Investors growing wary of high-profile mergers

By Gary Gentile, The Associated Press
Saturday July 06, 2002

LOS ANGELES — On the same day this week, news about two major mergers broke, bookends marking the extremes of the merger and acquisitions frenzy that has clearly run its course. 

Monday, defense giant Northrop Grumman Corp. announced it would buy TRW Inc. for $7.8 billion in stock. The deal was old-school, combining two solid companies in a growth industry. 

A continent away, Vivendi Universal, the result of a heralded merger in 2000, was spiraling toward self destruction. Its flashy chairman, Jean-Marie Messier, was forced to resign as his dream of a cutting-edge media empire vanished under a mountain of debt and red ink. 

The stock market’s reaction to both developments says a lot about the skepticism and fear that has crept into financial markets over high profile mergers. 

The Northrop Grumman-TRW deal, though praised, didn’t cause a ripple in the market. In fact, shares of TRW, which would have been expected to rise on the news, actually fell 40 cents cents Monday. 

The Vivendi Universal woes, the latest in a series of troubles experienced by mega-mergers such as AOL Time Warner and WorldCom, sent investors scurrying. 

“People are very suspicious, they are not enthusiastic about the market, so they are not willing to view things in the way the same merger would have been viewed three or four years ago,” said Lou Altfest, a certified financial planner with L.J. Altfest & Co. in New York City. 

Merger and acquisition activity is in a slump. 

In the first six months of the year, only $200 billion worth of M&A transactions in the United States were announced, according to Thomson Financial. That’s down 45 percent from the same period last year and down 77 percent from the $886.7 billion announced in the first half of 2000. 

Executives are reluctant to pull the trigger on anything but the safest deals, with immediate benefits instead of pie-in-the-sky projections of future profits. 

“People are being more risk averse than they were in the past,” said Steve Baronoff, global head of mergers and acquisitions for Merrill Lynch & Co. “They are more likely to do deals within their industry when they are risk averse.” 

Combinations in sectors less sensitive to recession, such as the defense industry or, as with Nestle SA and Dreyer’s Grand Ice Cream Inc., in the consumer products sector, are more likely to be done than the kind of grand strategy mergers such as Vivendi Universal, experts say. 

Complicating matters is growing doubt over the reliability of corporate financial statements and questions of honesty on the part of CEOs. 

“Corporate executives’ collective confidence in doing mergers and acquisitions has been badly bruised for more than a year,” said Judy Radler Cohen, editor of Mergers & Acquisition Report. “So the recent spate of bad boy/girl CEO news has only further damaged an already skittish corporate America when it comes to doing deals.” 

The difficulties experienced by companies in recent months cast a cloud over all mergers and have considerably shortened the time investors are willing to wait for a deal to work out. 

“Many high-profile mergers in recent years have failed to deliver the promised benefits,” Frederick W. Green, president of The Merger Fund, wrote to shareholders in a recent letter. 

“Not only must senior managers convince themselves that a deal makes sense, but they also must be able to sell the transaction to Wall Street, which is no longer willing to give would-be acquirers a free pass.” 

Green cites the Hewlett Packard purchase of Compaq Computer, which was sold to investors based on its long-term benefits, but which was opposed because of its near-term effects on the company’s earnings and the distractions often caused when two companies integrate. 

“CEOs are under increasing pressure from all sides to get it right when they undertake a significant merger or acquisition, and the crisis of confidence that pervades many executive suites has not been good for our business,” Green wrote. 

Experts say the current slump will probably last a few more quarters, after which pent-up demand will trigger more deals, though probably not the kind of overambitious deals seen in recent years.