulators are not considered overly aggressive by historical standards, allowing many eye-popping deals go through without complaint. “The overwhelming majority of the deals I see are competition-neutral,” explained the FTC’s Baer. “It’s not our job to manage the economy.”

Many corporate executives, economists and Wall Street analysts insist that worries about the seemingly gargantuan size of the newly merging companies are misplaced.

“People shouldn’t be too concerned that we’ll wind up with oligopolies controlling the marketplace,” said Roger C. Altman, a former deputy Treasury secretary in the Clinton administration who now runs a boutique Wall Street investment bank advising companies on mergers and acquisitions.

“Businesses are being created at such a rapid rate that I don’t think you’ll see a very small number of players in key industries,” he added. “In telecommunications, look at WorldCom. Whoever heard of them 10 years ago?”

With the increasing globalization of the world economy--meaning unprecedented interdependence among markets--”what looks big in a national economy looks small in the global economy,” said MIT economist Lester Thurow.

The planned merger of Chrysler and Germany’s Daimler-Benz will create an auto maker that still will rank only No. 5 in size worldwide, Thurow noted.

The merger craze among U.S. banks is finally creating institutions on the scale of financial giants in Europe and Japan, where mega-banks have long been the rule rather than the exception.

What’s more, the traditional main objection to giant mergers--that the resulting companies will be able to exercise undue influence over prices of goods and services--has proved to be a straw man in the 1990s, economists point out.

The decline in consumer price inflation to the lowest levels in decades, in the United States and abroad, “tells you that companies aren’t doing that [controlling prices]” even as they have grown in size and apparent power, Thurow said.

Eastman Kodak Co. and Japan’s Fuji Photo Film Co. account for more than 80% of the 35-millimeter film market in the United States, yet they are locked in a vicious competitive battle with each other--resulting in film-price cuts, to the obvious benefit of the consumer.

Some economists, however, worry that an ongoing merger wave that results in over-concentration in key industries will eventually lead to price control. But that day still seems far off to many. And should it arrive, economists such as Thurow say the government will have little trouble dealing with such blatant cases, just as the corporate trusts of the early part of this century were broken up.

The greater challenge, Thurow said, is that the new realities of the global economy “require that companies both compete and cooperate” with each other. Cooperation is needed in the sense that the global telecommunications systems, for example, must be seamless from the customer’s point of view, yet must give those same customers many choices of vendors and technologies.

Warren Bennis, business professor at USC’s Marshall School of Business, said another danger is “the bureaucratization of imagination”--the risk that piling size on size may stifle creativity.

Of course, he and other experts noted, such a trend is self-limiting because bloated, unimaginative companies get shouldered aside in competition and eventually get broken up or go out of business.

Perhaps the most interesting answer to the question of “when will it end” is this: It may end when stocks no longer are so richly priced and thus so relatively easy to use as currency in takeovers.

Small Investors Playing a Role

High-priced stocks allow companies to issue comparatively fewer shares to buy other companies. And unlike debt-financed takeovers, stock-for-stock deals cost the buyers nothing in terms of borrowing costs.

SBC Communications’ offer for Ameritech, for example, is 1.316 shares of SBC for each of Ameritech’s 1.1 billion outstanding shares.

Ironically, small investors are contributing to the merger wave by funneling record sums into stock mutual funds--often via retirement accounts--which then help push the broad market higher, giving stocks their luster as merger currency.

“The individual investor has fueled the mergers and acquisitions boom by pouring money into mutual funds,” said Edward Yardeni, economist at Deutsche Morgan Grenfell in New York.

But some Wall Street pros say that even a significant pullback in the stock market may not be enough to end the merger wave.

Should stock prices decline, making companies more reluctant to use their shares as payment for acquisitions, some firms may simply decide to pay in cash, using borrowed money--as was the case with many mergers in the 1980s.

Thanks to spectacular profit gains in the 1990s, many of America’s largest companies are in superb financial shape, and could easily afford to take on far more debt to finance takeovers that make strategic sense, analysts say.

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Mulligan reported from New York and Petruno from Los Angeles.