Big mergers fueling economic optimism
Big mergers fueling economic optimism
Analysts say deals show confidence in market
Tuesday, July 15, 2003
Tom Abate, Chronicle Staff Writer
A summertime spate of big merger deals, fueled by a mild rebound in stock prices, offers evidence that a battered economy is on the mend, experts say.
That thinking was bolstered by the $1.63 billion bid by Yahoo Monday for Overture Services Inc., an Internet advertising firm based in Pasadena.
Other similar deals recently include the triangular merger battle involving Oracle Corp., PeopleSoft and J.D. Edwards, and EMC Corp.'s $1.3 billion bid for Bay Area data storage firm Legato Systems Inc.
Experts say these mergers signal a mixed but generally positive outlook toward the economy in the corporate boardrooms where such deals are made.
"When mergers heat up, it tells you that people have confidence in the future," said Charles Elson, a professor of corporate governance at the University of Delaware. "When merger activity slows down, it tells you that companies are slowing down."
George Milstein, chief investment banker for Pacific Growth Equities, a San Francisco firm that manages both mergers and initial public offerings, explained the chicken-and-egg relationship between stock prices and big mergers. The Nasdaq stock exchange, a market heavily laden with high-tech firms and often viewed as a barometer for the sector, has risen 31 percent so far this year.
Milstein, who advises chief executives on both the buy and sell side of mergers, said the mild rebound in stock prices of late had encouraged parties on both sides of the table. Rising share prices give buyers a bigger war chest when proposing stock-financed deals, allowing them to offer sellers deals too sweet to refuse.
"If you're a believer in the tech recovery, as many people are, you're looking at some relatively cheap numbers (for acquisition targets)," he said, adding that many executives believe that share prices will continue to rise and therefore vindicate many of these deals.
While Wall Street analysts, economists and business experts generally agree that mergers signify rising corporate confidence, a new report from the Boston Consulting Group says mergers generally fail to live up to the high hopes of shareholders. At the same time, the report says mergers made in weak economic climates, like now, stand the best chance of success.
"Periods of weak economic growth can be an ideal time for companies to use M&A (mergers and acquisitions) strategically," said Chris Neenan, a co-author of the Boston Consulting Group's report.
Overall, however, the report drew a sobering message after studying 277 big deals in the United States between 1985 and 2000. It reads in part: "A consistent finding of many recent studies is that most mergers fail to create value for the investors of the acquiring company. Our study is no different. We found that a full 64 percent of the deals in our sample destroyed value at the time they were announced, and 56 percent continued to do so two years after the deal."
GLOBAL ECONOMIES FOLLOW SUIT
Although technology deals are the focus of merger interest in the Bay Area, the factors driving the current trends have prompted similar activity worldwide. The Economist, the British news magazine, counted a whopping $26 billion worth of merger bids in July, covering every industry from fashion to tourism, trucking to mining, from software to car parts.
And if the local interest in M&A activity can be traced back to June, when Larry Ellison, the flamboyant founder of Oracle Corp. made a hostile bid for rival PeopleSoft, careful market watchers had seen the first signs of merger resurgence as early as December, when staid IBM offered $2.1 billion to acquire Rational Software, a business software firm based in Cupertino and Lexington, Mass.
"IBM sort of shocked the tech world," said Ken Marlin, principal at Marlin & Associates, a New York investment banking firm. "It was the first big deal we'd seen in quite some time, and it was IBM doing this."
Bay Area economist Tapan Munroe of Moraga said that if the current merger trend is evidence of an economy that is moving once again, it should not be forgotten that more often than not, fusing two businesses means cutting jobs. "This M&A activity comes at a time when the job market is at its worst," Munroe said. "This is the process of creative destruction of capitalism. There are winners. Hopefully the stockholders."