Return of the Big Deal

Some targets fight, but $100 million mergers grow

One corporate activity that the stock market's sag has not discouraged is the big takeover. Quite the contrary: partly because share prices are low, the number of multimillion-dollar mergers is rising. W.T. Grimm, a Chicago firm of merger consultants, counts a somewhat lower total number of mergers and acquisitions so far in 1977 than a year ago, but in the first six months of this year it found 20 cases in which a company proposed to pay $100 million or more for control of another firm, as compared with twelve bids of that size in the same 1976 period. Victor Niederhoffer, a New York corporate matchmaker, estimates that $17.2 billion worth of merger deals will be consummated this year, v. $12.6 billion last year and $5.1 billion in 1975.

The list of big deals announced over the past twelve months includes the largest U.S. merger ever: General Electric's $2 billion purchase of Utah International, a company that mines coal and copper. Two other huge mergers: Mobil Oil's $1 billion acquisition of Marcor, the company that owns the Montgomery Ward department stores, and Atlantic-Richfield's $700 million buy-out of Anaconda, the copper-mining giant. Right now, Gulf Oil has offered $440 million for Kewanee Industries, an independent oil and gas producer; PepsiCo has bid $315 million in stock for Pizza Hut, a chain of franchised fast-food stores; and Anderson, Clayton & Co., a major food processor, initially offered $323 million, before later reducing its bid, to buy control of Gerber Products, maker of two-thirds of the nation's baby food.

The hottest takeover battle now going on is the struggle for control of Babcock & Wilcox, New York-based maker of steam-generating equipment and builder of nuclear power plants (estimated 1977 sales: $1.8 billion). Early in 1977, when the company's shares were selling for $35, Babcock management rejected a tender offer from United Technologies Corp. of $42 a share for all its stock; opposition continued when the offer was raised to $48. Last week Babcock accepted a bid from J. Ray McDermott & Co., a New Orleans-based firm best known for its production of oil-drilling rigs, of $55 for 35% of its shares. At week's end United raised its offer to $55 each for "any and all" of Babcock's 12.2 million shares, an offer that, if accepted, could cost it $671 million. McDermott raised the ante further to $60, and Babcock shareholders will have to decide which offer to take.

Why the surge in big merger proposals? Primarily, says Stephen Friedman, a partner specializing in corporate marriages at Goldman,, Sachs, because many managers of giant companies find that "it is cheaper to buy than to build." Their own companies are flush with cash, and as they look around for expansion possibilities, they find numerous companies not much smaller than their own selling for less than asset value per share--so that they can afford to make an offer well above market price and still pick up a company relatively inexpensively.

The activity is further increased, according to Wall Street merger experts, by the recent interest of European investors--beset by political, social and economic uncertainty at home--in taking over U.S. companies. Says Peter Bucks, a U.S. representative of Hill Samuel, a London merchant-banking firm: "The U.S. is the last bastion of capitalism. Where else can European industrial!sts get such high rates of return with such low perceived levels of risk?" This spring, Great Britain's Beecham Group Ltd. paid $82 million for the Calgon division of Merck & Co.

For managers of target companies, a takeover bid is a mixed blessing. Some welcome it as a way of showing stockholders that however low the market price of a company's shares may be, somebody appreciates a good profit record. Many other corporate executives exhibit what one merger expert calls the "knee-jerk reaction" to fight back--possibly because they cherish independence, possibly because they fear a takeover will cost them their own jobs. Companies threatened with mergers have many weapons to fight back with, including an appeal to federal courts that a takeover would violate antitrust laws and an invocation of laws in most industrial states that even ban takeovers approved by federal authorities. Companies can also change corporate charters to give directors veto rights over shareholders' wishes.

But there is a danger that time-delaying defensive moves can often leave directors vulnerable to lawsuits filed by disgruntled shareholders who wanted to accept an offer that seemed fair. Now some of the rules that help small companies to fight off unwanted bids are under attack, and many of Wall Street's merger experts see the rush toward acquisitions continuing--especially since one of the best ways a vulnerable company can protect itself from a takeover is for it to use up its own spare cash to buy a still smaller firm.

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