Takeovers have been the most awesome money machine on Wall Street. And the investment firm of Drexel Burnham Lambert frequently has been at the controls, revving things up by feeding the financial markets with high-interest bonds that it called "high yield" and others called "junk."
As the insider trading scandal surrounding professional speculator Ivan F. Boesky widens, an atmosphere of fear and panic among securities professionals has enveloped Drexel. Federal investigators have subpoenaed a number of its officials, and the resulting speculation about who might be involved in the scandal has raised doubts about the ability of Drexel and other investment houses to complete takeovers and corporate restructurings that require junk bonds to be issued.
Troubles for Drexel and junk bonds could have widespread implications for the takeover wave that they have stirred up in so many different industries.
Stocks of real and rumored takeover targets fell sharply last week, although they recovered somewhat toward the end of the week. And Drexel and corporate raiders have felt obliged to assure the rest of Wall Street that their deals won't fall apart.
While Drexel may lose some business, the firm has completed some hefty financings in the midst of the unfolding scandal. And new takeover assaults emerged last week.
Here is a look at how uncertainty in the takeover and junk bond market could affect various industries:
One effect of the Boesky scandal is that companies are less likely to be "put into play" as takeover candidates because speculative stock buying by arbitrageurs may taper off, notes Robert Hanisee, president and director of research at Seidler Amdec Securities in Los Angeles. It appeared that just prior to the disclosure of the Boesky case, Lockheed had become a target of takeover speculation. Its stock rose sharply in active trading, but it then fell off sharply last week. The rumors and buying frenzy are dead for now.
Beyond the impact on arbitrageurs, acquisition activity in defense and aerospace firms will be virtually unaffected by the Boesky scandal, securities analysts say.
Although defense stocks have been considered ripe for takeover activity, virtually all of the deals involving major contractors have been friendly, and none have been financed by junk bonds.
Of three recently announced deals in defense stocks, none are unfriendly, and all are financed through traditional channels, Hanisee noted. They include Emerson Electric's acquisition of Hazeltine, Lockheed's acquisition of Sanders Associates and Emhart's acquisition of Planning Research, he noted.
"Some of these defense contractors have a lot of cash and established lines of bank credit, so they can effect acquisitions without going to the junk bond market," said Gregory Kieselmann, senior vice president at Morgan, Olmstead, Kennedy & Gardner in Los Angeles.