NEW YORK — The wave of debt-financed mergers and buy-outs, once considered so inexorable that it required the attention of Congress and the Federal Reserve Board, has lately run into a breakwater.
In the last few months, no fewer than four highly publicized takeover offers have been reworked to reduce the offer price, in most cases because investors could not be found to finance the higher bids.
As a result, some investment bankers say they are beginning to detect a crest in the merger cycle.
"It's natural in markets that things go to excess," one mergers and acquisitions professional at a major Wall Street firm said. "In mid-1984, it was obvious to those of us in the trade that the piper would have to be paid."
Whether that moment has arrived is still open to debate. Most merger experts believe that commercial banks, institutional money managers and other big investors are so eager to place their funds in these high-yielding deals that the vogue for debt-financed takeovers has far to go before petering out.
"If there was a general softening in the economy, I think you'd see some more stringent standards," says Guy P. Wyser-Pratte, head of the arbitrage department at Prudential-Bache Securities.
Among the major takeover bids that have run into financing problems are these:
- Atlanta entrepreneur Ted Turner's acquisition of MGM/UA Entertainment, for which he initially offered $29 a share in cash, later reduced to $25 a share and finalized last Thursday at $20 a share.
- Carl C. Icahn's takeover of Trans World Airlines, which ran afoul of the airline's burgeoning business problems. After Paine Webber Inc. failed to interest investors with a deal for $19.50 per share in cash and $4.50 per share in preferred stock, the investment banking firm of Drexel Burnham Lambert stepped in and reworked the transaction as a no-cash offer. By then, the airline had reported quarterly losses of double the projected $70 million.
- The buy-out of R. H. Macy, the department store company, by its own management, which initially offered $70 a share but completed the deal at $68 a share after the financial community derided the first offer as overpriced and bankers balked at putting up the necessary financing.
In at least one other case, a buyer reduced the cash portion of its offer at a late stage. That is the buy-out of Beatrice Cos. financed by Kohlberg Kravis Roberts & Co., a private firm that specializes in leveraged buy-outs (in which the target company's assets are used as collateral for loans to the group buying it out).
But many takeover experts think that Kohlberg Kravis may have strategically overbid at first to drive counterbidders away, then renegotiated its proposal as the only buyer in the market.
The Beatrice board met to consider the new bid last week, but it is expected to accede.
Some say the price cuts on so many high-profile deals in such a short period may just reflect a confluence of unrelated misfortunes.
"I don't think there is a trend," says Leon Black, a managing director of Drexel Burnham Lambert, which is known for its imaginativeness in arranging mergers financed with high-yield, or "junk" debt, and the lead investment banker on the Turner and Icahn offers. "Right now there is a coincidence of a few highly visible deals in different industries involving companies with material adverse changes" in their financial results.
Icahn's bid for TWA, initially negotiated by Paine Webber, was considered risky even when it included $19.50 a share in cash and $4.50 in preferred stock, and the collapse of the airline's business late last year simply added to its aura of fantasy.
"That was a poorly priced transaction from the beginning," says one institutional investor who has been an enthusiastic buyer of other highly leveraged deals. "When Paine Webber sent us their documents, I could see I wasn't going to end up with any equity in the deal. It was a bad joke."
In the end, Drexel Burnham fashioned a bid in which shareholders will get preferred stock and junk bonds that will not pay dividends or interest in cash for four years.
Poor Credit Rating
Turner's takeover of MGM, financiers say, has also been troubled by the entrepreneur's less-than-sterling credit rating and reports of sliding financial results at the target company.
The difficulty in financing high-stakes buy-out deals is not exactly a new phenomenon, even in what many consider an overheated market.
One year ago, the leveraged buy-out of Denny's, the La Mirada-based fast-food chain, suffered months of delays while Merrill Lynch struggled to raise $800 million. Denny's was finally taken private at a reduced price of $765 million.
Perhaps the biggest buy-out to meet financing problems was that of City Investing, the diversified financial-services company. In late 1984, City considered two leveraged buy-outs for more than $1.8 billion--one to be arranged by Merrill Lynch.