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Mergers Unlimited, Inc.

Responding To Globalization And Technology Pressures. Companies Have Decided That Consolidation Is The Answer. Employees Of Mega-firms Pay The Price.

April 12, 1998|Roger C. Altman | Roger C. Altman, the founder of Evercore Partners, an investment banking firm, twice served in the U.S. Treasury, most recently as deputy secretary in the first Clinton administration

NEW YORK — From hamburgers to rock music to mergers, U.S. culture is sweeping the globe. McDonald's is now on almost every other street corner in Europe. The theme from "Titanic" blares throughout the Middle East. And corporations everywhere are pursuing U.S.-style mega-deals, like the gigantic Citicorp-Travelers Group combination or Bertelsmann's recent acquisition of Random House.

There has never been a merger boom like this. The deals are vastly bigger; there are more of them; the trend is global, and the main impetus is the corporate drive for size. The mere idea of last year's $35-billion combination between two Swiss pharmaceutical companies would have been inconceivable even five years ago. Let alone the record $70-billion financial services combination announced last week.

There are many who see this trend as unhealthy and, in times past, it often was. During the 1960s, wildly acquisitive conglomerates were the rage, slapping together completely unrelated businesses--and usually regretting it later. Then, during the roaring 1980s, many of the biggest deals were driven by junk bonds, financial leverage and little else. Fortunately, this decade is seeing a return to basics, with the emphasis on achieving global scale in research, production and marketing. Thus many of the recent mega-deals actually should lead to higher productivity and standards of living.

But, there is always a human sacrifice along the way. Almost all of these mergers cost jobs--sometimes thousands of them--as the two organizations are slammed together. Workers at all levels are thrown out, their families anguished. Yes, the dislocated usually find new jobs, but they're frequently lesser ones.

Yet the merger beat goes on. The volume of business combinations has reached breathtaking levels. Last year, a trillion dollars of U.S. deals were completed, an all-time record and almost twice the volume of two years ago. But, that just covers situations where U.S. companies were on both sides. Another $800 billion of cross-border transactions occurred, also nearly doubling the 1995 level. Until quite recently, no one could have imagined such numbers.

This wave of deals mostly reflects a drive for sheer size and the economies of scale that go with it. To a lesser extent, some are driven by strictly financial considerations. But, it is the pressures of globalization, technology and cost reduction that are leading to greater and greater scale.

Today, marketplaces are global and it is big companies that compete successfully. This compares to 25 years ago, when most leading U.S. companies derived the bulk of their sales from our home market. They didn't worry much about serving foreign markets and not at all about foreign competitors invading here. But, all that has changed. They now serve markets from Africa to China--and face multinational competitors all over. To compete globally, companies must be big enough to produce in every region and market there, too. It is often more efficient to obtain those capabilities through mergers than to build them from scratch.

The relentless rise of technology has played a similar role. It is changing so many industries so fast that few companies can maintain the necessary cutting edge technologies. They must go outside to acquire some of them. That is why IBM spent $3.5 billion for Lotus, and Compaq is paying $9 billion for Digital Equipment.

The pharmaceutical industry illustrates this vividly. Producers must regularly turn out new and more effective, high-tech drugs. If they don't, new products from aggressive competitors will swamp them. But research expenses for drug development have become huge; only the biggest companies can afford them. The result has been a string of mergers including the combinations of SmithKline and Beecham, Bristol Meyers and Squibb and Sandoz and Ciba-Geigy.

The other key motivation is cost reduction. Facing relentless competition from Asia and other inexpensive regions, many U.S. and European companies must lower production costs. Often, combining two businesses and consolidating their plants and labor forces is a way to do that. Indeed, cost reduction benefits alone are often so large they make mergers irresistible. This explains the recently announced combination of the largest and third largest U.S. aluminum producers.

Then, there is a wholly different category of narrower, financial motivations. The stock market is now so frothy that the announcement of a business combination can raise the stock prices of both companies. Many chief executives, seeing this, and with a duty to shareholders, say, "Why not?" In addition, CEO compensation increasingly is based on the company's stock-price performance. If the shareholders will see higher stock prices over the short-term, and that fattens the CEO's wallet, any proposed combination is hard to resist.

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