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Merger Mania Looking Likely

February 2004

Merger Mania Looking Likely

Owning Shares Of Acquired Companies Is The Way Investors Cash In On Deals CEOs Can't Resist Making

February 29, 2004 

The economy is looking up, companies have their financial houses in order, banks are willing to lend more money and interest rates remain low.

Such symptoms foreshadow the outbreak of merger mania, a malady in which the corporate desire to grow bigger becomes insatiable.

Likely to heighten this financial fever is a weak U.S. dollar beckoning foreign suitors to buy American companies at currency rates that are 20 to 30 percent more favorable than two years ago.

Lawyers and investment bankers, prepare your personal bank accounts for outrageous deposits! Everyone has amnesia about past mega-mergers that produced so many odd couples, such as the tumultuous and costly union of AOL with Time Warner.

"Some players are getting itchy because they have a lot of liquidity, and the latest announcements of deals have them primed to act," said Richard Cripps, chief market strategist with Legg Mason Wood Walker in Baltimore. "We're going to see a lot more strategic acquisitions."

There's certainly nothing Mickey Mouse about the mergers and acquisitions that have boosted the stock market lately.

The bidding war won by Cingular Wireless to purchase AT&T Wireless for $41 billion, as well as big-buck bids by Comcast for Walt Disney Co. and Oracle for PeopleSoft, are evidence of that.

In banking, J.P. Morgan Chase & Co. agreed to buy Bank One Corp. for $58 billion, while in technology Juniper Networks Inc. bought NetScreen Technologies Inc. in an all-stock $4 billion deal.

In health care, Abbott Laboratories will shell out $1.2 billion in cash for TheraSense.

"Merger activity and potential buyers are returning to the market," said Ken Marlin, managing partner in the Marlin & Associates investment banking firm that specializes in mergers and acquisitions in the media and technology groups.

"We're confident that the first quarter of 2004 is going to be the best quarter in a couple of years."

As a result, the relatively undervalued share prices of many cable companies, satellite broadcasters, tech companies and banks have turned them into speculative buys as possible takeovers.

For the investor, owning shares in the company that's to be acquired is how you win. There may be a hefty offer for your shares, whether friendly or hostile.

If there's a bidding war for the company, there's a greater chance to make money, but also an accompanying risk that the deal may fall apart.

The result for those holding shares of an acquiring company are less sure. The shares often decline initially because the firm is taking on greater financial risk, even though the deal may ultimately enhance the company and its stock price.

Financial services companies and technology firms should continue to lead the merger pack in 2004 because consolidation in both of their industries makes sense.

But because picking takeover targets is inexact and speculative, you should never buy a stock on takeover potential alone.

"Hewlett-Packard is likely to acquire software companies because that's a weak area for it that it must bolster," said Michael Cohen, director of research for Pacific American Securities in San Diego.

"So a pairing with a software firm makes sense."

BEA Systems (BEAS), an application infrastructure software provider, could potentially be a buyout candidate because it seems to be an excellent strategic fit for a company such as Hewlett-Packard or Sun Microsystems, Cohen believes.

H-P recently bought the network management software firm Novadigm.

Other companies that could be potential acquisition targets because their stock prices are relatively low, Cripps believes, include Providian Financial (PVN) and Wachovia Corp. (WB) in banking; Hewlett-Packard (HP) in technology, an indication that a company can be either an acquirer or an acquisition; Parker-Hannifin (PH) in motion-control products; Commercial Metals (CMC) in steel and metal products; and EOG Resources (EOG), Devon Energy (DN), Burlington Resources (BR) and Occidental Petroleum (OXY) in energy.

"These could be likely merger candidates with the rationale that they are quality companies, cheap relative to their historical valuations," Cripps said. "I do not own them, we don't do business with any of them and we're not recommending them, but we are saying they could be merger candidates."

Thinking small has often made sense in recent years.

"Smaller deals in which one company picks up a niche player that fits in well with the overall company tend to be very good," said Paul Nolte, investment director of Hinsdale Associates in Hinsdale, Ill.

Though not making recommendation for specific takeover reasons, Nolte likes the smaller banks Commerce Bancshares (CBSH) and Northwest Bancorp (NWSB) for their fundamentals.

"You can do an acquisition for all the right reasons, but not execute properly and it doesn't work out," said John Caldwell, chief investment strategist with McDonald Financial Group in Cleveland. "You can do it for all the wrong reasons, but it still ends up benefiting shareholders because it was too good of a deal to pass up."

Important questions to ask about any merger deal, Caldwell believes, are:

Does it make sense from a product or geography standpoint?

Is it an extension of the existing business?

Are the businesses complementary or similar enough that integration will be smooth?

Is the deal being done at the right price? Overpaying for an acquisition is a difficult mistake to correct.


Andrew Leckey is a Tribune Media Services columnist.

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