Swallowing Up One Another

By John Greenwald

A new megawave of mergers washes over corporate America

Few threats shake top executives more than takeover fights for their companies. Such battles often consume colossal amounts of time and cash and strip the losers of their jobs and power. New merger wars are now sweeping across U.S. industry, and the outlook is for more contests ahead. Says Jeffrey Berenson, managing director of mergers and acquisitions for Merrill Lynch: "The whole merger arena is on fire again. 1984 is starting out as another blockbuster year."

The experts who painstakingly track merger activity agree. A total of 2,533 mergers in the U.S. was reported last year by Chicago-based W.T. Grimm & Co. That was a nine-year high. "We usually don't like to make predictions," says Grimm's research director, Tomislava Simic. "But I think you can expect to see the trend continue." That alarms some economists and politicians, who contend that takeovers are wasteful and dangerously concentrate corporate power. But many businessmen answer that under current conditions it often makes more financial sense to buy an existing company than to start a new one.

Mergers do not inevitably mean unfriendly takeovers. Last week Royal Dutch/Shell Group (1983 nine-month revenues: $60.7 billion), the mammoth British and Dutch energy producer, sought to buy out minority owners of its Houston-based Shell Oil subsidiary. Royal Dutch offered $55 a share, or $5.2 billion, for the approximately 30% of the U.S. firm that it does not already own. Said Sir Peter Baxendell, Royal Dutch senior executive: "This will enable us to invest and operate within the U.S. and abroad without any obstructions that might result from the presence of minority shareholders."

Plenty of obstructions have been facing Texaco (1983 revenues: $41.1 billion), which is battling to acquire Getty Oil in what would be the biggest corporate takeover ever. Last week Texaco sweetened its bid from $125 a share to $128 a share. That boosted its offer to more than $10 billion and won over Getty heirs who had earlier raised legal objections. Meanwhile, Pennzoil, which had opened the bidding for Getty with an offer of $112.50 a share, now wants $14 billion in damages if the Texaco deal goes through.

On Wall Street, investors greeted last week's Texaco and Royal Dutch offers with delight. Shell Oil stock jumped 9 1/2 points a share in one day, to 53 1/2, on news of the Royal Dutch bid, while Getty climbed 3 1/4, to 120. The excitement quickly spread through other energy stocks, sparking a rally among the issues.

Nor was last week's merger activity confined to energy firms. In the latest round of what is shaping up as a complex battle for control of Warner Communications (1983 revenues: about $3.5 billion), Newspaper and Magazine Publisher Rupert Murdoch filed court papers accusing the entertainment conglomerate of racketeering and fraud. The charges by Murdoch, who now owns a little more than 7% of Warner's voting stock, also named a rival suitor, Chris-Craft Industries, as a defendant. Murdoch wants the court to overturn a recent swap that would give Warner a 42.5% interest in Chris-Craft's television unit. That deal could block a possible Murdoch takeover bid.

Some peace overtures were also made in the merger wars last week. The board of soft-drink producer Royal Crown Cos. reversed itself and agreed to recommend that stockholders accept a $40-a-share bid by Florida-based Investor Victor Posner unless a better offer comes along. Posner, an aggressive and frequently feared accumulator of big blocks of corporate stock, controls more than 26% of Royal Crown's shares. Separately, a Castle & Cooke-led group dropped its efforts to swallow Dr Pepper, another beverage company, which is planning to sell out to Forstmann Little & Co., a private investment firm. Dr Pepper picked Forstmann Little even though its $22-a-share bid was $2 less than the Castle & Cooke group offer. Said Joe Hughes, executive vice president of Dr Pepper: "The Castle & Cooke offer was turned down because it did not demonstrate firm financial backing."

Companies currently being sought in the merger sweepstakes include many well-known names. Among them is Faberge, a cosmetics and fragrance firm that has become the object of a lively bidding war. McGregor Corp., a men's and boys' clothing maker, is offering $32 a share for Faberge, or $2 more than has so far been bid by anyone else. If the McGregor proposal succeeds, Faberge would become part of Meshulam Riklis's Rapid-American empire, which owns majority control of McGregor. Merger mania has had prospective targets searching for effective defenders (see box), and has inspired a spirited game on Wall Street: guessing which firms might be next. One frequently named takeover candidate is RCA (1983 revenues: $8.98 billion), whose sickly profits have not been helped by the dreary ratings of its NBC television network. Others include Walt Disney Productions, whose movie business has been floundering, and United Cable Television, a Denver-based cable-TV operator with 615,000 subscribers in 18 states. Says Michael Franson, an analyst for Boettcher & Co., a Denver securities firm: "If you broke up United into pieces and sold them all separately, they would be worth more to investors than United is today." Franson reasons that the stock, which is now trading for about $28 a share, has a real value of close to $40. Gene Schneider, United Cable's chairman, takes takeover talk in stride. "We don't have nightmares about it," says he.

Experts note that reserve-rich oil and gas producers like Phillips Petroleum (estimated 1983 revenues: $15.3 billion) and Sun Co. ($15.5 billion) are among the most attractive merger prospects. Reason: big oil firms can acquire energy reserves through mergers far more cheaply than they can find and develop them.

Similar arguments help to explain some of the rush to buy non-oil companies. Says Attorney Donald Drapkin, a merger and acquisition specialist with the law firm of Skadden, Arps, Slate, Meagher & Flom: "In the past ten years, it has been cheaper in most cases to buy companies than to build them. This is the ultimate justification for acquiring companies." High interest rates and low returns on capital investments are part of the reason. Says Edward Kliff, executive vice president of a New Jersey firm that looks for possible acquisition targets: "Money is expensive, and investment in research and development and in new ventures is risky. In these conditions, it makes more sense to buy a company than to invest in one."

Kliff and other observers have also noticed a fast-growing trend to so-called leveraged buyouts. In the fight for Dr Pepper, for example, both rival bidders planned to acquire the soft-drink producer through such arrangements. They enable buyers, often officers of a company, to purchase a firm or one of its divisions without risking their own money. Instead, they pledge assets of the business as security for a loan, and then use its income to repay the debt. Such deals, which some observers have attacked as invitations to strip a company of valuable operations, now account for about 10% of corporate takeovers, according to Mergers & Acquisitions, a quarterly business journal.

There are many critics of the trend to more and bigger mergers. Among them is James C. Thomas, a University of Tulsa law professor and longtime student of business. Thomas fears that the current takeover pace will lead to ominous concentrations of power, particularly in the oil industry. "Unless someone says 'Stop!' it's going to continue," says he. "And it will end with oil companies numbering no more than a handful."

Some public officials agree. Democratic Senator Howard Metzenbaum of Ohio will introduce this week a new version of his four-year-old bill to ban big oil mergers. Worries Metzenbaum: "With each new takeover, market concentration will increase, and the consumer will be left with fewer choices and higher prices." Says New Jersey Democrat Peter Rodino, chairman of the House Judiciary Committee who last year proposed that regulators review mergers to ensure that they meet public-interest standards:

'It's time to send a clear signal to corporate America that we will no longer tolerate unrestrained warfare between top managements for control of corporate assets."

Although such initiatives have yet to gain much support in either House, concerned business lobbyists are nevertheless working hard to defeat them. "There's a great uneasiness now in Congress about what is perceived as an incredible movement of money without creation of any jobs or products," says Howard Vine, a National Association of Manufacturers vice president. "The next time there's a big hostile takeover attempt, this unhappiness will come to life. We're not sitting around waiting to be kicked in the pants when it happens."

Any congressional drive against mergers will receive little support from the Reagan Administration. Its relaxed antitrust posture has helped to encourage big acquisitions and is unlikely to change after Presidential Counsellor Edwin Meese is sworn in as Attorney General. Says Council of Economic Advisers Chairman Martin Feldstein: "These mergers are not a development to be alarmed about. People think that when one company pays $100 million for another, the money simply disappears or is wasted. But that's not true." The shareholders who get the cash can use it to make productive investments, Feldstein says.

No matter who wins or loses the merger wars, one group will certainly come out ahead. It consists of the investment bankers and law firms that advise companies on everything from ways to fend off hostile takeovers to how much to pay for a corporation's stock. Last year such counselors raked in more than $1 billion in fees for their merger services, and 1984 is already shaping up as even better. If the Texaco-Getty deal goes through without hitches, Texaco's financial adviser will earn the largest hourly fee ever paid an investment banker. The firm, First Boston, which was called in last month to arbitrate between Getty management and key family members, is to receive $10 million for the 79 hours that it spent getting the feuding parties to accept Texaco's offer. That works out to $126,582 an hour. -- By John Greenwald Reported by David Beckwith/Washington and Raji Samghabadi/New York

With reporting by David Beckwith, Raji Samghabadi