The year 2000 would seem to have presented enough obstacles to unsettle even the most daring deal makers. But it didn’t. Neither careening stock prices nor rising interest rates nor the prospect of a slowing U.S. economy could shake the desire of U.S. corporate managers to merge with and acquire other companies.
Mergers and acquisitions in the United States totaled a record $1.81 trillion through November 28,
2000, according to Thomson Financial Securities Data. That’s slightly higher than 1999′s level of $1.75 trillion, and marks the eighth consecutive year of rising deal activity in the U.S. market. This is probably as good as it gets for Wall Street investment banks, however. Most analysts expect the volatile capital markets to quiet things down in the coming year.
Out of the Gates
The year started with a bang, thanks to America Online Inc.’s January engagement to Time Warner Inc. in an all-stock transaction then valued at $350 billion. The Federal Trade Commission has yet to give its blessing to the union. But if a settlement is reached between the company and the antitrust regulator, the deal will be the largest of all time, representing nearly a fifth of total merger volume for the past year.
The deal-making cooled off in the spring as the stock markets took a dive, slowing to a low of $78.7 billion in April. But it heated up again over the summer, with such deals as Deutsche Telekom AG/VoiceStream Wireless Corp. ($41.6 billion) and Chase Manhattan Corp./JP Morgan & Co. ($36.5 billion) topping the list. The September quarter ranked as the third most active in history, with more than $550 billion in announced deals. And the momentum continued through October, when 3 of the year’s top 10 deals — Firstar Corp./U.S Bancorp, Chevron/Texaco, and General Electric Co./Honeywell International Inc. — were unveiled. The second half of the year was just as strong as the first, even as stocks — used as currency in 65 percent of merger transactions — dropped sharply in value.
The chief reason companies are so eager to merge, say experts, is the high premium that investors continue to place on growth. “The only way that larger companies can significantly accelerate their growth rates is to add to their capabilities,” says Rick Escherich, a managing director at JP Morgan. “I don’t think there’s ever been as high a premium paid as this.” A recent study by JP Morgan showed that small differences in projected earnings growth make big differences in market valuations. Large companies with projected earnings-per-share growth of 12 to 15 percent traded at an average earnings multiple of 13.7, while those with 16 to 20 percent projected growth enjoyed an 18.4 multiple. Projected EPS growth of 25 to 30 percent commanded an average multiple of 27.3.
Jack’s Swan Song
GE’s announced acquisition of Honeywell, originally valued at $45 billion, was a prime example of the drive to add growth engines. In fact, engines are a key component of the deal, with Honeywell’s $10.5 billion in sales in the aerospace division expected to boost GE’s aircraft engine offerings. In addition, Welch claims Honeywell’s three other core business units — automated controls, performance materials, and microturbine technology — overlap neatly enough with GE to yield $1.5 billion in overhead savings within the first year.